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, 2011 or
 
o           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 o
 
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 x No o
 
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 o Accelerated filer o Non-accelerated filer o 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 o No x
 
There were 2,833,204 shares of the registrant’s Common Stock, without par value, outstanding at September 30, 2011.
 
 
 

 
 
NorthWest Indiana Bancorp
Index
 
       
Page
       
Number
PART I. Financial Information
   
         
 
Item 1. 
Unaudited Financial Statements
   
         
   
Consolidated Balance Sheets, September 30, 2011 and December 31, 2010
 
1
         
   
Consolidated Statements of Income, Three and Nine Months Ended September 30, 2011 and 2010
 
2
         
   
Consolidated Statements of Changes in Stockholders' Equity, Three and Nine Months ended September 30, 2011 and 2010
 
3
         
   
Consolidated Statements of Cash Flows, Nine Months ended September 30, 2011 and 2010
 
4
         
   
Notes to Consolidated Financial Statements
 
5-20
         
 
Item 2. 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
21-33
         
 
Item 3. 
Quantitative and Qualitative Disclosures About Market Risk
 
33
         
 
Item 4. 
Controls and Procedures
 
33
         
PART II. Other Information
 
34-35
         
SIGNATURES
 
36
         
EXHIBITS
   
 
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
 
37
 
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
 
38
 
32.1 Section 1350 Certifications
 
39
 
101 XBRL Interactive Data File
   
 
 
 

 
 
NorthWest Indiana Bancorp
Consolidated Balance Sheets
 
   
September 30,
       
   
2011
   
December 31,
 
(Dollars in thousands)
 
(unaudited)
   
2010
 
             
ASSETS
           
             
Cash and non-interest bearing balances in financial institutions
  $ 10,749     $ 7,427  
Interest bearing balances in financial institutions
    5,207       90  
Federal funds sold
    7,358       3,421  
Total cash and cash equivalents
    23,314       10,938  
                 
Securities available-for-sale
    184,391       142,055  
Securities held-to-maturity
    -       18,397  
Loans held-for-sale
    414       422  
Loans receivable
    407,095       418,233  
Less: allowance for loan losses
    (8,362 )     (9,121 )
Net loans receivable
    398,733       409,112  
Federal Home Loan Bank stock
    3,086       3,381  
Accrued interest receivable
    2,325       2,591  
Premises and equipment
    18,383       19,293  
Foreclosed real estate
    1,606       3,298  
Cash value of bank owned life insurance
    12,751       12,452  
Prepaid FDIC insurance premium
    1,655       2,425  
Other assets
    4,299       6,689  
                 
Total assets
  $ 650,957     $ 631,053  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
                 
Deposits:
               
Non-interest bearing
  $ 61,737     $ 50,712  
Interest bearing
    465,926       469,559  
Total
    527,663       520,271  
Repurchase agreements
    24,258       16,074  
Borrowed funds
    29,555       32,544  
Accrued expenses and other liabilities
    7,408       6,075  
                 
Total liabilities
    588,884       574,964  
                 
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, 2011 - 2,888,902
               
December 31, 2010 - 2,888,902
    361       361  
shares outstanding:  September 30, 2011 - 2,833,204
               
December 31, 2010 - 2,826,796
               
Additional paid in capital
    5,167       5,140  
Accumulated other comprehensive income/(loss)
    2,666       (492 )
Retained earnings
    55,066       52,398  
Treasury stock, common shares at cost:  September 30, 2011 - 55,698
               
December 31, 2010 - 62,106
    (1,187 )     (1,318 )
                 
Total stockholders' equity
    62,073       56,089  
                 
Total liabilities and stockholders' equity
  $ 650,957     $ 631,053  
 
See accompanying notes to consolidated financial statements.
 
 
1

 
 
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,
 
   
2011
   
2010
   
2011
   
2010
 
Interest income:
                       
Loans receivable
                       
Real estate loans
  $ 4,247     $ 4,866     $ 12,949     $ 15,104  
Commercial loans
    892       1,051       2,726       3,204  
Consumer loans
    10       16       35       60  
Total loan interest
    5,149       5,933       15,710       18,368  
                                 
Securities
    1,526       1,455       4,628       4,549  
Other interest earning assets
    6       7       17       21  
                                 
Total interest income
    6,681       7,395       20,355       22,938  
                                 
Interest expense:
                               
Deposits
    581       880       1,966       3,135  
Repurchase agreements
    26       46       83       145  
Borrowed funds
    159       210       486       714  
                                 
Total interest expense
    766       1,136       2,535       3,994  
                                 
Net interest income
    5,915       6,259       17,820       18,944  
Provision for loan losses
    570       1,615       2,635       4,120  
                                 
Net interest income after provision for loan losses
    5,345       4,644       15,185       14,824  
                                 
Noninterest income:
                               
Fees and service charges
    644       652       1,865       1,896  
Wealth management operations
    293       353       877       887  
Gain/(loss) on foreclosed real estate, net
    (2 )     (266 )     786       (201 )
Gain on sale of securities, net
    183       111       683       853  
Increase in cash value of bank owned life insurance
    97       102       299       306  
Gain on sale of loans held-for-sale, net
    27       335       137       607  
Other-than-temporary impairment of securities
    -       65       -       (29 )
Net credit portion of gain/(loss) recognized in other comprehensive income
    -       (80 )     -       (99 )
Other
    9       3       37       12  
                                 
Total noninterest income
    1,251       1,275       4,684       4,232  
                                 
Noninterest expense:
                               
Compensation and benefits
    2,519       2,426       7,430       7,293  
Occupancy and equipment
    877       794       2,569       2,386  
Federal deposit insurance premiums
    208       231       805       727  
Data processing
    246       236       747       700  
Marketing
    88       90       304       329  
Other
    1,297       1,007       3,217       2,906  
                                 
Total noninterest expense
    5,235       4,784       15,072       14,341  
                                 
Income before income tax expenses
    1,361       1,135       4,797       4,715  
Income tax expenses
    231       94       816       669  
                                 
Net income
  $ 1,130     $ 1,041     $ 3,981     $ 4,046  
                                 
Earnings per common share:
                               
Basic
  $ 0.40     $ 0.37     $ 1.41     $ 1.43  
Diluted
  $ 0.40     $ 0.37     $ 1.41     $ 1.43  
                                 
Dividends declared per common share
  $ 0.15     $ 0.15     $ 0.45     $ 0.57  
 
See accompanying notes to consolidated financial statements.
 
 
2

 
 
NorthWest Indiana Bancorp
Consolidated Statements of Changes in Stockholders' Equity
(unaudited)
 
   
Three Months Ended
   
Nine Months Ended
 
(Dollars in thousands)
 
September 30,
   
September 30,
 
   
2011
   
2010
   
2011
   
2010
 
                         
Balance at beginning of period
  $ 59,158     $ 56,307     $ 56,089     $ 53,078  
                                 
Comprehensive income:
                               
Net income
    1,130       1,041       3,981       4,046  
Net unrealized change on securities available-for-sale, net of reclassifications and tax effects
    2,172       483       3,164       1,796  
Amortization of unrecognized gain
    (2 )     (2 )     (6 )     (6 )
Comprehensive income
    3,300       1,522       7,139       5,836  
                                 
Stock based compensation expense
    9       8       27       27  
                                 
Sale of treasury stock
    31       41       92       122  
                                 
Cash dividends
    (425 )     (424 )     (1,274 )     (1,609 )
                                 
Balance at end of period
  $ 62,073     $ 57,454     $ 62,073     $ 57,454  
 
See accompanying notes to consolidated financial statements.
 
 
3

 
 
NorthWest Indiana Bancorp
Consolidated Statements of Cash Flows
(unaudited)
 
   
Nine Months Ended
 
(Dollars in thousands)
 
September 30,
 
   
2011
   
2010
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net income
  $ 3,981     $ 4,046  
Adjustments to reconcile net income to
               
net cash provided by operating activities:
               
Origination of loans for sale
    (5,231 )     (22,296 )
Sale of loans originated for sale
    5,330       23,366  
Depreciation and amortization, net of accretion
    1,656       1,570  
Amortization of mortgage servicing rights
    103       81  
Stock based compensation expense
    27       27  
Gain on sale of securities, net
    (683 )     (853 )
Gain on sale of loans held-for-sale, net
    (137 )     (607 )
Net losses due to other-than-temporary impairment of securities
    -       128  
Loss on foreclosed real estate, net
    (786 )     201  
Provision for loan losses
    2,635       4,120  
Net change in:
               
Interest receivable
    266       262  
Other assets
    1,418       1,590  
Cash value of bank owned life insurance
    (299 )     (306 )
Accrued expenses and other liabilities
    1,333       2,018  
Total adjustments
    5,632       9,301  
Net cash - operating activities
    9,613       13,347  
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Proceeds from maturities and pay downs of securities available-for-sale
    30,982       22,743  
Proceeds from sales of securities available-for-sale
    13,562       16,630  
Purchases of securities available-for-sale
    (65,243 )     (53,240 )
Proceeds from maturities and pay downs of securities held-to-maturity
    1,807       1,063  
Proceeds from sale of Federal Home Loan Bank Stock
    296       -  
Net change in loans receivable
    7,943       19,210  
Proceeds from sales of foreclosed real estate
    2,279       1,495  
Purchase of premises and equipment, net
    (268 )     (847 )
Net cash - investing activities
    (8,642 )     7,054  
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Change in deposits
    7,392       (2,626 )
Proceeds from  FHLB advances
    3,000       13,000  
Repayment of FHLB advances
    (3,000 )     (22,000 )
Change in other borrowed funds
    5,195       (4,293 )
Proceeds from sale of treasury stock
    92       122  
Dividends paid
    (1,274 )     (1,775 )
Net cash - financing activities
    11,405       (17,572 )
Net change in cash and cash equivalents
    12,376       2,829  
Cash and cash equivalents at beginning of period
    10,938       13,222  
Cash and cash equivalents at end of period
  $ 23,314     $ 16,051  
                 
SUPPLEMENTAL CASH FLOW INFORMATION:
               
Cash paid during the period for:
               
Interest
  $ 2,560     $ 4,035  
Income taxes
  $ 738     $ 1,185  
SUPPLEMENTAL NONCASH INFORMATION:
               
Transfers from loans to foreclosed real estate
  $ 585     $ 3,573  
Transfers from loans to loans held for sale
  $ -     $ 5,167  
Transfers from securities held-to-maturity to available-for-sale
  $ 16,437     $ -  
 
See accompanying notes to consolidated financial statements.
 
 
4

 
 
 
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 consolidated 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, 2011 and December 31, 2010, and the consolidated statements of income and changes in stockholders’ equity, for the three and nine months ended September 30, 2011 and 2010, and consolidated statements of cash flows for the nine months ended September 30, 2011 and 2010. The income reported for the nine month period ended September 30, 2011 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 foreclosed real estate, loan servicing rights, investment securities, deferred tax assets, and the 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
   
Estimated
 
   
Cost
   
Unrealized
   
Unrealized
   
Fair
 
   
Basis
   
Gains
   
Losses
   
Value
 
September 30, 2011
                       
U.S. government sponsored entities
  $ 13,129     $ 36     $ (11 )   $ 13,154  
Collateralized mortgage obligations and residential mortgage-backed securities
    107,705       4,607       (13 )     112,299  
Municipal securities
    54,311       3,287       (2 )     57,596  
Collateralized debt obligations
    5,215       -       (3,873 )     1,342  
Total securities available-for-sale
  $ 180,360     $ 7,930     $ (3,899 )   $ 184,391  
                                 
December 31, 2010
                               
U.S. government sponsored entities
  $ 4,172     $ -     $ (3 )   $ 4,169  
Collateralized mortgage obligations and residential mortgage-backed securities
    94,930       2,372       (160 )     97,142  
Municipal securities
    38,549       1,027       (211 )     39,365  
Collateralized debt obligations
    5,215       -       (3,836 )     1,379  
Total securities available-for-sale
  $ 142,866     $ 3,399     $ (4,210 )   $ 142,055  

 
5

 

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

   
(Dollars in thousands)
 
         
Gross
   
Gross
   
Estimated
 
   
Cost
   
Unrecognized
   
Unrecognized
   
Fair
 
   
Basis
   
Gains
   
Losses
   
Value
 
December 31, 2010
                       
Municipal securities
  $ 17,573     $ 613     $ -     $ 18,186  
Residential mortgage-backed securities
    824       29       (1 )     852  
Total securities held-to-maturity
  $ 18,397     $ 642     $ (1 )   $ 19,038  

During August 2011, management transferred its entire held-to-maturity securities portfolio to available-for-sale. The book value of the securities transferred totaled $16.4 million, with an unrealized gain of $1.0 million that was recorded as a component of other comprehensive income at the date of transfer. All held-to-maturity securities were transferred to available-for-sale to avoid the potential implication that any remaining held-to-maturity securities would be tainted by a partial transfer. In addition, the transfer provides management the ability to sell lower balance odd lot securities, divest of certain securities to reduce credit or interest rate risk within the portfolio, and be positioned to take advantage of other portfolio restructuring opportunities.

The fair value of available-for-sale debt securities and carrying amount, if different, at September 30, 2011 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
 
   
Estimated
       
   
Fair
   
Tax-Equivalent
 
September 30, 2011  
Value
   
Yield (%)
 
Due in one year or less
  $ 192       7.07  
Due from one to five years
    12,221       3.42  
Due from five years to ten years
    27,830       5.12  
Due over ten years
    31,849       5.92  
Collateralized mortgage obligations and residential mortgage-backed securities
    112,299       3.52  
Total
  $ 184,391       4.17  

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

   
(Dollars in thousands)
 
   
September 30,
   
September 30,
 
   
2011
   
2010
 
             
Proceeds
  $ 13,562       16,630  
Gross gains
    692       853  
Gross losses
    (9 )     -  

 
6

 

Accumulated other comprehensive income/(loss) balances, net of tax, were as follows:

   
(Dollars in thousands)
 
   
Unrealized
 
   
gain/(loss)
 
Beginning balance, December 31, 2010
  $ (561 )
Current period change
    3,164  
Ending balance, September 30, 2011
  $ 2,603  

Securities with carrying values of $74,483,000 and $24,484,000 were pledged as of September 30, 2011 and December 31, 2010, respectively, as collateral for repurchase agreements, public funds, and for other purposes as permitted or required by law. The increase in pledged securities was the result of new pledging requirements for Indiana public funds deposits.

Securities with unrealized losses at September 30, 2011 and December 31, 2010 not recognized in income are as follows:

   
(Dollars in thousands)
 
   
Less than 12 months
   
12 months or longer
   
Total
 
   
Estimated
         
Estimated
         
Estimated
       
   
Fair
   
Unrealized
   
Fair
   
Unrealized
   
Fair
   
Unrealized
 
   
Value
   
Losses
   
Value
   
Losses
   
Value
   
Losses
 
September 30, 2011
                                   
U.S. government sponsored entities
  $ 3,278     $ (11 )   $ -     $ -     $ 3,278     $ (11 )
Collateralized mortgage obligations and residential mortgage-backed securities
    2,164       (13 )     -       -       2,164       (13 )
Municipal securities
    878       (2 )     -       -       878       (2 )
Collateralized debt obligations
    -       -       1,342       (3,873 )     1,342       (3,873 )
Total temporarily impaired
  $ 6,320     $ (26 )   $ 1,342     $ (3,873 )   $ 7,662     $ (3,899 )
Number of securities
            8               4               12  
                                                 
   
(Dollars in thousands)
 
   
Less than 12 months
   
12 months or longer
   
Total
 
   
Estimated
           
Estimated
           
Estimated
         
   
Fair
   
Unrealized
   
Fair
   
Unrealized
   
Fair
   
Unrealized
 
   
Value
   
Losses
   
Value
   
Losses
   
Value
   
Losses
 
December 31, 2010
                                               
U.S. government sponsored entities
  $ 2,513     $ (3 )   $ -     $ -     $ 2,513     $ (3 )
Collateralized mortgage obligations and residential mortgage-backed securities
    13,767       (161 )     -       -       13,767       (161 )
Municipal securities
    7,496       (194 )     398       (17 )     7,894       (211 )
Collateralized debt obligations
    -       -       1,379       (3,836 )     1,379       (3,836 )
Total temporarily impaired
  $ 23,776     $ (358 )   $ 1,777     $ (3,853 )   $ 25,553     $ (4,211 )
Number of securities
            27               5               32  

      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 those securities for the foreseeable future, and the decline in fair value is largely due to changes in interest rates and volatility in securities markeets. The fair value is expected to recover as the securities approach maturity.

 
7

 

Note 4 - Loans Receivable

   
(Dollars in thousands)
 
   
September 30, 2011
   
December 31, 2010
 
Loans secured by real estate:
           
Construction and land development
  $ 26,300     $ 46,371  
Residential, including home equity
    150,206       153,150  
Commercial real estate and other dwelling
    154,338       146,111  
Total loans secured by real estate
    330,844       345,632  
Consumer loans
    540       765  
Commercial business
    65,504       61,837  
Government and other
    10,595       10,380  
Subtotal
    407,483       418,614  
Less:
               
Net deferred loan origination fees
    (244 )     (273 )
Undisbursed loan funds
    (144 )     (108 )
Loans receivable
  $ 407,095     $ 418,233  

 
8

 
 
The Bancorp's activity in the allowance for loan losses, by loan segment, is summarized below for the nine months ended September 30, 2011:
 
                
Commercial Real
                         
               
Estate,
                         
               
Construction &
                         
   
Residential Real
         
Land Development,
   
Commercial
                   
   
Estate, Including
         
and Other
   
Participations
   
Commercial
             
(Dollars in thousands)
 
Home Equity
   
Consumer Loans
   
Dwellings
   
Purchased
   
Business Loans
   
Government
   
Total
 
For the nine months ending September 30, 2011
                                         
Allowance for loan losses:
                                         
Beginning Balance
  $ 994     $ 30     $ 2,773     $ 4,704     $ 620     $ -     $ 9,121  
Charge-offs
    (457 )     (14 )     (682 )     (2,432 )     (113 )     -       (3,698 )
Recoveries
    111       11       182       -       -       -       304  
Provisions
    543       (8 )     1,150       331       619       -       2,635  
Ending Balance
  $ 1,191     $ 19     $ 3,423     $ 2,603     $ 1,126     $ -     $ 8,362  
                                                         
The Bancorp's allowance for loan losses impairment evaluation, by loan segment, at September 30, 2011:
 
                                                         
Ending balance: individually evaluated for impairment
  $ -     $ -     $ 897     $ 470     $ 324     $ -     $ 1,691  
                                                         
Ending balance: collectively evaluated for impairment
  $ 1,191     $ 19     $ 2,526     $ 2,133     $ 802     $ -     $ 6,671  
                                                         
Ending balance: loans acquired with deteriorated credit quality
  $ -     $ -     $ -     $ -     $ -     $ -     $ -  
                                                         
FINANCING RECEIVABLES
                                                       
Ending balance
  $ 149,893     $ 539     $ 147,296     $ 33,342     $ 65,430     $ 10,595     $ 407,095  
                                                         
Ending balance: individually evaluated for impairment
  $ -     $ -     $ 9,700     $ 11,734     $ 2,400     $ -     $ 23,834  
                                                         
Ending balance: collectively evaluated for impairment
  $ 149,893     $ 539     $ 137,596     $ 21,608     $ 63,030     $ 10,595     $ 383,261  
                                                         
Ending balance: loans acquired with deteriorated credit quality
  $ -     $ -     $ -     $ -     $ -     $ -     $ -  
                                                         
The Bancorp's allowance for loan losses impairment evaluation, by loan segment, at December 31, 2010:
 
                                                         
Ending balance: individually evaluated for impairment
  $ 1     $ -     $ 875     $ 1,897     $ 21     $ -     $ 2,794  
                                                         
Ending balance: collectively evaluated for impairment
  $ 993     $ 30     $ 1,898     $ 2,807     $ 599     $ -     $ 6,327  
                                                         
Ending balance: loans acquired with deteriorated credit quality
  $ -     $ -     $ -     $ -     $ -     $ -     $ -  
                                                         
FINANCING RECEIVABLES
                                                       
Ending balance
  $ 152,881     $ 874     $ 163,616     $ 28,866     $ 61,726     $ 10,270     $ 418,233  
                                                         
Ending balance: individually evaluated for impairment
  $ 64     $ -     $ 10,974     $ 14,493     $ 482     $ -     $ 26,013  
                                                         
Ending balance: collectively evaluated for impairment
  $ 152,817     $ 874     $ 152,642     $ 14,373     $ 61,244     $ 10,270     $ 392,220  
                                                         
Ending balance: loans acquired with deteriorated credit quality
  $ -     $ -     $ -     $ -     $ -     $ -     $ -  

The Bancorp has established a standard loan grading system to assist management, lenders and review personnel in their analysis and supervision of the loan portfolio. The use and application of theses grades by the Bancorp is uniform and conforms to regulatory definitions. The loan grading system is as follows:

2 - Moderate risk
Borrower consistently internally generates sufficient cash flow to fund debt service, working assets, and some capital expenditures. Risk of default considered low.

3 – Acceptable
Borrower generates sufficient cash flow to fund debt service, but most working asset and all capital expansion needs are provided from external sources. Profitability ratios and key balance sheet ratios are usually close to peers but one or more ratios e.g. leverage may be higher than peer. Earnings may be trending down over the last three years. Borrower may be able to obtain similar financing from other banks with comparable or less favorable terms. Risk of default is acceptable but requires collateral protection.

 
9

 

4 – Pass/monitor
The borrower has significant weaknesses resulting from performance trends or management concerns.  The financial condition of the company has taken a negative turn and may be temporarily strained. Cash flow may be weak but cash reserves remain adequate to meet debt service. Management weaknesses are evident. Borrowers in this category will warrant more than the normal level of supervision and more frequent reporting.

5 – Special mention (watch)
Special Mention credits are considered bankable assets with no apparent loss of principal or interest envisioned but requiring a high level of management attention. Assets in this category are currently protected but are potentially weak.  These borrowers are subject to economic, industry, or management factors having an adverse impact upon their prospects for orderly service of debt. The perceived risk in continued lending are considered to have increased beyond the level where such loans would normally be granted. These assets constitute an undue and unwarranted credit risk, but not to the point of justifying a classification of Substandard.

6 – Substandard
This classification consists of loans which are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged.  Financial statements normally reveal some or all of the following: poor trends, lack of earnings and cash flow, excessive debt, lack of liquidity, and the absence of creditor protection.  Loans are still considered collectible, but due to increased risks and defined weaknesses of the credit, some loss could be incurred in collection if the deficiencies are not corrected.

7 – Doubtful
This classification consists of loans where the possibility of loss is high after collateral liquidation based upon existing facts, market conditions, and value.  Loss is deferred until certain important and reasonably specific pending factors which may strengthen the credit can be exactly determined.  These factors may include proposed acquisitions, liquidation procedures, capital injection and receipt of additional collateral, mergers or refinancing plans.
 
Performing loans are loans that are paying as agreed and are less than ninety days past due on payments of interest and principal.

The Bancorp's credit quality indicators, by loan segment, are summarized below at September 30, 2011 and December 31, 2010:

    
(Dollars in thousands)
 
   
Corporate Credit Exposure - Credit Risk Portfolio By Creditworthiness Category
 
   
Commercial Real Estate, Construction
                   
   
& Land Development, and Other Dwellings
   
Commercial Participations Purchased
   
Commercial Business Loans
   
Government
 
Loan Grades
 
2011
   
2010
   
2011
   
2010
   
2011
   
2010
   
2011
   
2010
 
2 Modest risk
  $ 27     $ 31     $ -     $ -     $ 5,940     $ 4,724     $ -     $ -  
3 Acceptable risk
    80,985       63,330       1,418       1,473       36,706       30,549       10,595       10,270  
4 Pass/monitor
    57,569       78,758       6,349       6,482       18,827       21,131       -       -  
5 Special mention (watch)
    7,123       9,817       4,811       6,419       1,313       2,517       -       -  
6 Substandard
    1,592       11,680       19,808       14,492       2,644       2,805       -       -  
7 Doubtful
    -       -       956       -       -       -       -       -  
Total
  $ 147,296     $ 163,616     $ 33,342     $ 28,866     $ 65,430     $ 61,726     $ 10,595     $ 10,270  

    
(Dollars in thousands)
 
   
Consumer Credit Exposure - Credit Risk Profile Based On Payment Activity
 
   
Residential Real Estate,
       
   
Including Home Equity
   
Consumer Loans
 
   
2011
   
2010
   
2011
   
2010
 
Performing
  $ 147,627     $ 149,892     $ 539     $ 871  
Nonperforming
    2,266       2,989       -       3  
Total
  $ 149,893     $ 152,881     $ 539     $ 874  

 
10

 

The Bancorp's troubled debt restructurings are summarized below:

   
(Dollars in thousands)
 
                           
Pre-
   
Post-
 
         
Pre-Modification
   
Post-Modification
         
Modification
   
Modification
 
         
Outstanding
   
Outstanding
         
Outstanding
   
Outstanding
 
   
Number of
   
Recorded
   
Recorded
   
Number of
   
Recorded
   
Recorded
 
   
Contracts
   
Investment
   
Investment
   
Contracts
   
Investment
   
Investment
 
   
September 30, 2011
   
December 31, 2010
 
Troubled Debt Restructurings
                                   
Residential real estate, including home equity
    -     $ -     $ -       -     $ -     $ -  
Consumer loans
    -     $ -     $ -       -     $ -     $ -  
Commercial real estate, construction & land development, and other dwellings
    3     $ 8,097     $ 7,811       3     $ 6,093     $ 5,909  
Commercial participations purchased
    2     $ 7,975     $ 5,824       2     $ 7,975     $ 6,186  
Commercial business loans
    -     $ -     $ -       -     $ -     $ -  
Government
    -     $ -     $ -       -     $ -     $ -  

   
Number of
   
Recorded
     
Number of
   
Recorded
   
   
Contracts
   
Investment
     
Contracts
   
Investment
   
   
September 30, 2011
     
December 31, 2010
   
Troubled Debt Restructurings That
                           
Subsequently Defaulted
                           
Residential real estate, including
home equity
    -     $ -         -     $ -    
Consumer loans
    -     $ -         -     $ -    
Commercial real estate, construction
& land development, and other dwellings
    1     $ 376         -     $ -    
Commercial participations purchased
    -     $ -         -     $ -    
Commercial business loans
    -     $ -         -     $ -    
Government
    -     $ -         -     $ -    

 
11

 

The Bancorp's individually evaluated impaired loans are summarized below:

         
For the nine months ended
 
   
As of September 30, 2011
   
September 30, 2011
 
                     
Average
   
Interest
 
(Dollars in thousands)
 
Recorded
   
Unpaid Principal
   
Related
   
Recorded
   
Income
 
   
Investment
   
Balance
   
Allowance
   
Investment
   
Recognized
 
With no related allowance recorded:
                             
Residential real estate, including home equity
  $ -     $ -     $ -     $ 32     $ -  
Commercial real estate, construction & land
development, and other dwellings
    791       871       -       923       16  
Commercial participations purchased
    2,606       8,123       -       2,651       182  
Commercial business loans
    782       101       -       568       11  
With an allowance recorded:
                                       
Residential real estate, including home equity
    -       -       -       -       -  
Commercial real estate, construction & land
development, and other dwellings
    8,909       8,605