2007 Annual Report

        David A. Bochnowski
                      Chairman and
        Chief Executive Officer

Dear Shareholder,

     2007 proved to be a challenging year for your company as well as for the financial services industry. Our earnings were $5.6 million, the fifth highest in our history, producing respectable key financial ratios: our return on assets was 0.91% and our return on equity was 10.78%. Both of these ratios are very competitive when compared to our community banking peers throughout the nation. Nevertheless, our 2007 income did not keep pace with prior years.

Operating Results

     For most of 2007, the Federal Reserve declined to react to deteriorating economic conditions, which stressed credit markets and limited growth. The persistent high interest rate environment exerted pressure on our cost of funds. At the same time, competitive pricing in our market area decreased the yield on our loan portfolio. The combination of these two factors caused a 7% reduction in our net interest income, leading to a decrease in our earnings compared to the prior year.

     Peoples Bank does not make or own any subprime loans that have depressed the earnings of some financial services companies both here and abroad, but our exposure to the slow down in the economy resulted in prudent action taken to increase reserves for potential problem credits. While economists are debating whether a recession may soon occur in the American economy, it is clear that the manufacturing sector of the Midwest has been declining for several years resulting in credit market stress.

     Additional reserves and expenses were incurred during 2007 in response to deterioration in our commercial real estate portfolio caused by two loan participations and a letter of credit related to a commercial project. These actions had a combined impact of $856 thousand on earnings, and management continues to take action to protect the Bank’s interest in the collateral supporting these credits. Our cautious approach to potential difficulties underscores the sound banking principle of vigilance in uncertain times.

     During the year, management carefully reviewed our loan underwriting guidelines for consistency in the current operating environment. We concluded that our standards adequately address the issue of asset quality. Management also reviewed our loan participation policy for signs of stress.

     The Bank historically has engaged in participations with other lenders in credit facilities in regional and national markets. This activity spreads the risk of concentrating our loan portfolio in our local community in the event of a severe downturn. Loan participations at the end of 2007 were $26 million or 5.6% of our total loan portfolio. Among our participations were $7.1 million in loans in states that were not contiguous to Indiana, or 1.5% of all loans outstanding. Each participation without exception has been underwritten according to the Bank’s own underwriting standards. Management concluded that the practice of spreading risk through participations was an appropriate practice, but that any decision on future activities would be subject to an analysis of alternative actions that would reduce risk concentrations in our loan portfolio.

     Fierce competition for deposit and loan growth in our local market tested the Bank’s ability to remain focused on building shareholder value. In response, management opted for a course of smart growth avoiding a commitment to long-term high cost deposits. Loan originations for the year totaled $217.2 million; however, growth of our portfolio was curtailed by the sale of mortgage loans, the high paced pay-off of loan participations, and scheduled loan principal reductions by borrowers. As a result, assets grew $9.7 million during the year to $628.7 million. Our capital position at year-end was a healthy $52.7 million or 8.4% of total assets.

     In 2007, the Bank successfully focused on managing our expense structure and expanding our market presence. We were pleased that operating expenses increased by only 1.6%. We also focused on our market positioning, and devoted much of the year to creating a message platform for delivering our products and services to customers and the community.

 2 

You First Banking: Enhancing Income

     With professional assistance, extensive surveys were conducted to determine the preferences within our trade territory for banking and financial needs. Those studies revealed that our customers place high value on the service they receive from the Bank, particularly our long-standing commitment to making the needs of our customers our first priority. The “You First Banking” brand was rolled out in the fall and included bank-wide training in delivery of the brand, along with a consistent look of our offices and Peoples Bank team logo wear. Our research confirmed that a progressive community bank that is sensitive to and responsive to customer and community needs can thrive in Northwest Indiana.

     Expansion during the year included the opening of our ninth Banking Center in Crown Point, the continued growth of our Wealth Management Group, and a Private Banking initiative. Our presence in Crown Point presents an exciting opportunity for the expansion of our substantial customer base in that community. The Banking Center offers a blend of traditional banking and a state of the art drive-up facility along with twenty-first century technology. An inviting lobby features a fireplace, as well as a cyber café where customers can learn the intricacies of electronic banking.

     Addressing the Wealth Management needs of our customers has become a high priority for the Bank. Today’s customer preferences have moved beyond traditional bank offerings to include investments and trusts designed to meet individual needs. Under the direction of Terry Quinn, Senior Vice-President, our Wealth Management Group increased the book value of assets under management by $47.1 million to $191.9 million during the year while enhancing the Bank’s income. Non-interest income from banking activities for 2007 totaled $4.4 million, an increase of $212 thousand over the prior year.

Strategic Direction

     Consistent with the responsibility of providing oversight for the Bank’s operations and direction, the Board of Directors reviewed the strategic positioning of the Bank taking into account current economic conditions and the future of the financial services sector. With the assistance of professionally prepared reports from Sandler, O’Neill and Keefe, Bruyette, Woods, the Board concluded that both the current and historic financial performance of the Bancorp was superior to that of our peers.

 3 

     The Board also determined that, over the long-term, shareholder value would be enhanced through:

	•		banking center expansion throughout Lake and Porter Counties
	•		continued development of electronic banking
	•		growth of Wealth Management
	•		additional loan personnel to take advantage of community bank consumer and commercial lending opportunities
	•		expansion of our suite of services to include Private Banking to serve the total financial needs of our professional customers
	•		increased marketing and training efforts designed to enhance business with existing customers and attract new customers to our “You First Banking” brand

     The Board’s business expansion discussion recognized that in the near term operating expenses would increase with potential impact on the Bank’s bottom line. At the same time, the Board determined that the Bank had established a widely accepted reputation for putting customers first whether their banking needs are personal, private, commercial, or related to wealth management. The Board concluded that any reluctance to incur the costs necessary to maximize our advantage would pose a greater risk to long-term shareholder value.

Looking Forward

     The Peoples team has responded with energy and enthusiasm to the task of managing our capital to implement our strategic plan. Private Banking came on line in the fourth quarter of last year with early indications of success. Two loan officers with strong credentials and experience in Porter County have joined the effort to expand our commercial loan offerings. A Banking Center in Gary will be under construction this spring with an opening planned for the fall of 2008. We plan to begin construction in the latter half of the year on our eleventh Banking Center which will be located in the Cumberland Crossing development in Valparaiso.

 4 

     Our marketing effort will be key to the success of our expansion plans. Consistent with the introduction of our “You First Banking” service brand, we will adopt the “You First” concept to new and existing product offerings. In February of 2008 the Bank rolled out “You First Checking,” an offering unique to our market that allows customers to tailor the features of the account to their individual needs. In addition to customary free checking, the customer can choose from the options of earned interest, waived service fees, up to five waivers per month of Peoples Bank ATM fees, premiums on certificates of deposits, free electronic bill payments, or fee discounts on consumer and mortgage loans.

     Although we are excited by the prospect of growing the bank, we recognize that the rapid reduction in interest rates by the Federal Reserve that began at the end of 2007 and continues into 2008 presents new challenges. Management remains steadfast in our commitment to enforcing our loan underwriting guidelines while avoiding marginal credits as competition heats up for residential and commercial credit facilities. We will also seek opportunities to reposition the duration of our assets, particularly our loan portfolio, so that when the inevitable upward turn in interest rates on deposits and other liabilities occurs, the earning asset side of our balance sheet is better positioned to react to increases in our cost of funds.

Our Commitment

     It is my privilege to lead the day-to-day effort of the Peoples team, which now totals one hundred and eighty seven men and women dedicated to serving our customers and community. We have never been reluctant to put in the hours needed to complete our mission and build shareholder value. This year’s challenges tested our ability to respond to unusual circumstances. Consistent with our values, we did so with extra time and commitment as we stand watch over your investment in the Bancorp. I am confident that with your continued support our hard work will continue to bring superior results to our customers, community and shareholders.

Sincerely,

David A. Bochnowski
Chairman and Chief Executive Officer

Financial Highlights

		7

Selected Consolidated Financial Data

in thousands of dollars, except per share data

		December 31,				December 31,				December 31,				December 31,				December 31,				December 31,
Fiscal Year Ended		2007				2006				2005				2004				2003				2002
Statement of Income:
Total interest income		$	35,768			$	34,979			$	30,024			$	26,614			$	26,357			$	27,781
Total interest expense			17,882				15,737				9,758				6,858				7,521				10,107
Net interest income			17,886				19,241				20,266				19,756				18,836				17,674
Provision for loan losses			552				15				245				385				420				720
Net interest income after provision for loan losses			17,334				19,226				20,021				19,371				18,416				16,954
Noninterest income			4,431				4,219				3,540				3,312				2,968				2,675
Noninterest expense			14,525				14,296				13,771				13,174				12,037				10,859
Net noninterest expense			10,094				10,077				10,231				9,862				9,069				8,184
Income tax expenses			1,651				2,674				3,118				3,219				3,411				3,277
Net income		$	5,589			$	6,475			$	6,672			$	6,290			$	5,936			$	5,493
Basic earnings per common share		$	1.99			$	2.32			$	2.40			$	2.28			$	2.16			$	2.01
Diluted earnings per common share		$	1.98			$	2.30			$	2.37			$	2.24			$	2.13			$	1.99
Cash dividends declared per common share		$	1.44			$	1.40			$	1.32			$	1.24			$	1.20			$	1.12

		December 31,				December 31,				December 31,				December 31,				December 31,				December 31,
		2007				2006				2005				2004				2003				2002
Balance Sheet:
Total assets		$	628,718			$	618,982			$	627,439			$	557,393			$	508,775			$	488,002
Loans receivable			468,459				471,716				469,043				433,790				409,808				380,428
Investment securities			114,644				99,012				90,093				79,979				63,733				56,571
Deposits			493,384				512,931				525,731				451,573				421,640				406,673
Borrowed funds			76,930				51,501				51,152				57,201				40,895				36,065
Total stockholders’ equity			52,733				50,010				46,433				44,097				41,554				39,148

		December 31,				December 31,				December 31,				December 31,				December 31,				December 31,
Fiscal Year Ended		2007				2006				2005				2004				2003				2002
Interest Rate Spread During Period:
Average effective yield on loans and investment securities			6.21	%			6.02	%			5.50	%			5.31	%			5.65	%			6.26	%
Average effective cost of deposits and borrowings			3.18	%			2.77	%			1.82	%			1.40	%			1.67	%			2.38	%
Interest rate spread			3.03	%			3.25	%			3.68	%			3.91	%			3.98	%			3.88	%
Net interest margin			3.10	%			3.31	%			3.71	%			3.94	%			4.04	%			3.99	%
Return on average assets			0.91	%			1.04	%			1.14	%			1.17	%			1.20	%			1.18	%
Return on average equity			10.78	%			13.42	%			14.67	%			14.64	%			14.65	%			14.58	%

		December 31,				December 31,				December 31,				December 31,				December 31,				December 31,
		2007				2006				2005				2004				2003				2002
Total capital to risk-weighted assets			12.0	%			12.0	%			11.6	%			12.2	%			12.5	%			13.1	%
Tier 1 capital to risk-weighted assets			11.0	%			11.1	%			10.7	%			11.2	%			11.5	%			11.9	%
Tier 1 capital to adjusted average assets			8.3	%			8.0	%			7.9	%			8.0	%			8.0	%			7.6	%
Allowance for loan losses to total loans			0.98	%			0.90	%			0.89	%			0.90	%			0.92	%			0.96	%
Allowance for loan losses to non-performing loans			53.16	%			153.95	%			198.00	%			371.00	%			220.31	%			152.43	%
Non-performing loans to total loans			1.84	%			0.58	%			0.45	%			0.24	%			0.42	%			0.63	%
Total loan accounts			5,268				5,392				5,422				5,370				5,213				5,049
Total deposit accounts			30,760				32,435				33,963				32,866				32,502				31,385
Total Banking Centers (all full service)			9				8				8				8				8				8

8

		December 31,				December 31,				December 31,				December 31,
		2001				2000				1999				1998
		$	28,425			$	28,077			$	25,607			$	25,235
			13,222				13,386				11,281				12,310
			15,203				14,691				14,326				12,925
			230				175				200				110
			14,973				14,516				14,126				12,815
			2,402				1,995				1,659				1,347
			9,911				9,449				8,774				7,938
			7,509				7,454				7,115				6,591
			2,754				2,691				2,775				2,461
		$	4,710			$	4,371			$	4,236			$	3,763
		$	1.73			$	1.61			$	1.53			$	1.36
		$	1.71			$	1.60			$	1.52			$	1.35
		$	1.04			$	0.96			$	0.84			$	0.74

		December 31,				December 31,				December 31,				December 31,
		2001				2000				1999				1998
		$	440,710			$	392,313			$	361,719			$	345,417
			342,642				326,207				295,813				273,433
			67,260				38,128				41,931				36,350
			355,215				324,310				306,647				293,222
			44,989				30,599				18,607				17,320
			35,882				33,529				32,471				31,316

		December 31,				December 31,				December 31,				December 31,
		2001				2000				1999				1998
			7.29	%			7.88	%			7.61	%			8.00	%
			3.55	%			3.95	%			3.54	%			4.16	%
			3.74	%			3.93	%			4.07	%			3.84	%
			3.90	%			4.12	%			4.26	%			4.10	%
			1.15	%			1.17	%			1.20	%			1.14	%
			13.49	%			13.30	%			13.17	%			12.35	%

		December 31,				December 31,				December 31,				December 31,
		2001				2000				1999				1998
			13.6	%			13.6	%			14.8	%			15.3	%
			12.5	%			12.3	%			13.5	%			14.1	%
			8.3	%			8.6	%			9.0	%			9.2	%
			0.92	%			1.02	%			1.12	%			1.14	%
			108.64	%			183.54	%			412.08	%			213.06	%
			0.85	%			0.55	%			0.27	%			0.54	%
			4,964				4,762				4,676				4,625
			30,433				28,906				27,712				26,172
			8				8				7				7

Business

     NorthWest Indiana Bancorp (the Bancorp) is a bank holding company registered with the Board of Governors of the Federal Reserve System. Peoples Bank SB (the Bank), an Indiana savings bank, is a wholly owned subsidiary of the Bancorp. The Bancorp has no other business activity other than being the holding company for Peoples Bank SB.

     The Bancorp conducts business from its Corporate Center in Munster and its nine full-service offices located in East Chicago, Hammond, Merrillville, Dyer, Munster, Schererville, Hobart and Crown Point, Indiana. The Bancorp is primarily engaged in the business of attracting deposits from the general public and the origination of loans secured by single family residences and commercial real estate, as well as, construction loans, various types of consumer loans and commercial business loans. In addition, the Bancorp’s Wealth Management Group provides estate and retirement planning, guardianships, land trusts, profit sharing and 401(k) retirement plans, IRA and Keogh accounts and investment agency accounts. The Wealth Management Group may also serve as the personal representative of estates and act as trustee for revocable and irrevocable trusts.

     The Bancorp’s common stock is traded in the over-the-counter market and is quoted on the OTC Bulletin Board. On February 22, 2008, the Bancorp had 2,810,103 shares of common stock outstanding and 413 stockholders of record. This does not reflect the number of persons or entities who may hold their stock in nominee or “street” name through brokerage firms.

		9

Management’s Discussion and Analysis of Financial Condition and Results of Operations

General

     The Bancorp’s earnings are dependent upon the earnings of the Bank. The Bank’s earnings are primarily dependent upon net interest margin. The net interest margin is the difference between interest income earned on loans and investments and interest expense paid on deposits and borrowings stated as a percentage of average interest earning assets. The net interest margin is perhaps the clearest indicator of a financial institution’s ability to generate core earnings. Fees and service charges, wealth management operations income, gains and losses from the sale of assets, provisions for loan losses, income taxes and operating expenses also affect the Bancorp’s profitability.

     A summary of the Bancorp’s significant accounting policies is detailed in Note 1 to the Bancorp’s consolidated financial statements included in this report. The preparation of our financial statements requires management to make estimates and assumptions that affect our financial condition and operating results. Actual results could differ from those estimates. Estimates associated with the allowance for loan losses, fair values of financial instruments and status of contingencies are particularly susceptible to material change in the near term as further information becomes available and future events occur.

     At December 31, 2007, the Bancorp had total assets of $628.7 million and total deposits of $493.4 million. The Bancorp’s deposit accounts are insured up to applicable limits by the Deposit Insurance Fund (DIF) that is administered by the Federal Deposit Insurance Corporation (FDIC), an agency of the federal government. At December 31, 2007, stockholders’ equity totaled $52.7 million, with book value per share at $18.77. Net income for 2007 was $5.6 million, or $1.99 basic earnings per common share and $1.98 diluted earnings per common share. The return on average assets (ROA) was 0.91%, while the return on average stockholders’ equity (ROE) was 10.78%.

Financial Condition

     During the year ended December 31, 2007, total assets increased by $9.7 million (1.6%), to $628.7 million, with interest-earning assets increasing by $14.2 million (2.5%). At December 31, 2007, interest earning assets totaled $588.5 million and represented 93.6% of total assets. Loans totaled $468.5 million and represented 79.6% of interest-earning assets, 74.5% of total assets and 95.0% of total deposits. The loan portfolio, which is the Bancorp’s largest asset, is a significant source of both interest and fee income. The Bancorp’s lending strategy emphasizes quality growth, product diversification, and competitive and profitable pricing. The loan portfolio includes $229.0 million (48.9%) in residential real estate loans, $118.4 million (25.3%) in commercial real estate loans, $47.1 million (9.9%) in construction and land development loans, $47.0 million (10.0%) in commercial business loans, $12.9 million (2.8%) in multifamily loans, $11.7 million (2.5%) in government and other loans, and $2.4 million (0.5%) in consumer loans. Adjustable rate loan balances comprised 56.4% of total loans at year-end. During 2007, loans decreased by $3.3 million (0.7%), with construction and development, multifamily, commercial business and government loan balances decreasing, while commercial real estate and consumer loan balances increased. Management believes a general slowdown in the national and local economies may result in a softening in loan demand in all categories.

     During 2007, the Bancorp sold $12.3 million in fixed rate mortgages originated for sale compared to $9.2 million in 2006. Net gains realized from the sales totaled $221 thousand and $157 thousand for 2007 and 2006. The current year increase in gain on sale of loans is a result of customer preference for fixed rate mortgage loans and an increase in loans originated for sale. Net mortgage loan servicing fees totaled $23 thousand for 2007 and $12 thousand for 2006. At December 31, 2007, the Bancorp had no loans that were held for sale. During 2008, the Bancorp expects to continue selling current year fixed rate mortgage loans originated for sale, with contractual maturities exceeding fifteen years, on a case-by-case basis, as part of its efforts to manage interest rate risk.

     Non-performing loans include those loans that are 90 days or more past due and those loans that have been placed in non-accrual status. Non-performing loans totaled $8.6 million at December 31, 2007, compared to $3.1 million at December 31, 2006, an increase of $5.5 million or 177.4%. The increase in non-performing loans during 2007 is primarily related to two past due commercial real estate participation loans that carry a balance of $4.1 million and $956 thousand. These loans were classified as substandard and impaired during the third quarter of 2007. For both loans, management is in frequent contact with the lead lenders and continues to gather information regarding steps required for protection of the Bank’s interest in the collateral. Based on the current information provided by the lead lenders, management has had to make certain estimates regarding both projects’ cash flows, collateral values and strength of personal guarantees. At December 31, 2007, for the first commercial real estate participation, a $4.1 million loan for a condominium conversion project in Ann Arbor, Michigan, management’s current estimates indicate a collateral deficiency. During the fourth quarter of 2007, additional provisions to the allowance for loan losses were recorded as a result of the collateral deficiency. In addition, management has retained legal counsel to actively pursue potential material violations of the participation agreement and the underlying loan documentation by the lead lender. For the second commercial real estate participation loan totaling $956 thousand, a condominium project in Portland, Oregon, management’s current estimates indicate a collateral deficiency. During the fourth quarter of 2007 additional provisions to the allowance for loan losses were recorded. To the extent that actual cash flows, collateral values and strength of personal guarantees differ from current estimates, additional provisions to the allowance for loan losses may be required for both commercial real estate participation loans.

     The ratio of non-performing loans to total loans was 1.84% at December 31, 2007, compared to 0.65% at December 31, 2006. The ratio of non-performing loans to total assets was 1.37% at December 31, 2007, compared to 0.50% at December 31, 2006. The December 31, 2007, non-performing loan balances include $7.8 million in loans

10

accounted for on a non-accrual basis and $842 thousand in accruing loans, which were contractually past due 90 days or more. Loans internally classified as substandard totaled $10.9 million at December 31, 2007, compared to $6.9 million at December 31, 2006. The increase in substandard loans at December 31, 2007, is related to the previously mentioned two commercial real estate participation loans in the amount of $5.1 million. No loans were classified as doubtful or loss. Substandard loans include non-performing loans and potential problem loans, where information about possible credit issues or other conditions causes management to question the ability of such borrowers to comply with loan covenants or repayment terms. In addition to identifying and monitoring non-performing and other classified loans, management maintains a list of watch loans. Watch loans represent loans management is closely monitoring due to one or more factors that may cause the loan to become classified. Watch loans totaled $10.8 million at December 31, 2007, compared to $7.6 million at December 31, 2006. The increase in watch loans at December 31, 2007 is related to commercial business loans.

     A loan is considered impaired when, based on current information and events, it is probable that a borrower will be unable to repay all amounts due according to the contractual terms of the loan agreement. At December 31, 2007, impaired loans totaled $6.0 million, compared to $1.9 million at December 31, 2006. The increase in impaired loans is related to the previously mentioned two commercial real estate participation loans. The December 31, 2007, impaired loan balances consisted of six loans to four commercial borrowers that are secured by business assets and real estate, and are personally guaranteed by the owners of the businesses. The December 31, 2007 allowance for loan losses (ALL) contained $824 thousand in specific allowances for collateral deficiencies, compared to $522 thousand in specific allowances at December 31, 2006. During the quarter ended December 31, 2007, a previously reported impaired commercial real estate loan with a specific allowance of $183 was eliminated as a result of a reduction in debt by the borrower and re-evaluation of collateral coverage. In addition, during the fourth quarter of 2007, a commercial business loan with a specific allowance of $80 thousand was eliminated as the loan became a performing credit and was reclassified to watch status. The December 31, 2007, impaired loan balances were also included in the previously discussed non-performing and substandard loan balances. There were no other loans considered to be impaired loans as of, or for the quarter ended, December 31, 2007.

     At December 31, 2007, management is of the opinion that there are no loans, except those discussed above, where known information about possible credit problems of borrowers causes management to have serious doubts as to the ability of such borrowers to comply with the present loan repayment terms, and which may result in disclosure of such loans as non-accrual, past due or restructured loans. Also, at December 31, 2007, no other interest bearing assets were required to be disclosed as non-accrual, past due or restructured. Management does not presently anticipate that any of the non-performing loans or classified loans would materially impact future operations, liquidity or capital resources.

     The Bancorp is a party to financial instruments in the normal course of business to meet the financing needs of its customers. These financial instruments, which include commitments to make loans and standby letters of credit, are not reflected in the accompanying consolidated financial statements. Such financial instruments are recorded when they are funded. The Bancorp has a $1.1 million participation in a $6.4 million letter of credit, which acts as payment support to bondholders. Cash flows from the security collateralizing the letter of credit have been negatively impacted due to the closing of the tenant. The letter of credit is also secured by a cash collateral account in the amount of $1.0 million. At December 31, 2007, based on current estimates management believes that a collateral deficiency of $72 thousand exists for this financial instrument. During 2007, management recorded a charge to earnings in the amount of $72 thousand to establish a contingent liability. To the extent that actual cash flows and third party valuation estimates differ from current estimates, the contingent liability for the letter of credit could change. Management will continue to monitor the letter of credit and bond repayments.

     Because some loans may not be repaid in accordance with contractual agreements, an ALL has been maintained. While management may periodically allocate portions of the allowance for specific problem loans, the entire allowance is available to absorb probable incurred losses that arise from the loan portfolio and is not segregated for, or allocated to, any particular loan or group of loans. For the year ended December 31, 2007, $552 thousand in additions to the ALL account were required, compared to $15 thousand for 2006. The December 31, 2007 ALL contained $824 thousand in specific allowances for the collateral deficiency associated with five loans to three borrowers totaling $4.4 million, which had been classified as impaired at December 31, 2007. Charge-offs, net of recoveries, totaled $238 thousand for the year ended December 31, 2007, compared to recoveries, net of charge-offs of $71 thousand for 2006. The ALL provisions take into consideration management’s current judgments about the credit quality of the loan portfolio, loan portfolio balances, changes in the portfolio mix and local economic conditions. In determining the provision for loan loss for the current period, management has given consideration to increased risks associated within the local economy, changes in loan balances and mix, and asset quality.

     The determination of the amount of the ALL and provisions for loan losses is based on management’s current judgments about the credit quality of the loan portfolio with consideration given to all known relevant internal and external factors that affect loan collectibility as of the reporting date. The appropriateness of the current year provision and the overall adequacy of the ALL are determined through a disciplined and consistently applied quarterly process that combines a review of the current position with a risk assessment worksheet. The risk assessment worksheet covers the residential, commercial real estate, commercial business, and consumer loan portfolios. Management uses a risk rating system to assist in determining the appropriate level for the ALL. Management

11

assigns risk factors to non-performing loans; loans that management has internally classified as impaired; loans that management has internally classified as substandard, doubtful, loss, or watch; and performing loans.

     Risk factors for non-performing and internally classified loans are based on an analysis of the estimated collateral liquidation value for individual loans defined as substandard, doubtful, loss or watch. Estimated collateral liquidation values are based on established loan underwriting standards and adjusted for current mitigating factors on a loan-by-loan basis. Aggregate substandard loan collateral deficiencies are determined for residential, commercial real estate, commercial business, and consumer loan portfolios. These deficiencies are then stated as a percentage of the classified loan category to determine the appropriate risk factors.

     Risk factors for performing and non-classified loans are based on the average net charge-offs for the most recent five years, which are then stated as a percentage of average loans for the same period. Historical risk factors are calculated for residential, commercial real estate, commercial business, and consumer loans. The historical factors are then adjusted for current subjective risks attributable to: local and national economic factors; loan growth and changes in loan composition; organizational structure; composition of loan staff; loan concentrations; policy changes and out of market lending activity.

     The ALL to total loans was 0.98% at December 31, 2007, compared to 0.90% at December 31, 2006, while the ALL to non-performing loans (coverage ratio) was 53.2% at December 31, 2007, compared to 138.6% at December 31, 2006. The decrease in the coverage ratio is attributable to the two commercial real estate participation loans totaling $5.1 million that were placed in non-accrual status during the third quarter. The December 31, 2007 balance in the ALL account of $4.6 million is considered adequate by management after evaluation of the loan portfolio, past experience and current economic and market conditions. While management may periodically allocate portions of the allowance for specific problem loans, the whole allowance is available for any loan charge-offs that occur. The allocation of the ALL reflects performance and growth trends within the various loan categories, as well as consideration of the facts and circumstances that affect the repayment of individual loans, and loans which have been pooled as of the evaluation date, with particular attention given to non-performing loans and loans which have been classified as substandard, doubtful or loss. Management has allocated general reserves to both performing and non-performing loans based on current information available.

     At December 31, 2007, the Bancorp’s investment portfolio totaled $114.6 million and was invested as follows: 45.7% in U.S. government agency mortgage-backed securities and collateralized mortgage obligations, 27.9% in municipal securities, 22.9% in U.S. government agency debt securities and 3.5% in trust preferred securities. At December 31, 2007, securities available-for-sale totaled $96.3 million or 84.0% of total securities. Available-for-sale securities are those the Bancorp may decide to sell if needed for liquidity, asset-liability management or other reasons. During 2007, securities increased by $15.6 million (15.8%). In addition, at December 31, 2007, the Bancorp had $3.6 million in FHLB stock.

     Deposits are a fundamental and cost-effective source of funds for lending and other investment purposes. The Bancorp offers a variety of products designed to attract and retain customers, with the primary focus on building and expanding relationships. At December 31, 2007, deposits totaled $493.4 million. During 2007, deposits decreased by $19.5 million (3.8%). The 2007 change in deposits was comprised of the following: money market deposit accounts (MMDA’s) decreased by $26.9 million (19.6%), savings accounts decreased by $1.7 million (3.2%), checking accounts increased by $8.2 million (7.6%), while certificates of deposit increased by $876 thousand (0.4%). The decrease in MMDA’s was a result of a planned withdrawal by local governmental units. At December 31, 2007, the deposit base was comprised of 43.4% certificates of deposit, 23.6% checking, 22.4% MMDA’s, and 10.6% savings accounts.

     Borrowings are primarily used to fund asset growth not supported by deposit generation. At December 31, 2007, borrowed funds totaled $76.9 million compared to $51.5 million at December 31, 2006, an increase of $25.4 million (49.4%). Retail repurchase agreements totaled $14.2 million at December 31, 2007, compared to $14.7 million at December 31, 2006, a decrease of $531 thousand (3.6%). FHLB advances totaled $59.0 million, increasing $27.0 million or 84.4%, as the Bancorp acquired short-term borrowings to fund MMDA withdrawals by local governmental units. In addition, the Bancorp’s FHLB line of credit carried a balance of $2.8 million at December 31, 2007, compared to $3.1 million at December 31, 2006. Other short-term borrowings totaled $898 thousand at December 31, 2007, compared to $1.7 million at December 31, 2006.

Liquidity and Capital Resources

     The Bancorp’s primary goal for funds and liquidity management is to ensure that at all times it can meet the cash demands of its depositors and its loan customers. A secondary purpose of funds management is profit management. Because profit and liquidity are often conflicting objectives, management will maximize the Bank’s net interest margin by making adequate, but not excessive, liquidity provisions. Furthermore, funds are managed so that future profits will not be significantly impacted because management uses expensive ways of raising cash.

     Changes in the liquidity position result from operating, investing and financing activities. Cash flows from operating activities are generally the cash effects of transactions and other events that enter into the determination of net income. The primary investing activities include loan originations, loan repayments, investments in interest bearing balances in financial institutions, dividend receipts and the purchase and maturity of investment securities. Financing activities focus almost entirely on the generation of customer deposits. In addition, the Bancorp utilizes borrowings (i.e., repurchase agreements, FHLB advances and federal funds purchased) as a source of funds.

12

     During 2007, cash and cash equivalents decreased $3.7 million, compared to a decrease of $24.1 million for 2006. During 2007, the primary sources of cash and cash equivalents were from the maturities and sales of securities, loan sales and repayments, FHLB advances and cash from operating activities. The primary uses of cash and cash equivalents were loan originations and loan participations purchased, the purchase of securities, deposit withdrawals, FHLB advance repayments and the payment of common stock dividends. During 2007, cash from operating activities totaled $8.2 million, compared to $6.6 million for 2006. The 2007 increase in cash provided by operating activities was a result of the net change in other liabilities. Cash outflows from investing activities totaled $13.9 million during 2007, compared to $14.6 million during 2006. The decrease during 2007 was due primarily to an increase in loan prepayments and security purchases, offset by maturities. Net cash inflows from loans receivable and loan participations purchased totaled $2.7 million during 2007, while net cash out flows from loans receivable and loan participations purchased totaled $2.9 million during 2006. Net cash inflows from financing activities totaled $2.0 million in 2007, compared to net cash outflows of $16.0 million in 2006. The change during 2007 was primarily due to a decrease in borrowed fund repayments. Deposits decreased by $19.5 million during 2007, compared to a decrease of $12.8 million for 2006. The 2007 decrease in deposits was a result of a planned withdrawal of a short-term local government deposit. FHLB advances increased by $27.0 million during 2007 compared to a decrease of $5.5 million during 2006. The increase in 2007 was due primarily to acquire funds to satisfy MMDA withdrawals by local governmental units. The Bancorp paid dividends on common stock of $4.0 million during 2007, compared to $3.8 million during 2006.

     During the fourth quarter of 2007, the Bancorp opened its ninth full service banking center in Crown Point, Indiana. The new $2.3 million state-of-the-art facility did not have a material impact on noninterest expense during 2007. It is expected that the new banking center will provide opportunities to expand market share for the Bancorp’s products and services.

     Management strongly believes that safety and soundness is enhanced by maintaining a high level of capital. During 2007, stockholders’ equity increased by $2.7 million (5.4%). The increase resulted primarily from earnings of $5.6 million for 2007. Additional items increasing stockholders’ equity were $286 thousand from stock-based compensation plans, and $962 thousand from the net change in the valuation of available-for-sale securities. Decreasing stockholders’ equity were the Bancorp’s declaration of $4.0 million in cash dividends, $63 thousand in treasury stock purchases and $10 thousand from the change in net unrealized gains on the Bank’s postretirement medical plan. At December 31, 2007, book value per share was $18.79 compared to $17.86 at December 31, 2006.

     The Bancorp is subject to risk-based capital guidelines adopted by the Board of Governors of the Federal Reserve System (the FRB), and the Bank is subject to risk-based capital guidelines adopted by the FDIC. As applied to the Bancorp and the Bank, the FRB and FDIC capital requirements are substantially the same. These regulations divide capital into two tiers. The first tier (Tier 1) includes common equity, certain non-cumulative perpetual preferred stock and minority interests in equity accounts of consolidated subsidiaries, less goodwill and certain other intangible assets. Supplementary (Tier 2) capital includes, among other things, cumulative perpetual and long-term limited-life preferred stock, mandatory convertible securities, certain hybrid capital instruments, term subordinated debt and the allowance for loan losses, subject to certain limitations, less required deductions. The Bancorp and the Bank are required to maintain a total risk-based capital ratio of 8%, of which 4% must be Tier 1 capital. In addition, the FRB and FDIC regulations provide for a minimum Tier 1 leverage ratio (Tier 1 capital to adjusted average assets) of 3% for financial institutions that meet certain specified criteria, including that they have the highest regulatory rating and are not experiencing or anticipating significant growth. All other financial institutions are required to maintain a Tier 1 leverage ratio of 3% plus an additional cushion of at least one to two percent.

     The following table shows that, at December 31, 2007, the Bancorp’s capital exceeded all regulatory capital requirements. At December 31, 2007, the Bancorp’s and the Bank’s regulatory capital ratios were substantially the same. The dollar amounts are in millions.

										Required for								To Be Well
		Actual								Adequate Capital								Capitalized
		Amount				Ratio				Amount				Ratio				Amount				Ratio
Total capital to risk-weighted assets		$	56,750				12.0	%		$	37,783				8.0	%		$	47,228				10.0	%
Tier 1 capital to risk-weighted assets		$	52,169				11.0	%		$	18,891				4.0	%		$	28,337				6.0	%
Tier 1 capital to adjusted average assets		$	52,169				8.3	%		$	18,816				3.0	%		$	31,360				5.0	%

     At December 31, 2007, management is not aware of any current recommendations by the regulatory authorities, which if they were to be implemented, would have a material effect on the Bancorp’s liquidity, capital resources or operations.

Results of Operations — Comparison of 2007 to 2006

     Net income for 2007 was $5.6 million, compared to $6.5 million for 2006, a decrease of $886 thousand (13.7%). During 2007, loan growth was negatively impacted as a result of several large commercial loan pay-offs, while core deposits decreased, in part, from expected withdrawals by local government units. In addition, the Bancorp’s 2007 net income was negatively impacted by two impaired commercial real estate participation loans that required additional provisions to the allowance for loan losses. Also, during the fourth quarter of 2007, net income was impacted by an impaired letter of credit that required a charge to earnings to establish a contingent liability. Contributing to the Bancorp’s earnings was an increase in noninterest income

13

from banking activities and stable operating expenses. The earnings represent a return on average assets of 0.91% for 2007 compared to 1.04% for 2006. The return on average equity was 10.78% for 2007 compared to 13.42% for 2006.

     Net interest income for 2007 was $17.9 million, a decrease of $1.4 million (7.0%) from $19.2 million for 2006. The decrease in net interest income was due primarily to high short-term interest rates and slow loan and core deposit growth. The weighted-average yield on interest-earning assets was 6.21% for 2007 compared to 6.02% for 2006. The weighted-average cost of funds was 3.18% for 2007 compared to 2.77% for 2006. The impact of the 6.21% return on interest-earning assets and the 3.18% cost of funds resulted in a net interest spread of 3.03% for 2007 compared to 3.25% for 2006. During 2007, total interest income increased by $789 thousand (2.3%) while total interest expense increased by $2.1 million (13.6%). The net interest margin was 3.10% for 2007 compared to 3.31% for 2006. During 2007, the Bancorp continued to focus on reducing its effective tax rate by investing in tax-exempt securities and loans. As a result, the Bancorp’s tax equivalent net interest margin for 2007 was 3.21% compared to 3.41% for 2006.

     During 2007, interest income from loans increased by $370 thousand (1.2%) compared to 2006. The increase was due to an increase in yields. The weighted-average yield on loans outstanding was 6.60% for 2007 compared to 6.44% for 2006. Loan balances averaged $466.4 million for 2007, down $5.8 million (1.2%) from $472.2 million for 2006. During 2007, interest income from securities and other interest earning assets increased by $419 thousand (9.2%) compared to 2006. The increase was due to higher average balances and an increase in portfolio yields. The weighted-average yield on securities and other interest earning assets was 4.52% for 2007 compared to 4.19% for 2006. Securities and other interest earning assets averaged $110.0 million for 2007, up $1.2 million (1.1%) from $108.8 million for 2006.

     Interest expense for deposits increased by $1.5 million (11.0%) during 2007 compared to 2006. The change was due to an increase in the weighted-average rate paid on deposits and increased average balances. The weighted-average rate paid on deposits for 2007 was 3.02% compared to 2.65% for 2006. Total deposit balances averaged $494.2 million for 2007, down $13.6 million (2.7%) from $507.8 million for 2006. During 2007, average deposit balances decreased as a result of expected withdrawals by local government units. Interest expense on borrowed funds increased by $660 thousand (29.0%) during 2007 due to an increase in average daily balances and an increase in cost of borrowing. The weighted-average cost of borrowed funds was 4.32% for 2007 compared to 3.78% for 2006. Borrowed funds averaged $68.0 million during 2007, up $7.8 million (13.0%) from $60.2 million for 2006. During 2007, additional borrowings were utilized as a result of the decrease in deposit balances.

     Noninterest income was $4.4 million for 2007, up $212 thousand (5.0%) from $4.2 million during 2006. During 2007, fees and service charges from account related services totaled $2.9 million, which was a decrease of $3 thousand (0.1%), compared to 2006. Fees from wealth management operations totaled $719 thousand for 2007, compared to $657 thousand for 2006, an increase of $62 thousand (9.4%). Income from increases in the cash value of bank owned life insurance totaled $407 thousand for 2007, compared to $365 thousand for 2006, an increase of $42 thousand (11.5%). During 2007, the Bancorp reported $221 thousand in gains on sales of loans compared to $157 thousand for 2006, an increase of $64 thousand (40.8%). Gain on sale of foreclosed real estate totaled $12 thousand during 2007, compared to $43 thousand for 2006, a decrease of $31 thousand (72.1%). In addition, the Bancorp reported $100 thousand in gains on the sale of securities during 2007, compared to gains of $3 thousand for 2006.

     Noninterest expense for 2007 was $14.5 million, up $229 thousand (1.6%) from $14.3 million for 2006. During the current year, compensation and benefits totaled $7.5 million, an increase of $143 thousand (2.0%) compared to $7.3 million for 2006. The increase was primarily due to increased compensation, due to annual salary increases. Occupancy and equipment totaled $2.5 million for 2007, an increase of $76 thousand (3.2%) compared to $2.4 million for 2006. The increase was a result of additional depreciation expense for equipment and technology expenditures. Data processing totaled $867 thousand for 2007, an increase of $40 thousand (4.8%), compared to $827 thousand for 2006. The change was a result of increased utilization and transaction volume with the Bancorp’s core data processing system. Statement and check processing totaled $354 thousand for 2007, compared to $348 thousand for 2006. Marketing expense totaled $279 thousand for 2007, a decrease of $46 thousand (14.2%), compared to $325 thousand for 2006. Marketing expenses for 2007 were lower, as the Bank focused on reengineering its marketing function. Professional services expense related to the utilization of third parties totaled $296 thousand for 2007, a decrease of $82 thousand (21.7%), compared to $379 thousand for 2006. Other expense totaled $2.8 million for 2007, compared to $2.7 million for 2006, an increase of $90 thousand (3.3%). The increase in other expense was a result of a $72 thousand charge to earnings to establish a contingent liability for an impaired letter of credit. The Bancorp’s efficiency ratio for 2007 was 65.1% compared to 60.9% for 2006. The ratio is determined by dividing total noninterest expense by the sum of net interest income and total noninterest income for the period.

     Income tax expenses for 2007 totaled $1.7 million compared to $2.7 million for 2006, a decrease of $1.0 million (38.3%). The combined effective federal and state tax rates for the Bancorp were 22.8% for 2007 and 29.3% for 2006. The decrease was due to an increased investment in tax-exempt investments and loans, bank owned life insurance and the Bank’s real estate investment trust.

14

Critical Accounting Policies

     Critical accounting policies are those accounting policies that management believes are most important to the portrayal of the Bancorp’s financial condition and that require management’s most difficult, subjective or complex judgments. The Bancorp’s most critical accounting policies are summarized below. Other accounting policies, including those related to the fair values of financial statements and the status of contingencies, are summarized in Note 1 to the Bancorp’s consolidated financial statements.

     Allowance for Loan Losses — The Bancorp maintains an Allowance for Loan Losses (ALL) to absorb probable incurred credit losses that arise from the loan portfolio. The ALL is increased by the provision for loan losses, and decreased by charge-offs net of recoveries. The determination of the amounts of the ALL and provisions for loan losses is based upon management’s current judgments about the credit quality of the loan portfolio with consideration given to all known relevant internal and external factors that affect loan collectibility. The methodology used to determine the current year provision and the overall adequacy of the ALL includes a disciplined and consistently applied quarterly process that combines a review of the current position with a risk assessment worksheet. Factors that are taken into consideration in the analysis include an assessment of national and local economic trends, a review of current year loan portfolio growth and changes in portfolio mix, and an assessment of trends for loan delinquencies and loan charge-off activity. Particular attention is given to non-accruing loans and accruing loans past due 90 days or more, and loans that have been classified as substandard, doubtful, or loss. Changes in the provision are directionally consistent with changes in observable data.

     Commercial and industrial, and commercial real estate loans that exhibit credit weaknesses and loans that have been classified as impaired are subject to an individual review. Where appropriate, ALL allocations are made to these loans based on management’s assessment of financial position, current cash flows, collateral values, financial strength of guarantors, industry trends, and economic conditions. ALL allocations for homogeneous loans, such as residential mortgage loans and consumer loans, are based on historical charge-off activity and current delinquency trends. Management has allocated general reserves to both performing and non-performing loans based on historical data and current information available.

     Risk factors for non-performing and internally classified loans are based on an analysis of the estimated collateral liquidation value for individual loans defined as substandard or doubtful. Estimated collateral liquidation values are based on established loan underwriting standards and adjusted for current mitigating factors on a loan-by-loan basis. Aggregate substandard loan collateral deficiencies are determined for residential, commercial real estate, commercial business, and consumer loan portfolios. These deficiencies are then stated as a percentage of the total substandard balances to determine the appropriate risk factors.

     Risk factors for performing and non-classified loans are based on the average net charge-offs for the most recent five years, which are then stated as a percentage of average loans for the same period. Historical risk factors are calculated for residential, commercial real estate, commercial business, and consumer loans. The historical factors are then adjusted for current subjective risks attributable to: local, regional and national economic factors; loan growth and changes in loan composition; organizational structure; composition of loan staff; loan concentrations; policy changes and out of market lending activity.

     The risk factors are applied to these types of loans to determine the appropriate level for the ALL. Adjustments may be made to these allocations that reflect management’s judgment on current conditions, delinquency trends, and charge-off activity.

     The Bancorp has not made any significant changes to its overall approach in the determination of the ALL for all periods reported. There have been no material changes in assumptions or estimation techniques. Based on the above discussion, management believes that the ALL is currently adequate, but not excessive, given the risk inherent in the loan portfolio.

Impact of Inflation and Changing Prices

     The financial statements and related data presented herein have been prepared in accordance with accounting principles generally accepted in the United States of America, which require the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative purchasing power of money over time due to inflation. The primary assets and liabilities of the Bancorp are monetary in nature. As a result, interest rates have a more significant impact on the Bancorp’s performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or magnitude as the prices of goods and services.

Forward-Looking Statements

     Statements contained in this report that are not historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The words or phrases “would be,” “will allow,” “intends to,” “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project,” or similar expressions are also intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act. The Bancorp cautions readers that forward-looking statements, including without limitation, those relating to the Bancorp’s future business prospects, interest income and expense, net income, liquidity, and capital needs are subject to certain risks and uncertainties that could cause actual results to differ materially from those indicated in the forward-looking statements, due to, among other things, factors identified in this report.

15

Report of Independent Registered
Public Accounting Firm

Board of Directors
NorthWest Indiana Bancorp
Munster, Indiana

We have audited the accompanying consolidated balance sheets of NorthWest Indiana Bancorp (“Company”) as of December 31, 2007 and 2006 and the related consolidated statements of income, changes in stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2007. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of NorthWest Indiana Bancorp as of December 31, 2007 and 2006, and the results of their operations and its cash flows for each of the two years in the period ended December 31, 2007 in conformity with U.S. generally accepted accounting principles.

Crowe Chizek and Company LLC

South Bend, Indiana
March 18, 2008

16

Consolidated Balance Sheets

		December 31,
(Dollars in thousands)		2007				2006
ASSETS
Cash and non-interest bearing balances in financial institutions		$	10,259			$	15,764
Interest bearing balances in financial institutions			1,852				—
Total cash and cash equivalents			12,111				15,764
Securities available-for-sale			96,286				83,765
Securities held-to-maturity; fair value: December 31, 2007 - $18,557
December 31, 2006 - $15,380			18,358				15,247
Loans receivable			468,459				471,716
Less: allowance for loan losses			(4,581	)			(4,267	)
Net loans receivable			463,878				467,449
Federal Home Loan Bank stock			3,550				3,544
Accrued interest receivable			3,294				3,331
Premises and equipment			16,326				14,603
Foreclosed real estate			134				323
Cash value of bank owned life insurance			11,229				10,822
Investment in real estate limited partnerships			550				696
Other assets			3,002				3,438
Total assets		$	628,718			$	618,982
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Non-interest bearing		$	44,799			$	43,889
Interest bearing			448,585				469,042
Total			493,384				512,931
Borrowed funds			76,930				51,501
Accrued expenses and other liabilities			5,671				4,540
Total liabilities			575,985				568,972
Stockholders’ Equity:
Preferred stock, no par or stated value;    10,000,000 shares authorized, none outstanding			—				—
Common stock, no par or stated value; 10,000,000 shares authorized;
shares issued: December 31, 2007 - 2,882,097
December 31, 2006 - 2,870,437
shares outstanding: December 31, 2007 - 2,808,853
December 31, 2006 - 2,799,814			360				359
Additional paid-in capital			4,895				4,610
Accumulated other comprehensive gain/(loss)			563				(389	)
Retained earnings			48,500				46,952
Treasury stock, common shares at cost: December 31, 2007 - 73,244
December 31, 2006 - 70,623			(1,585	)			(1,522	)
Total stockholders’ equity			52,733				50,010
Total liabilities and stockholders’ equity		$	628,718			$	618,982

See accompanying notes to consolidated financial statements.

Consolidated Statements of Income

		Year ended December 31,
(Dollars in thousands, except per share data)		2007				2006
Interest income:
Loans receivable
Real estate loans		$	26,637			$	25,819
Commercial loans			3,963				4,356
Consumer loans			195				250
Total loan interest			30,795				30,425
Securities			4,862				4,057
Other interest earning assets			111				497
Total interest income			35,768				34,979
Interest expense:
Deposits			14,944				13,460
Borrowed funds			2,938				2,278
Total interest expense			17,882				15,738
Net interest income			17,886				19,241
Provision for loan losses			552				15
Net interest income after provision for loan losses			17,334				19,226
Noninterest income:
Fees and service charges			2,947				2,950
Wealth management operations			719				657
Increase in cash value of bank owned life insurance			407				365
Gain on sale of loans, net			221				157
Gain on sale of foreclosed real estate			12				43
Gain on sales of securities, net			100				3
Other			25				44
Total noninterest income			4,431				4,219
Noninterest expense:
Compensation and benefits			7,472				7,329
Occupancy and equipment			2,457				2,381
Data processing			867				827
Statement and check processing			354				348
Marketing			279				325
Professional services			296				378
Other			2,800				2,710
Total noninterest expense			14,525				14,296
Income before income tax expenses			7,240				9,149
Income tax expenses			1,651				2,674
Net income		$	5,589			$	6,475
Earnings per common share:
Basic		$	1.99			$	2.32
Diluted		$	1.98			$	2.30
Dividends declared per common share		$	1.44			$	1.40

See accompanying notes to consolidated financial statements.

Consolidated Statements of
Changes in Stockholders’ Equity

										Accumulated
						Additional				Other
		Common				Paid-in				Comprehensive				Retained				Treasury				Total
(Dollars in thousands, except per share data)		Stock				Capital				Income (Loss)				Earnings				Stock				Equity
Balance at December 31, 2005		$	357			$	4,299			$	(1,089	)		$	44,388			$	(1,522	)		$	46,433
Comprehensive income:
Net income			—				—				—				6,475				—				6,475
Net unrealized gain/(loss) on securities available-for-sale, net of reclassification and tax effects			—				—				593				—				—				593
Comprehensive income			—				—				—				—				—				7,068
Adjustment to initially apply SFAS No. 158, net of tax effects			—				—				107				—				—				107
Issuance of 15,348 shares of common stock at $16.00 - $31.60 per share, under stock-based compensation plans, including related tax effects			2				244				—				—				—				246
Stock-based compensation expense			—				67				—				—				—				67
Cash dividends, $1.40 per share			—				—				—				(3,911	)			—				(3,911	)
Balance at December 31, 2006			359				4,610				(389	)			46,952				(1,522	)			50,010
Comprehensive income:
Net income			—				—				—				5,589				—				5,589
Net unrealized gain/(loss) on securities available-for-sale, net of reclassification and tax effects			—				—				962				—				—				962
Change in unrecognized gain on post retirement benefit, net of reclassification and tax effects			—				—				(10	)			—				—				(10	)
Comprehensive income			—				—				—				—				—				6,541
Issuance of 9,760 shares of common stock at $16.00 - $25.25 per share, under stock-based compensation plans, including related tax effects			1				213				—				—				—				214
Stock-based compensation expense			—				72				—				—				—				72
Purchase of treasury stock			—				—				—				—				(63	)			(63	)
Cash dividends, $1.44 per share			—				—				—				(4,041	)			—				(4,041	)
Balance at December 31, 2007		$	360			$	4,895			$	563			$	48,500			$	(1,585	)		$	52,733

See accompanying notes to consolidated financial statements.

Consolidated Statements of Cash Flows

		Year Ended December 31,
(Dollars in thousands)		2007				2006
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	5,589			$	6,475
Adjustments to reconcile net income to net cash provided by operating activities:
Origination of loans for sale			(12,230	)			(9,141	)
Sale of loans originated for sale			12,335				9,234
Depreciation and amortization, net of accretion			1,368				1,310
Amortization of mortgage servicing rights			86				84
Amortization of investment in real estate limited partnerships			14				132
Equity in (gain)/loss of investments in limited partnership, net of interest received			117				89
Stock-based compensation			72				67.
Net gains on sale of securities			(100	)			(3	)
Net gains on sale of loans			(221	)			(157	)
Net gain on sale of foreclosed real estate			(12	)			(43	)
Provision for loan losses			552				15
Net change in:
Interest receivable			37				(345	)
Cash value of bank owned life insurance			(407	)			(365	)
Other assets			(44	)			(1,324	)
Accrued expenses and other liabilities			1,090				542
Total adjustments			2,657				95
Net cash from operating activities			8,246				6,570
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities and paydowns of securities available-for-sale			24,423				13,352
Proceeds from sales of securities available-for-sale			14,853				3,290
Purchase of securities available-for-sale			(50,197	)			(23,137	)
Purchase of securities held-to-maturity			(4,046	)			(1,561	)
Proceeds from maturities and paydowns of securities held-to-maturity			883				13
Loan participations purchased			(12,465	)			(12,354	)
Net change in loans receivable			15,127				9,413
Proceeds from sale of Federal Home Loan Bank Stock			—				164
Purchase of Federal Home Loan Bank Stock			(6	)			(721	)
Purchase of premises and equipment, net			(3,052	)			(1,360	)
Proceeds from sale of foreclosed real estate			558				319
Purchase of bank owned life insurance			—				(2,000	)
Net cash from investing activities			(13,922	)			(14,582	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in deposits			(19,547	)			(12,800	)
Proceeds from FHLB advances			25,000				26,000
Repayment of FHLB advances			(8,000	)			(31,500	)
Change in other borrowed funds			8,429				5,848
Tax effect of nonqualified stock option exercise			17				13
Proceeds from issuance of common stock			197				231
Dividends paid			(4,010	)			(3,849	)
Treasury stock purchased			(63	)			—
Net cash from financing activities			2,023				(16,055	)
Net change in cash and cash equivalents			(3,653	)			(24,067	)
Cash and cash equivalents at beginning of period			15,764				39,831
Cash and cash equivalents at end of period		$	12,111			$	15,764
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest		$	17,881			$	15,704
Income taxes		$	2,190			$	3,230
SUPPLEMENTAL NONCASH INFORMATION:
Transfers from loans to foreclosed real estate		$	357			$	339

See accompanying notes to consolidated financial statements.

Notes to Consolidated Financial Statements
Years ended December 31, 2007 and 2006

NOTE 1 — Summary of Significant Accounting Policies

     Principles of Consolidation — The consolidated financial statements include NorthWest Indiana Bancorp (the Bancorp), its wholly owned subsidiary, Peoples Bank SB (the Bank), and the Bank’s wholly owned subsidiaries, Peoples Service Corporation and NWIN, LLC. The Bancorp has no other business activity other than being a holding company for the Bank. The Bancorp’s earnings are dependent upon the earnings of the Bank. Peoples Service Corporation provides insurance and annuity investments to the Bank’s wealth management customers. NWIN, LLC is located in Las Vegas, Nevada and serves as the Bank’s investment subsidiary and parent of a real estate investment trust, NWIN Funding, Inc.

     NWIN Funding, Inc. was formed on September 1, 2006, as an Indiana Real Estate Investment Trust. The formation of NWIN Funding, Inc. provides the Bancorp with a vehicle that may be used to raise capital utilizing portfolio mortgages as collateral, without diluting stock ownership. In addition, NWIN Funding, Inc. will receive favorable state tax treatment for income generated by its operations. All significant inter-company accounts and transactions have been eliminated in consolidation.

     Use of Estimates — Preparing financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period, as well as the disclosures provided. Actual results could differ from those estimates. Estimates associated with the allowance for loan losses, loan servicing rights, fair values of financial instruments and status of contingencies are particularly susceptible to material change in the near term.

     Concentrations of Credit Risk — The Bancorp grants residential, commercial real estate, commercial business and installment loans to customers primarily of Lake County, in northwest Indiana. Substantially all loans are secured by specific items of collateral including residences, commercial real estate, business assets and consumer assets.

     Cash Flow Reporting — For purposes of the statement of cash flows, the Bancorp considers cash on hand, noninterest bearing balances in financial institutions, all interest-bearing balances in financial institutions with original maturities of ninety days or less and federal funds sold to be cash and cash equivalents. The Bancorp reports net cash flows for customer loan and deposit transactions and short-term borrowings with maturities of 90 days or less.

     Interest-bearing Deposits in Other Financial Institutions —Interest bearing deposits in other financial institutions mature within one year and are carried at cost.

     Securities — The Bancorp classifies securities into held-to-maturity, available-for-sale, or trading categories. Held-to-maturity securities are those which management has the positive intent and the Bancorp the ability to hold to maturity, and are reported at amortized cost. Available-for-sale securities are those the Bancorp may decide to sell if needed for liquidity, asset-liability management or other reasons. Available-for-sale securities are reported at fair value, with unrealized gains and losses reported in other comprehensive income, net of tax. The Bancorp does not have a trading portfolio. Realized gains and losses resulting from the sale of securities recorded on the trade date are computed by the specific identification method. Interest and dividend income, adjusted by amortization of premium or discount on a level yield method are included in earnings. Securities are written down to fair value when a decline in fair value is not temporary.

     Declines in the fair value of securities below their cost that are other than temporary are reflected as realized losses. In estimating other than temporary losses, management considers: (1) the length of time and extent that fair value has been less than cost, (2) the financial condition and near term prospects of the issuer, and (3) the Bancorp’s ability and intent to hold the security for a period sufficient to allow for any anticipated recovery in fair value.

     Loans Held for Sale — Mortgage loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or market, as determined by outstanding commitments from investors. Net unrealized losses, if any, are recorded as a valuation allowance and charged to earnings.

     Mortgage loans held for sale are generally sold with servicing rights retained. The carrying value of mortgage loans sold is reduced by the cost allocated to the servicing rights. Gains and losses on sales of mortgage loans are based on the difference between the selling price and the carrying value of the related loan sold.

     Loans and Loan Income — Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of unearned interest, deferred loan fees and costs, and an allowance for loan losses. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the level yield method without anticipating prepayments.

     Interest income on mortgage and commercial loans is discontinued at the time the loan is 90 days delinquent unless the loan is well-secured and in process of collection. Consumer loans are typically charged off no later than 120 days past due. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on non-accrual or charged-off at an earlier date if collection of principal or interest is considered doubtful.

     All interest accrued but not received for loans placed on non-accrual is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

     Allowance for Loan Losses — The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged off.

     A loan is considered impaired when, based on current information and events, it is probable that the Bancorp will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case by case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Bancorp does not separately identify individual consumer and residential loans for impairment disclosures.

     Federal Home Loan Bank Stock — The Bank is a member of the FHLB system. Members are required to own a certain amount of stock based on the level of borrowings and other factors, and may invest in additional amounts. FHLB stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on ultimate recovery of par value. Both cash and stock dividends are reported as income.

     Premises and Equipment — Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation. Premises and related components are depreciated using the straight-line method with useful lives ranging from 26 to 39 years. Furniture and equipment are depreciated using the straight-line method with useful lives ranging from 2 to 10 years.

     Foreclosed Real Estate — Assets acquired through or instead of loan foreclosure are initially recorded at fair value when acquired, establishing a new cost basis. If fair value declines subsequent to foreclosure, a valuation allowance is recorded through expense. Operating costs after acquisition are expensed.

     Servicing Rights — Servicing rights are recognized separately when they are acquired through sales of loans. For sales of mortgage loans prior to January 1, 2007, a portion of the cost of the loan was allocated to the servicing right based on relative fair values. The Bancorp adopted SFAS No. 156 on January 1, 2007, and for sales of mortgage loans beginning in 2007, servicing rights are initially recorded at fair value with the income statement effect recorded in gains on sales of loans. Fair value is based on market prices for comparable mortgage servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as the cost to service, the discount rate, the custodial earnings rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses. The Bancorp compares the valuation model inputs and results to published industry data in order to validate the model results and assumptions. All classes of servicing assets are subsequently measured using the amortization method which requires servicing rights to be amortized into non interest income in proportion to, and over the period of, the estimated future net servicing income of the underlying loans.

     Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to carrying amount. Impairment is determined by stratifying rights into groupings based on predominant risk characteristics, such as interest rate, loan type and investor type. Impairment is recognized through a valuation allowance for an individual grouping, to the extent that fair value is less than the carrying amount. If the Bancorp later determines that all or a portion of the impairment no longer exists for a particular grouping, a reduction of the allowance may be recorded as an increase to income. Changes in valuation allowances are reported with Other Noninterest Income on the income statement. The fair values of servicing rights are subject to significant fluctuations as a result of changes in estimated and actual prepayment speeds and default rates and losses.

     Servicing fee income which is reported on the income statement as Other Noninterest Income is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal; or a fixed amount per loan and are recorded as income when earned. The amortization of mortgage servicing rights is netted against loan servicing fee income. Servicing fees totaled $109 thousand and $96 thousand for the years ended December 31, 2007 and 2006. Late fees and ancillary fees related to loan servicing are not material.

     Investment in Real Estate Limited Partnerships — Investment in real estate limited partnerships represent the Bancorp’s investments in affordable housing projects for the primary purpose of available tax benefits. The method of accounting used for each investment is based on ownership percentage in the investment. One investment is accounted for using the cost method of accounting. The excess of the carrying amount of the investment over its estimated residual value is amortized during the periods in which associated tax credits are allocated to the investor. The annual amortization of the investment is based on the proportion of tax credits received in the current year to total estimated tax credits to be allocated to the Bancorp. The other investment is accounted for using the equity method of accounting. Under the equity method of accounting, the Bancorp records its share of the partnership’s earnings or losses in its income statement and adjusts the carrying amount of the investments on the balance sheet. These investments are reviewed for impairment when events indicate their carrying amounts may not be recoverable from future undiscounted cash flows. If impaired, the investments are reported at fair value. The Bancorp’s involvement in these types of investments is for tax planning purposes only and, as such, the Bancorp is not involved in the management or operation of such investments.

     Long-term Assets — Premises and equipment and other long term assets are reviewed for impairment when events indicate their carrying amount may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at fair value.

     Bank Owned Life Insurance — The Bancorp has purchased life insurance policies on certain key executives. Upon adoption of EITF 06-5, which is discussed further below, Bank owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement. Prior to adoption of EITF 06-5, the Bancorp recorded bank owned life insurance at its cash surrender value.

     In September 2006, the FASB Emerging Issues Task Force finalized Issue No. 06-5, Accounting for Purchases of Life Insurance - Determining the Amount That Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4 (Accounting for Purchases of Life Insurance). This Issue requires that a policyholder consider contractual terms of a life insurance policy in determining the amount that could be realized under the insurance contract. It also requires that if the contract provides for a greater surrender value if all individual policies in a group are surrendered at the same time, that the surrender value be determined based on the assumption that policies will be surrendered on an individual basis. Lastly, the Issue requires disclosure when there are contractual restrictions on the Bancorp’s ability to surrender a policy. The adoption of EITF 06-5 on January 1, 2007 had no impact on the Bancorp’s financial condition or results of operation.

     Repurchase Agreements — Substantially, all repurchase agreement liabilities represent amounts advanced by various customers that are not covered by federal deposit insurance and are secured by securities owned by the Bancorp.

     Postretirement Benefits Other Than Pensions — The Bancorp sponsors a defined benefit postretirement plan that provides comprehensive major medical benefits to all eligible retirees. Postretirement benefits are accrued based on the expected cost of providing postretirement benefits to employees during the years the employees have rendered service to the Bancorp.

     Stock-Based Compensation — Effective January 1, 2006, the Bancorp adopted Statement of Financial Accounting Standards (“SFAS”) No. 123(R), Share-based Payment, using the modified prospective transition method. Accordingly, the Bancorp has recorded stock-based employee compensation cost using the fair value method starting in 2006.

     Income Taxes — Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. The Bancorp adopted FASB Interpretation 48, Accounting for Uncertainty in Income Taxes (“FIN 48”), as of January 1, 2007. A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. The Bancorp recognizes interest and/or penalties related to income tax matters in income tax expense. The adoption had no affect on the Bancorp’s financial statements.

     Loan Commitments and Related Financial Instruments — Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and standby letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded.

     Earnings Per Common Share — Basic earnings per common share is net income divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per common share includes the dilutive effect of additional potential common shares issuable under stock options.

     Comprehensive Income — Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes unrealized gains and losses on securities available-for-sale and the unrecognized gains and losses on postretirement benefits.

     Loss Contingencies — Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there now are such matters that will have a material effect on the financial statements.

     Restrictions on Cash — Cash on hand or on deposit with the Federal Reserve Bank of $575,000 and $345,000 was required to meet regulatory reserve and clearing requirements at year-end 2007 and 2006. These balances do not earn interest.

     Fair Value of Financial Instruments — Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in a separate note. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates.

     Operating Segments — While the Bancorp’s executive management monitors the revenue streams of the various products and services, the identifiable segments are not material and operations are managed and financial performance is evaluated on a company-wide basis. Accordingly, all of the Bancorp’s financial service operations are considered by management to be aggregated in one reportable operating segment.

     Reclassification — Certain amounts appearing in the consolidated financial statements and notes thereto for the year ended December 31, 2006, may have been reclassified to conform to the December 31, 2007 presentation.

     Adoption of New Accounting Standards — In February 2006, the FASB issued Statement of Financial Accounting Standards No. 155, Accounting for Certain Hybrid Financial Instruments (SFAS No. 155), which permits fair value remeasurement for hybrid financial instruments that contain an embedded derivative that otherwise would require bifurcation. Additionally, SFAS No. 155 clarifies the accounting guidance for beneficial interests in securitizations. Under SFAS No. 155, all beneficial interests in a securitization will require an assessment in accordance with SFAS No. 133 to determine if an embedded derivative exists within the instrument. In January 2007, the FASB issued Derivatives Implementation Group Issue B40, Application of Paragraph 13(b) to Securitized Interests in Prepayable Financial Assets (DIG Issue B40). DIG Issue B40 provides an exemption from the embedded derivative test of paragraph 13(b) of SFAS No. 133 for instruments that would otherwise require bifurcation if the test is met solely because of a prepayment feature included within the securitized interest and prepayment is not controlled by the security holder. SFAS No. 155 and DIG Issue B40 are effective for fiscal years beginning after September 15, 2006. The adoption of SFAS No. 155 and DIG Issue B40 did not have a material impact on the Bancorp’s consolidated financial position or results of operations.

     In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans —an amendment of FASB Statements No. 87, 88, 106 and 132(R). This Statement requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its balance sheet, beginning with year end 2006, and to recognize changes in the funded status in the year in which the changes occur through comprehensive income beginning in 2007. Additionally, defined benefit plan assets and obligations are to be measured as of the date of the employer’s fiscal year-end, starting in 2008.

		(Dollars in thousands)
		Before								After
		Application								Application
		of SFAS								of SFAS
		No. 158				Adjustments				No. 158
Liability for postretirement benefits		$	207			$	(185	)		$	22
Deferred income taxes			(1,464	)			(78	)			(1,503	)
Total assets			619,060				(78	)			618,982
Total liabilities			569,157				(185	)			568,972
Accumulated other comprehensive loss			(496	)			107				(389	)
Total stockholders’ equity		$	49,903			$	107			$	50,010

     Effect of Newly Issued Accounting Standards — In September 2006, the FASB issued Statement No. 157, Fair Value Measurements. This Statement defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. This Statement establishes a fair value hierarchy about the assumptions used to measure fair value and clarifies assumptions about risk and the effect of a restriction on the sale or use of an asset. The standard is effective for fiscal years beginning after November 15, 2007. The impact of adoption was not material.

     In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. The standard provides companies with an option to report selected financial assets and liabilities at fair value and establishes presentation and disclosure requirements designed to facilitate comparisons between companies that

choose different measurement attributes for similar types of assets and liabilities. The new standard is effective for the Bancorp on January 1, 2008. The Bancorp did not elect the fair value option for any financial assets or financial liabilities as of January 1, 2008.

     In September 2006, the FASB Emerging Issues Task Force finalized Issue No. 06-4, Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements. This issue requires that a liability be recorded during the service period when a split-dollar life insurance agreement continues after participants’ employment or retirement. The required accrued liability will be based on either the post-employment benefit cost for the continuing life insurance or based on the future death benefit depending on the contractual terms of the underlying agreement. This issue is effective for fiscal years beginning after December 15, 2007. The impact of adoption was not material.

     On November 5, 2007, the SEC issued Staff Accounting Bulletin No. 109, Written Loan Commitments Recorded at Fair Value through Earnings (“SAB 109”). Previously, SAB 105, Application of Accounting Principles to Loan Commitments, stated that in measuring the fair value of a derivative loan commitment, a company should not incorporate the expected net future cash flows related to the associated servicing of the loan. SAB 109 supersedes SAB 105 and indicates that the expected net future cash flows related to the associated servicing of the loan should be included in measuring fair value for all written loan commitments that are accounted for at fair value through earnings. SAB 105 also indicated that internally-developed intangible assets should not be recorded as part of the fair value of a derivative loan commitment, and SAB 109 retains that view. SAB 109 is effective for derivative loan commitments issued or modified in fiscal quarters beginning after December 15, 2007. The Bancorp does not expect the impact of this standard to be material.

NOTE 2 — Securities

     The fair value of available-for-sale securities and the related gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) were as follows:

		(Dollars in thousands)
						Gross				Gross
		Fair				Unrealized				Unrealized
		Value				Gains				Losses
2007
U.S. government sponsored entities		$	24,871			$	276			$	(27	)
CMO and mortgage-backed securities			51,913				547				(156	)
Municipal securities			14,104				208				(15	)
Trust preferred securities			4,049				—				(130	)
CMO government sponsored entities			1,349				3				—
Total debt securities		$	96,286			$	1,034			$	(328	)
2006
U.S. government sponsored entities		$	39,596			$	35			$	(450	)
CMO and mortgage-backed securities			38,302				138				(515	)
Municipal securities			4,959				—				(12	)
Trust preferred securities			—				—				—
CMO government sponsored entities			908				44				(19	)
Total debt securities		$	83,765			$	217			$	(996	)

     The carrying amount, unrecognized gains and losses, and fair value of securities held-to-maturity were as follows:

		(Dollars in thousands)
						Gross				Gross
		Carrying				Unrecognized				Unrecognized				Fair
		Amount				Gains				Losses				Value
2007
Municipal securities		$	17,897			$	219			$	(24	)		$	18,093
Mortgage-backed securities			461				6				(3	)			464
Total debt securities		$	18,358			$	225			$	(27	)		$	18,557
2006
Municipal securities		$	14,709			$	163			$	(29	)		$	14,843
Mortgage-backed securities			538				4				(5	)			537
Total debt securities		$	15,247			$	167			$	(34	)		$	15,380

     The fair value of debt securities and carrying amount, if different, at year end 2007 by contractual maturity were as follows. Securities not due at a single maturity date, primarily mortgage-backed securities, are shown separately.

		(Dollars in thousands)
		Available-for-sale				Held-to-maturity
		Fair				Carrying				Fair
		Value				Amount				Value
Due in one year or less		$	11,049			$	—			$	—
Due from one to five years			6,799				—				—
Due over five years			26,525				17,897				18,093
CMO and mortgage-backed securities			51,913				461				464
Total		$	96,286			$	18,358			$	18,557

     Sales of available-for-sale securities were as follows:

		(Dollars in thousands)
		2007				2006
Proceeds		$	14,853			$	3,290
Gross gains			107				3
Gross losses			(7	)			—

     The tax benefit (provision) related to these net realized gains and losses were $39,000 for 2007 and $1,000 for 2006.

     Securities with carrying values of $25,060,000 and $20,329,000 were pledged as of December 31, 2007 and 2006 as collateral for repurchase agreements and public funds and for other purposes as permitted or required by law.

     Securities with unrealized losses at year-end 2007 and 2006 not recognized in income are as follows:

		(Dollars in thousand)
		Less than								12 months
		12 months								or longer								Total
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
		Value				Loss				Value				Loss				Value				Loss
2007
Description of Securities:
U.S. government sponsored entities		$	—			$	—			$	9,433			$	(27	)		$	9,433			$	(27	)
CMO and mortgage-backed securities			1,376				(6	)			14,259				(153	)			15,635				(159	)
Municipal securities			2,152				(15	)			2,629				(24	)			4,781				(39	)
Trust preferred securities			4,050				(130	)			—				—				4,050				(130	)
Total temporarily impaired		$	7,578			$	(151	)		$	26,321			$	(204	)		$	33,899			$	(355	)

		(Dollars in thousands)
		Less than								12 months
		12 months								or longer								Total
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
		Value				Loss				Value				Loss				Value				Loss
2006
Description of Securities:
U.S. government sponsored entities		$	—			$	—			$	35,519			$	(450	)		$	35,519			$	(450	)
CMO and mortgage-backed securities			918				(6	)			21,594				(533	)			22,512				(539	)
Municipal securities			2,654				(10	)			3,107				(31	)			5,761				(41	)
Trust preferred securities			—				—				—				—				—				—
Total temporarily impaired		$	3,572			$	(16	)		$	60,220			$	(1,014	)		$	63,792			$	(1,030	)