Unassociated Document

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x	Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the quarterly period ended September 30, 2009, or

¨	Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the transition period from ________ to ________

Commission File Number: 0-26128

NorthWest Indiana Bancorp

(Exact name of registrant as specified in its charter)

Indiana		35-1927981
(State or other jurisdiction of incorporation		(I.R.S. Employer
or organization)		Identification Number)

9204 Columbia Avenue
Munster, Indiana		46321
(Address of principal executive offices)		(ZIP code)

Registrant's telephone number, including area code: (219) 836-4400

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):

Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer ¨ Smaller Reporting Company x

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

There were 2,816,663 shares of the registrant’s Common Stock, without par value, outstanding at September 30, 2009.

NorthWest Indiana Bancorp

Index

			Page
			Number
PART I. Financial Information

	Item 1.	Unaudited Financial Statements

		Consolidated Balance Sheets, September 30, 2009 and December 31, 2008	1

		Consolidated Statements of Income, Three and Nine months Ended
		September 30, 2009 and 2008	2

		Consolidated Statements of Changes in Stockholders' Equity, Three and Nine months
		Ended September 30, 2009 and 2008	3

		Consolidated Statements of Cash Flows, Nine months
		Ended September 30, 2009 and 2008	4

		Notes to Consolidated Financial Statements	5-15

	Item 2.	Management’s Discussion and Analysis of Financial Condition and
		Results of Operations	16-26

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	26

	Item 4T.	Controls and Procedures	26

PART II. Other Information			27

SIGNATURES			28

EXHIBITS
	31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
	31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
	32.1 Section 1350 Certifications

NorthWest Indiana Bancorp

Consolidated Balance Sheets

	September 30,			December 31,
	2009			2008
(Dollars in thousands)	(unaudited)

ASSETS

Cash and non-interest bearing balances in financial institutions	$	8,981		$	10,005
Interest bearing balances in financial institutions		16,394			-
Federal funds sold		3,664			1,291
Total cash and cash equivalents		29,039			11,296

Securities available-for-sale		122,279			108,207
Securities held-to-maturity		21,280			18,515
Loans held for sale		906			-
Loans receivable		463,143			489,509
Less: allowance for loan losses		(5,173	)		(5,830	)
Net loans receivable		457,970			483,679
Federal Home Loan Bank stock		3,650			3,650
Accrued interest receivable		2,893			3,160
Premises and equipment		19,511			19,083
Foreclosed real estate		3,617			527
Cash value of bank owned life insurance		11,948			11,641
Other assets		5,203			4,974

Total assets	$	678,296		$	664,732

LIABILITIES AND STOCKHOLDERS' EQUITY

Deposits:
Non-interest bearing	$	52,201		$	43,367
Interest bearing		505,069			484,781
Total		557,270			528,148
Borrowed funds		61,050			74,795
Accrued expenses and other liabilities		6,657			9,016

Total liabilities		624,977			611,959

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: September 30, 2009 - 2,889,802		361			361
December 31, 2008 - 2,887,452
shares outstanding: September 30, 2009 - 2,816,663
December 31, 2008 - 2,809,075
Additional paid in capital		5,095			5,064
Accumulated other comprehensive income/(loss)		653			(1,289	)
Retained earnings		48,799			50,365
Treasury stock, common shares at cost: September 30, 2009 - 73,139
December 31, 2008 - 78,377		(1,589	)		(1,728	)

Total stockholders' equity		53,319			52,773

Total liabilities and stockholders' equity	$	678,296		$	664,732

See accompanying notes to consolidated financial statements.

NorthWest Indiana Bancorp

Consolidated Statements of Income

(unaudited)

	Three Months Ended						Nine Months Ended
(Dollars in thousands, except per share data)	September 30,						September 30,
	2009			2008			2009			2008
Interest income:
Loans receivable
Real estate loans	$	5,293		$	6,285		$	16,826		$	19,004
Commercial loans		954			941			2,767			2,939
Consumer loans		29			40			93			118
Total loan interest		6,276			7,266			19,686			22,061

Securities		1,538			1,482			4,632			4,243
Other interest earning assets		3			13			14			59

Total interest income		7,817			8,761			24,332			26,363

Interest expense:
Deposits		1,636			2,365			5,687			8,255
Borrowed funds		437			607			1,384			1,738

Total interest expense		2,073			2,972			7,071			9,993

Net interest income		5,744			5,789			17,261			16,370
Provision for loan losses		4,675			590			6,490			1,540

Net interest income after provision for loan losses		1,069			5,199			10,771			14,830

Noninterest income:
Fees and service charges		694			782			2,004			2,185
Gain on sale of loans, net		167			24			1,032			94
Wealth management operations		270			201			672			618
Gain on securities, net		93			41			437			187
Increase in cash value of bank owned life insurance		98			106			306			311
Other-than-temporary impairment of securities		138			0			(145	)		0
Portion of gain/(loss) recognized in other comprehensive income		(182	)		0			101			0
Gain/(loss) on foreclosed real estate		(26	)		(40	)		(58	)		(21	)
Other		11			11			23			131

Total noninterest income		1,263			1,125			4,372			3,505

Noninterest expense:
Compensation and benefits		2,451			2,243			7,061			6,577
Occupancy and equipment		782			733			2,315			2,148
Federal deposit insurance premiums		246			27			986			57
Data processing		222			213			652			641
Marketing		153			85			368			304
Other		924			976			2,896			2,764

Total noninterest expense		4,778			4,277			14,278			12,491

Income before income tax expenses		(2,446	)		2,047			865			5,844
Income tax expenses/(benefit)		(1,051	)		474			(498	)		1,178

Net income/(loss)	$	(1,395	)	$	1,573		$	1,363		$	4,666

Earnings/(loss) per common share:
Basic	$	(0.50	)	$	0.56		$	0.48		$	1.66
Diluted	$	(0.50	)	$	0.56		$	0.48		$	1.65

Dividends declared per common share	$	0.32		$	0.36		$	1.00		$	1.08

See accompanying notes to consolidated financial statements.

NorthWest Indiana Bancorp

Consolidated Statements of Changes in Stockholders' Equity

(unaudited)

	Three Months Ended						Nine Months Ended
(Dollars in thousands)	September 30,						September 30,
	2009			2008			2009			2008

Balance at beginning of period	$	53,274		$	52,253		$	52,773		$	52,733

Comprehensive income:
Net income/(loss)		(1,395	)		1,573			1,363			4,666
Net unrealized gain/(loss) on securities
available-for-sale, net of reclassifications and tax effects		2,283			(1,976	)		1,948			(3,410	)
Amortization of unrecognized gain		(2	)		(2	)		(6	)		(9	)
Comprehensive income/(loss)		886			(405	)		3,305			1,247

Issuance of common stock,
under stock based compensation plan, including tax effects		-			60			4			101

Stock based compensation expense		9			14			33			45

Sale of treasury stock		52			25			101			89

Stock repurchase		-			-			-			(226	)

Adjustment to retained earnings for EITF 06-4		-			-			(84	)		(20	)

Cash dividends		(902	)		(1,011	)		(2,813	)		(3,033	)

Balance at end of period	$	53,319		$	50,936		$	53,319		$	50,936

See accompanying notes to consolidated financial statements.

NorthWest Indiana Bancorp

Consolidated Statements of Cash Flows

(unaudited)

	Nine Months Ended
(Dollars in thousands)	September 30,
	2009			2008
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	1,363		$	4,666
Adjustments to reconcile net income to
net cash provided by operating activities:
Origination of loans for sale		(44,961	)		(3,940	)
Sale of loans originated for sale		44,771			3,812
Depreciation and amortization, net of accretion		1,095			1,149
Amortization of mortgage servicing rights		113			69
Amortization of investment in real estate limited partnerships		142			19
Equity in (gain)/loss of investment in limited partnership,
net of interest received		11			73
Stock based compensation expense		33			45
Net gains on sales and calls of securities		(437	)		(187	)
Net gains on sale of loans		(1,032	)		(94	)
Net losses due to other-than-temporary impairment of securities		44			-
Net losses on foreclosed real estate		58			21
Provision for loan losses		6,490			1,540
Net change in:
Interest receivable		267			191
Other assets		(1,373	)		(410	)
Cash value of bank owned life insurance		(307	)		(311	)
Accrued expenses and other liabilities		(2,442	)		(405	)
Total adjustments		2,472			1,572
Net cash from operating activities		3,835			6,238

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities and pay downs of securities available-for-sale		17,254			24,343
Proceeds from sales of securities available-for-sale		21,023			5,976
Purchase of securities available-for-sale		(48,914	)		(39,612	)
Purchase of securities held-to-maturity		(3,860	)		(2,171	)
Proceeds from maturities and pay downs of securities held-to-maturity		1,073			1,925
Proceeds from sale of loans transferred to held-for-sale		10,651			-
Loan participations purchased		-			(200	)
Net change in loans receivable		5,578			(19,138	)
Purchase of Federal Home Loan Bank Stock		-			(100	)
Purchase of premises and equipment, net		(1,566	)		(3,082	)
Proceeds from sale of foreclosed real estate		-			109
Net cash from investing activities		1,239			(31,950	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Change in deposits		29,122			29,065
Proceeds from FHLB advances		6,000			30,000
Repayment of FHLB advances		(13,000	)		(26,000	)
Change in other borrowed funds		(6,745	)		(3,793	)
Tax effect of nonqualified stock option exercise		-			6
Proceeds from issuance of common stock		4			95
Proceeds from sale of treasury stock		101			89
Dividends paid		(2,813	)		(3,034	)
Treasury stock purchased		-			(226	)
Net cash from financing activities		12,669			26,202
Net change in cash and cash equivalents		17,743			490
Cash and cash equivalents at beginning of period		11,296			12,111
Cash and cash equivalents at end of period	$	29,039		$	12,601

SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest	$	7,128		$	10,379
Income taxes	$	990		$	1,390
SUPPLEMENTAL NONCASH INFORMATION:
Transfers from loans to foreclosed real estate	$	3,529		$	821
Transfers from loans to loans held for sale	$	10,493		$	-

See accompanying notes to consolidated financial statements.

NorthWest Indiana Bancorp

Notes to Consolidated Financial Statements

Note 1 - Basis of Presentation

The consolidated financial statements include the accounts of NorthWest Indiana Bancorp (the “Bancorp”), its wholly-owned subsidiary, Peoples Bank SB (the “Bank”), and the Bank’s wholly-owned subsidiaries, Peoples Service Corporation, NWIN, LLC and NWIN Funding, Inc. 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. The accompanying unaudited consolidated financial statements were prepared in accordance with instructions for Form 10-Q and, therefore, do not include all disclosures required by U.S. generally accepted accounting principles for complete presentation of financial statements. In the opinion of management, the consolidated financial statements contain all adjustments necessary to present fairly the consolidated balance sheets of the Bancorp as of September 30, 2009 and December 31, 2008, and the consolidated statements of income and changes in stockholders’ equity for the three and nine months ended September 30, 2009 and 2008, and cash flows for the nine months ended September 30, 2009 and 2008. The income reported for the nine-month period ended September 30, 2009 is not necessarily indicative of the results to be expected for the full year.

Note 2 - 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 consolidated 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, fair values of investment securities and status of contingencies are particularly susceptible to material change in the near term.

Note 3 – 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
	Cost		Unrealized		Unrealized			Fair
	Basis		Gains		Losses			Value
9/30/2009
U.S. government sponsored entities	$	1,992	$	73	$	-		$	2,065
CMO and residential mortgage-backed securities		62,670		2,716		-			65,386
Municipal securities		33,438		2,007		(59	)		35,386
Corporate debt securities		3,026		89		(11	)		3,104
CMO government sponsored entities		14,805		270		(11	)		15,064
Collateralized debt obligations		5,435		-		(4,161	)		1,274
Total debt securities	$	121,366	$	5,155	$	(4,242	)	$	122,279

12/31/2008
U.S. government sponsored entities	$	5,484	$	137	$	-		$	5,621
CMO and residential mortgage-backed securities		63,520		1,856		(7	)		65,369
Municipal securities		26,952		259		(532	)		26,679
Corporate debt securities		5,079		-		(266	)		4,813
CMO government sponsored entities		3,756		97		(1	)		3,852
Collateralized debt obligations		5,481		-		(3,608	)		1,873
Total debt securities	$	110,272	$	2,349	$	(4,414	)	$	108,207

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
9/30/2009
Municipal securities	$	20,256	$	906	$	(4	)	$	21,158
Residential mortgage-backed securities		1,024		34		(4	)		1,054
Total debt securities	$	21,280	$	940	$	(8	)	$	22,212

12/31/2008
Municipal securities	$	18,127	$	117	$	(263	)	$	17,981
Residential mortgage-backed securities		388		16		-			404
Total debt securities	$	18,515	$	133	$	(263	)	$	18,385

The fair value of debt securities and carrying amount, if different, at September 30, 2009 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	$	192	$	-	$	-
Due from one to five years		6,239		-		-
Due over five years		35,398		20,256		21,158
CMO and residential mortgage-backed securities		80,450		1,024		1,054
Total	$	122,279	$	21,280	$	22,212

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

	(Dollars in thousands)
	9/30/2009			12/31/2008

Proceeds	$	21,023		$	11,203
Gross gains		437			214
Gross losses		(344	)		(5	)

Change in net unrealized gain/(loss) on available-for-sale securities included in other comprehensive income is as follows:

	(Dollars in thousands)
	Unrealized gains (losses) on securities available for sale
Beginning balance, June 30, 2009	$	(1,375	)
Current period change		1,948
Ending balance, September 30, 2009	$	573

Securities with carrying values of $30,010,000 and $37,414,000 were pledged as of September 30, 2009 and December 31, 2008, respectively, as collateral for repurchase agreements and public funds and for other purposes as permitted or required by law.

Securities with unrealized losses at September 30, 2009 and December 31, 2008 not recognized in income are as follows:

	(Dollars in thousands)
	Less than 12 months					12 months or longer					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
9/30/2009
Description of Securities:
U.S. government
sponsored entities	$	-	$	-		$	-	$	-		$	-	$	-
CMO and residential mortgage-
backed securities		4,325		(15	)		39		-			4,365		(15	)
Municipal securities		-		-			1,882		(63	)		1,882		(63	)
Corporate debt securities		-		-			3,105		(11	)		3,105		(11	)
Collateralized debt obligations		-		-			1,274		(4,047	)		1,274		(4,047	)
Total temporarily impaired	$	4,325	$	(15	)	$	6,300	$	(4,121	)	$	10,626	$	(4,136	)

	(Dollars in thousands)
	Less than 12 months					12 months or longer					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
12/31/2008
Description of Securities:
U.S. government
sponsored entities	$	-	$	-		$	104	$	(1	)	$	104	$	(1	)
CMO and residential mortgage-
backed securities		1,368		(3	)		371		(4	)		1,739		(7	)
Municipal securities		25,924		(795	)		-		-			25,924		(795	)
Corporate debt securities		4,813		(266	)		-		-			4,813		(266	)
Collateralized debt obligations		1,409		(2,640	)		464		(968	)		1,873		(3,608	)
Total temporarily impaired	$	33,514	$	(3,704	)	$	939	$	(973	)	$	34,453	$	(4,677	)

Unrealized losses on securities have not been recognized into income because the securities are of high credit quality or have undisrupted cash flows. Management has the intent and ability to hold for the foreseeable future, and the decline in fair value is largely due to changes in interest rates. The fair value is expected to recover as the securities approach maturity.

Note 4 – Loans Receivable

Non-performing loans at period-end were as follows:

	(Dollars in thousands)
	9/30/2009		12/31/2008
Loans past due over 90 days still on accrual	$	1,770	$	1,476
Non-accrual loans		17,337		10,937

Impaired loans at period-end were as follows:

	(Dollars in thousands)
	9/30/2009		12/31/2008
Period-end loans with no allocated
allowance for loan losses	$	14,037	$	1,748
Period-end loans with allocated
allowance for loan losses		803		6,819
Total	$	14,840	$	8,567
Amount of the allowance for
loan losses allocated	$	201	$	1,683
Average of impaired loans
during the period	$	11,784	$	7,393
Interest income recognized
during impairment		-		-
Cash-basis interest income
recognized during impairment		-		-

Note 5 - Concentrations of Credit Risk

The primary lending area of the Bancorp encompasses all of Lake County in northwest Indiana, where a majority of loan activity is concentrated. The Bancorp is also an active lender in Porter County, and to a lesser extent, LaPorte, Newton and Jasper counties in Indiana, and Lake, Cook and Will counties in Illinois. Substantially all loans are secured by specific items of collateral including residences, commercial real estate, land development, business assets and consumer assets.

Note 6 – Earnings Per Share

Earnings per common share is computed by dividing net income/(loss) by the weighted average number of common shares outstanding. A reconciliation of the numerators and denominators of the basic and diluted earnings per common share computation for the three and nine months ended September 30, 2009 and September 30, 2008 are presented below:

(Dollars in thousands, except per share data)

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2009			2008		2009		2008
Basic earnings per common share:
Net income as reported	$	(1,395	)	$	1,573	$	1,363	$	4,666
Weighted average common shares outstanding:		2,816,600			2,807,103		2,813,031		2,809,244
Basic earnings per common share:	$	(0.50	)	$	0.56	$	0.48	$	1.66
Diluted earnings per common share:
Net income as reported	$	(1,395	)	$	1,573	$	1,363	$	4,666
Weighted average common shares outstanding:		2,816,600			2,807,103		2,813,031		2,809,244
Add: Dilutive effect of assumed stock
option exercises:		-			17,698		-		17,006
Weighted average common and dilutive
potential common shares outstanding:		2,816,600			2,824,801		2,813,031		2,826,250
Diluted earnings per common share:	$	(0.50	)	$	0.56	$	0.48	$	1.65

Note 7 – Stock Based Compensation

The Bancorp’s 2004 Stock Option Plan (the Plan), which is stockholder-approved, permits the grant of share options to its employees for up to 250,000 shares of common stock. Awards granted under the Plan may be in the form of incentive stock options, non-incentive stock options, or restricted stock. As required by the Compensation – Stock Compensation Topic (formerly Financial Accounting Standards No. 123R (FAS 123R,), “Share-Based Payments”), companies are required to record compensation cost for stock options provided to employees in return for employment service. The cost is measured at the fair value of the options when granted, and this cost is expensed over the employment service period, which is normally the vesting period of the options. Compensation cost will also be recorded for prior option grants that vest after the date of adoption. For the nine months ended September 30, 2009, stock based compensation expense of $33,000 was recorded, compared to $45,000 for the nine months ended September 30, 2008. It is anticipated that current outstanding vested and unvested options will result in additional compensation expense of approximately $11,000 in 2009 and $42,000 in 2010.

There were 2,500 shares of restricted stock granted during the first nine months of 2009, compared to 600 shares during the first nine months of 2008.

A summary of option activity under the Bancorp’s incentive stock option plan for the three and nine months ended September 30, 2009 is presented below:

						Weighted-
				Weighted-		Average
				Average		Remaining	Aggregate
				Exercise		Contractual	Intrinsic
Options	Shares			Price		Term	Value
Outstanding at January 1, 2009		70,597		$	23.56
Granted		-		$	-
Exercised		(200	)	$	20.50
Forfeited or expired		(3,650	)	$	22.00
Outstanding at September 30, 2009		66,747		$	23.65	2.5	-
Exercisable at September 30, 2009		65,746		$	23.58	2.4	-

There were no options granted during the first nine months of 2009. The total intrinsic value of options exercised during the nine months ended September 30, 2009 and 2008, was $700 and $30,388.

Note 8 – Adoption of New Accounting Standards

Effective for periods on or after September 15, 2009, references to GAAP issued by the FASB in these footnotes are to the FASB Accounting Standards Codification, which is sometimes referred to as the Codification or ASC. The Codification does not change how NorthWest Indiana Bancorp accounts for its transactions or the nature of related disclosures made. However, when referring to GAAP, the Bancorp refers to topics in the ASC. We have updated references to GAAP to reflect the guidance in the Codification.

The Fair Value Measurements Topic of the ASC (formerly known as FAS No. 157), establishes a framework for measuring fair value and expands disclosures about fair value measurements. This Topic 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 Topic was effective for fiscal years beginning after November 15, 2007. In February 2008, this Topic was updated (formerly FSP 157-2) to delay the effective date of the Standard for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value on a recurring basis (at least annually) to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. In October 2008, the Topic was updated (formerly FSP 157-3) to clarify the application of the Topic in a market that is not active. In April 2009, the Topic was updated (formerly FSP 157-4) to provide additional guidance for estimating fair value in accordance with the Topic when the volume and level of activity for the asset or liability being measured have significantly decreased. This update also included guidance on identifying circumstances that indicate a transaction is not orderly. This update was effective for reporting periods ending after June 15, 2009.

The Compensation – Retirement Benefits Aspects Topic (formerly known as EITF No. 06-4, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements”) 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 was effective for fiscal years beginning after December 15, 2007. A liability of $104,000 has been recorded and reflected as an adjustment to retained earnings since adoption.

The Financial Instruments Topic was updated (formerly FSP FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments”) to require disclosures about fair value of financial instruments in interim reporting periods of publicly traded companies that were previously only required to be disclosed in annual financial statements. This update was effective for the Bancorp’s interim period ending on June 30, 2009 and has been included as part of Note 9, Fair Value.

The Investments – Debt and Equity Securities Topic was updated (formerly FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments”) to amend current other-than-temporary impairment guidance in the Topic for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. This update does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. The Topic is effective for the Bancorp’s interim period ending on June 30, 2009.

The Subsequent Events Topic (formerly FAS No. 165, “Subsequent Events”) establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. In particular, this Topic sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. In accordance with this Topic, an entity should apply the requirements to interim or annual financial periods ending after June 15, 2009.

The Transfers and Servicing Topic was updated (formerly FAS No. 166, “Accounting for Transfers of Financial Assets—an amendment of FASB Statement No. 140”) to remove the concept of a qualifying special-purpose entity from the Topic and removes the exception from applying the Consolidations Topic (formerly FASB Interpretation No. 46R) The objective in issuing this update is to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets. This update must be applied as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. The impact of adoption is not expected to be material.

The Consolidations Topic was amended (formerly FAS No. 167, “Amendments to FASB Interpretation No. 46(R)”) to improve financial reporting by enterprises involved with variable interest entities. The amendment addresses (1) the effects on certain provisions of the Topic as they relate to the elimination of the qualifying special-purpose entity concept in the Transfers and Servicing Topic and (2) constituent concerns about the application of certain key provisions of the Topic including those in which the accounting and disclosures under the Topic do not always provide timely and useful information about an enterprise’s involvement in a variable interest entity. This amendment shall be effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. The impact of adoption is not expected to be material.

Note 9 – Fair Value

The Fair Value Measurements Topic establishes a hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The Topic describes three levels of inputs that may be used to measure fair value:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing and asset or liability.

The fair values of securities available for sale are determined on a recurring basis by obtaining quoted prices on nationally recognized securities exchanges or pricing models utilizing significant observable inputs such as matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities. Different judgment and assumptions used in pricing could result in different estimates of value. In certain cases where market data is not readily available because of lack of market activity or little public disclosure, values may be based on unobservable inputs and classified in Level 3 of the fair value hierarchy.

At the end of each reporting period securities held in the investment portfolio are evaluated on an individual security level for other-than-temporary impairment in accordance with the Investments – Debt and Equity Securities Topic. An impairment is other-than-temporary if the decline in the fair value of the security is below its amortized cost and it is probable that all amounts due according to the contractual terms of a debt security will not be received. Significant judgments are required in determining impairment, which include making assumptions regarding the estimated prepayments, loss assumptions and the change in interest rates. We consider the following factors when determining an other-than-temporary impairment for a security: the length of time and the extent to which the market value has been less than amortized cost; the financial condition and near-term prospects of the issuer; the underlying fundamentals of the relevant market and the outlook for such market for the near future; an assessment of whether the Bancorp has (1) the intent to sell the debt securities or (2) more likely than not will be required to sell the debt securities before its anticipated market recovery. If either of these conditions is met, management will recognize other-than-temporary impairment. If, in management’s judgment, an other-than-temporary impairment exists, the cost basis of the security will be written down for the credit loss, and the unrealized loss will be transferred from accumulated other comprehensive loss as an immediate reduction of current earnings.

For the quarter ended September 30, 2009, the Bancorp’s management performed an other-than-temporary impairment analysis for each of its four pooled trust preferred securities. The analysis utilizes analytical models used to project future cash flows for the pooled trust preferred securities based on current assumptions for prepayments, default and deferral rates, and recoveries. The projected cash flows are than tested for impairment consistent with the Investments – Other Topic (formerly FSP EITF 99-20-1) and the Investments – Debt and Equity Securities Topic (formerly FSP FAS 115-2 and FAS 124-2). The other-than-temporary impairment testing compares the present value of the cash flows from quarter to quarter to determine if there is a “favorable” or “adverse” change. Other-than-temporary impairment is recorded if the projected present value is lower than the book value of the security. To perform the quarterly other-than-temporary impairment analysis, management utilizes current reports issued by the trustee, which contains principal and interest tests, waterfall distributions, note valuations, collection detail and credit ratings for each pooled trust preferred security. In addition, for the performing collateral, management monitors the level of non-performing assets and capital adequacy to determine trends of future defaults or deferrals. The other-than-temporary impairment analysis indicated that one of the trust preferred securities has other-than-temporary impairment in the amount of $44 thousand. The unrealized loss for the remaining three trust preferred securities represents a decline in value that is considered a temporary impairment. These investments are collateralized by underlying investments in trust preferred securities issued by many different banks and insurance companies. We believe the increase in the net unrealized loss is the result of the current economic decline, the low trade volume of the security, and the lack of confidence in the financial services industry.

The table below shows the credit loss roll forward for the Bancorp’s trust preferred securities that have been classified with other-than-temporary impairment:

(Dollars in thousands)
	Collateralized debt obligations other- than-temporarily impaired
Beginning balance, June 30, 2009	$	-
Additions not previously recongnized		44
Ending balance, September 30, 2009	$	44

Below is a table containing information regarding the Bancorp’s pooled trust preferred securities as of September 30, 2009:

Deal name	PreTSL XXIV			PreTSL XXVII			Alesco IX			Alesco XVII
Class		B-1			C-1			A-2A			B
Book value		1,272,986			1,427,774			1,322,816			1,411,090
Fair value		394,483			360,208			330,000			188,821
Unrealized gains/(losses)		(878,503	)		(1,067,566	)		(992,816	)		(1,222,269	)
Lowest credit rating assigned	Caa3			Ca			BB			Ca
Number of performing banks		57			31			52			42
Number of performing insurance companies		13			7			11			n/a
Number of issuers in deferral or default		23			11			7			13
Defaults & deferrals as a % of performing collateral		28.50	%		20.00	%		16.55	%		31.51	%
Excess subordination:
As a % of performing collateral		-8.57	%		-10.88	%		29.60	%		3.80	%
As a % of performing collateral - adjusted for projected future defaults		-16.78	%		-12.60	%		24.66	%		-1.20	%
Other-than-temporary impairment model assumptions:
Defaults:
Year 1		4.00	%		2.00	%		5.00	%		0.25	%
Year 2		0.25	%		0.25	%		0.25	%		0.25	%
Year 3		3.50	%		0.25	%		2.00	%		0.25	%
> 3 Years		0.25	%		0.25	%		0.25	%		0.25	%
Discount rate		1.58	%		1.24	%		1.29	%		1.46	%
Recovery assumptions	25% - 5 year lag			25% - 5 year lag			12% - 5 year lag				0	%
Prepayments		1.00	%		1.00	%		1.00	%		1.00	%
Other-than-temporary impairment		25,086			0			15,884			2,563

In the table above, the Bancorp’s excess subordination for each trust preferred security is calculated by taking the total performing collateral and subtracting the sum of the total collateral within the Bancorp’s class and the total collateral within all senior classes, and then stating this result as a percentage of the total performing collateral. This measure is an indicator of the level of collateral that can default before potential cash flow disruptions may occur. In addition, management calculates excess subordination assuming future collateral defaults by utilizing the default/deferral assumptions in the Bancorp’s OTTI analysis. Excess subordination assuming future default/deferral assumptions is calculated by deducting future defaults from the current performing collateral. At September 30, 2009, management reviewed the excess subordination levels for each security in context of the level of current collateral defaults and deferrals within each security; the potential for additional defaults and deferrals within each security; the length of time that the security has been in “payment in kind” status; and the Bancorp’s class position within each security.

In the table above, management calculated the other-than-temporary impairment model assumptions based on the specific collateral underlying each individual security. The following assumption methodology was applied consistently to each of the four pooled trust preferred securities: All defaulted collateral was identified and removed from the bank pool; no cash flows were assumed from the banks currently in deferral, with the exception of the recovery assumptions; and for each bank remaining in the bank pool the most recent financial data submitted by the banks for regulatory purposes was used to identify capitalization levels and asset quality. The default and recovery assumptions were calculated based on the level of capital adequacy and asset quality for each bank contained in the collateral pool. The discount rate assumption used in the calculation of the present value of cash flows is based on the discount margin (i.e., credit spread) at the time each security was purchased using the original purchase price. The discount margin is then added to the appropriate 3-month LIBOR forward rate obtained from the forward LIBOR curve. The assumption for prepayments was 1% for each of the four pooled trust preferred securities. At September 30, 2009, based on the current information available regarding the specific collateral underlying the securities, management’s OTTI analysis indicated that three of the four trust preferred securities had other-than-temporary impairment of $44 thousand in the aggregate.

At September 30, 2009, three of the trust preferred securities with a cost basis of $4.2 million have been placed in “payment in kind” status. The Bancorp’s securities that are classified as “payment in kind” are a result of not receiving the scheduled quarterly interest payments. For the securities in “payment in kind” status, management anticipates to receive the unpaid contractual interest payments from the issuer, because of the self correcting cash flow waterfall provisions within the structure of the securities. When a tranche senior to the Bancorp’s position fails the coverage test, the Bancorp’s interest cash flows are paid to the senior tranche and recorded as a reduction of principal. The coverage test represents an over collateralization target by stating the balance of the performing collateral as a percentage of the balance of the Bancorp’s tranche, plus the balance of all senior tranches. The principal reduction in the senior tranche continues until the appropriate coverage test is passed. As a result of the principal reduction in the senior tranche, more cash is available for future payments to the Bancorp’s tranche. Consistent with the Investments – Debt and Equity Securities Topic management considered the failure of the issuer of the security to make scheduled interest payments in determining whether a credit loss existed. Management will not capitalize the “payment in kind” interest payments to the book value of the securities and will keep these securities in non-accrual status until the quarterly interest payments resume.

Assets and Liabilities Measured on a Recurring Basis

Assets and liabilities measured at fair value on a recurring basis are summarized below:

(Dollars in thousands)			Fair Value Measurements at September 30, 2009 Using
	30-Sep-09		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)

Assets:
Available for sale securities	$	122,279	$	-	$	121,005	$	1,274

Reconciliation of available for sale securities, which require significant adjustment based on unobservable data are presented below:

(Dollars in thousands)	Fair Value Measurements at September 30, 2009 Using Significant Unobservable Inputs (Level 3)
	Available for sale securities
Beginning balance, December 31, 2008	$	1,003
Total realized/unrealized losses
Included in earnings		(44	)
Included in other comprehensive income		(135	)
Transfers in and/or (out) of Level 3		450
Ending balance, September 30, 2009	$	1,274

Assets and liabilities measured at fair value on a non-recurring basis are summarized be