SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2013 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 Identification Number)
or organization)

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 x 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 2,844,219 shares of the registrant’s Common Stock, without par value, outstanding at June 30, 2013.

NorthWest Indiana Bancorp

Index

			Page
			Number
PART I. Financial Information

	Item 1.	Unaudited Financial Statements

		Consolidated Balance Sheets, June 30, 2013 and December 31, 2012	1

		Consolidated Statements of Income, Three and Six Months Ended June 30, 2013 and 2012	2

		Consolidated Statements of Comprehensive Income, Three and Six Months Ended June 30, 2013 and 2012	3

		Consolidated Statements of Changes in Stockholders' Equity, Three and Six Months Ended June 30, 2013 and 2012	3

		Consolidated Statements of Cash Flows, Six Months Ended June 30, 2013 and 2012	4

		Notes to Consolidated Financial Statements	5-17

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18-29

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	30

	Item 4.	Controls and Procedures	30

PART II. Other Information			31

SIGNATURES			32

EXHIBITS
	31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer		33
	31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer		34
	32.1 Section 1350 Certifications		35
	101 XBRL Interactive Data File

NorthWest Indiana Bancorp

Consolidated Balance Sheets

	June 30,
	2013			December 31,
(Dollars in thousands)	(unaudited)			2012

ASSETS

Cash and non-interest bearing balances in financial institutions	$	6,465		$	8,512
Interest bearing balances in financial institutions		35,314			19,832
Federal funds sold		987			5,407
Total cash and cash equivalents		42,766			33,751

Securities available-for-sale		184,791			187,475
Loans held-for-sale		522			323
Loans receivable		434,140			436,981
Less: allowance for loan losses		(7,764	)		(8,421	)
Net loans receivable		426,376			428,560
Federal Home Loan Bank stock		3,086			3,086
Accrued interest receivable		2,334			2,483
Premises and equipment		17,284			17,678
Foreclosed real estate		415			425
Cash value of bank owned life insurance		12,691			12,516
Prepaid FDIC insurance premium		-			991
Other assets		6,745			4,557

Total assets	$	697,010		$	691,845

LIABILITIES AND STOCKHOLDERS' EQUITY

Deposits:
Non-interest bearing	$	72,182		$	75,228
Interest bearing		500,546			491,181
Total		572,728			566,409
Repurchase agreements		19,360			16,298
Borrowed funds		33,406			33,207
Accrued expenses and other liabilities		5,952			8,280

Total liabilities		631,446			624,194

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: June 30, 2013 - 2,895,702		361			361
December 31, 2012 - 2,888,902
shares outstanding: June 30, 2013 - 2,844,219
December 31, 2012 - 2,839,137
Additional paid in capital		5,204			5,189
Accumulated other comprehensive (loss)/income		(1,940	)		2,339
Retained earnings		63,028			60,817
Treasury stock, common shares at cost: June 30, 2013 - 51,483
December 31, 2012 - 49,765		(1,089	)		(1,055	)

Total stockholders' equity		65,564			67,651

Total liabilities and stockholders' equity	$	697,010		$	691,845

See accompanying notes to consolidated financial statements.

NorthWest Indiana Bancorp

Consolidated Statements of Income

(unaudited)

	Three Months Ended						Six Months Ended
(Dollars in thousands, except per share data)	June 30,						June 30,
	2013			2012			2013			2012
Interest income:
Loans receivable
Real estate loans	$	4,196		$	4,276		$	8,401		$	8,526
Commercial loans		754			876			1,549			1,726
Consumer loans		5			9			11			18
Total loan interest		4,955			5,161			9,961			10,270

Securities		1,245			1,386			2,496			2,772
Other interest earning assets		7			7			13			11
		1,252			1,393			2,509			2,783

Total interest income		6,207			6,554			12,470			13,053

Interest expense:
Deposits		283			410			586			854
Repurchase agreements		17			21			34			41
Borrowed funds		137			183			279			364

Total interest expense		437			614			899			1,259

Net interest income		5,770			5,940			11,571			11,794
Provision for loan losses		95			550			230			1,075

Net interest income after provision for loan losses		5,675			5,390			11,341			10,719

Noninterest income:
Fees and service charges		625			610			1,216			1,248
Wealth management operations		330			314			697			646
Gain on sale of securities, net		316			251			444			617
Gain on sale of loans held-for-sale, net		139			272			298			347
Increase in cash value of bank owned life insurance		88			97			175			194
Loss on foreclosed real estate, net		(18	)		(120	)		(1	)		(84	)
Other-than-temporary credit impairment of debt securities		-			(6	)		-			(6	)
Noncredit portion of other-than-temporary impairment of debt securities recognized in other comprehensive income		-			-			-			-
Other		4			5			18			58

Total noninterest income		1,484			1,423			2,847			3,020

Noninterest expense:
Compensation and benefits		2,628			2,507			5,270			5,132
Occupancy and equipment		741			763			1,523			1,582
Data processing		232			277			472			548
Marketing		159			83			267			158
Federal deposit insurance premiums		131			147			253			291
Other		937			928			1,838			2,216

Total noninterest expense		4,828			4,705			9,623			9,927

Income before income tax expenses		2,331			2,108			4,565			3,812
Income tax expenses		624			488			1,188			838

Net income	$	1,707		$	1,620		$	3,377		$	2,974

Earnings per common share:
Basic	$	0.60		$	0.57		$	1.19		$	1.05
Diluted	$	0.60		$	0.57		$	1.19		$	1.05

Dividends declared per common share	$	0.22		$	0.19		$	0.41		$	0.34

See accompanying notes to consolidated financial statements.

NorthWest Indiana Bancorp

Consolidated Statements of Comprehensive Income

(unaudited)

	Three Months Ended						Six Months Ended
(Dollars in thousands)	June 30,						June 30,
	2013			2012			2013			2012

Net income	$	1,707		$	1,620		$	3,377		$	2,974

Net change in net unrealized gains and losses on securities available-for-sale:
Unrealized (losses)/gains arising during the period		(5,217	)		318			(6,060	)		428
Less: reclassification adjustment for gains included in net income		(316	)		(245	)		(444	)		(611	)
Net securities (loss)/gain during the period		(5,533	)		73			(6,504	)		(183	)
Tax effect		1,892			(23	)		2,228			66
Net of tax amount		(3,641	)		50			(4,276	)		(117	)

Net change in unrecognized gain on postretirement benefit:
Amortization of net actuarial gain		(1	)		(1	)		(3	)		(3	)
Net loss during the period		(1	)		(1	)		(3	)		(3	)
Tax effect		-			-			-			-
Net of tax amount		(1	)		(1	)		(3	)		(3	)
Other comprehensive (loss)/gain, net of tax		(3,642	)		49			(4,279	)		(120	)

Comprehensive (loss)/income, net of tax	$	(1,935	)	$	1,669		$	(902	)	$	2,854

See accompanying notes to consolidated financial statements.

NorthWest Indiana Bancorp

Consolidated Statements of Changes in Stockholders' Equity

(unaudited)

	Three Months Ended						Six Months Ended
(Dollars in thousands)	June 30,						June 30,
	2013			2012			2013			2012

Balance at beginning of period	$	68,115		$	63,755		$	67,651		$	62,960

Comprehensive (loss)/income:
Net income		1,707			1,620			3,377			2,974
Net unrealized change on securities available-for-sale, net of reclassifications and tax effects		(3,641	)		50			(4,276	)		(117	)
Amortization of unrecognized gain on postretirement benefit		(1	)		(1	)		(3	)		(3	)
Comprehensive (loss)/income, net of tax		(1,935	)		1,669			(902	)		2,854

Stock based compensation expense		10			4			16			8
Sale of treasury stock		-			32			22			63
Stock repurchase		-			-			(57	)		-
Cash dividends		(626	)		(539	)		(1,166	)		(964	)

Balance at end of period	$	65,564		$	64,921		$	65,564		$	64,921

See accompanying notes to consolidated financial statements.

NorthWest Indiana Bancorp

Consolidated Statements of Cash Flows

(unaudited)

	Six Months Ended
(Dollars in thousands)	June 30,
	2013			2012
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	3,377		$	2,974
Adjustments to reconcile net income to net cash provided by operating activities:
Origination of loans for sale		(9,463	)		(5,926	)
Sale of loans originated for sale		9,494			6,055
Depreciation and amortization, net of accretion		1,099			1,173
Amortization of mortgage servicing rights		84			57
Stock based compensation expense		16			8
Gain on sale of securities, net		(444	)		(617	)
Other-than-temporary credit impairment of debt securities		-			6
Gain on sale of loans held-for-sale, net		(298	)		(347	)
Loss on foreclosed real estate, net		1			84
Provision for loan losses		230			1,075
Net change in:
Interest receivable		149			7
Other assets		904			32
Accrued expenses and other liabilities		(2,328	)		(1,421	)
Total adjustments		(556	)		186
Net cash - operating activities		2,821			3,160

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities and pay downs of securities available-for-sale		23,772			30,137
Proceeds from sales of securities available-for-sale		12,475			13,283
Purchases of securities available-for-sale		(40,006	)		(49,198	)
Proceeds from sale of loans receivable transferred to loans held-for-sale		-			3,591
Loan participations purchased		253			(9,393	)
Net change in loans receivable		1,609			(25,707	)
Proceeds from sales of foreclosed real estate		101			809
Purchase of premises and equipment, net		(302	)		(323	)
Increase in cash value of bank owned life insurance		(175	)		(194	)
Net cash - investing activities		(2,273	)		(36,995	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposits		6,319			20,619
Proceeds from FHLB advances		11,000			2,000
Repayment of FHLB advances		(11,000	)		(2,000	)
Change in other borrowed funds		3,261			7,051
Proceeds from sale of treasury stock		22			63
Common stock repurchased		(57	)		-
Dividends paid		(1,078	)		(850	)
Net cash - financing activities		8,467			26,883
Net change in cash and cash equivalents		9,015			(6,952	)
Cash and cash equivalents at beginning of period		33,751			26,367
Cash and cash equivalents at end of period	$	42,766		$	19,415

SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest	$	906		$	1,261
Income taxes		744			1,263
SUPPLEMENTAL NONCASH INFORMATION:
Transfers from loans to foreclosed real estate	$	95		$	930
Transfers from loans receivable to loans held-for-sale		-			3,428

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, NWIN Funding, Inc, and Columbia Development Company, 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. 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 June 30, 2013 and December 31, 2012, and the consolidated statements of income, comprehensive income, and changes in stockholders’ equity for the three and six months ended June 30, 2013 and 2012, and consolidated statements of cash flows for the six months ended June 30, 2013 and 2012. The income reported for the six month period ended June 30, 2013 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:

			Gross		Gross			Estimated
(Dollars in thousands)	Cost		Unrealized		Unrealized			Fair
	Basis		Gains		Losses			Value
June 30, 2013
U.S. government sponsored entities	$	20,498	$	5	$	(588	)	$	19,915
Collateralized mortgage obligations and residential mortgage-backed securities		96,403		1,568		(1,015	)		96,956
Municipal securities		65,656		2,019		(1,471	)		66,204
Collateralized debt obligations		5,208		-		(3,492	)		1,716
Total securities available-for-sale	$	187,765	$	3,592	$	(6,566	)	$	184,791

December 31, 2012
U.S. government sponsored entities	$	23,009	$	94	$	(7	)	$	23,096
Collateralized mortgage obligations and residential mortgage-backed securities		96,782		3,147		(15	)		99,914
Municipal securities		58,946		4,155		(28	)		63,073
Collateralized debt obligations		5,208		-		(3,816	)		1,392
Total securities available-for-sale	$	183,945	$	7,396	$	(3,866	)	$	187,475

The fair value of available-for-sale debt securities and carrying amount, if different, at June 30, 2013 by contractual maturity, were as follows. Securities not due at a single maturity date, primarily mortgage-backed securities, are shown separately.

	Available-for-sale
(Dollars in thousands)	Estimated
	Fair		Tax-Equivalent
June 30, 2013	Value		Yield (%)
Due in one year or less	$	315		6.89
Due from one to five years		13,378		2.98
Due from five to ten years		36,447		4.32
Due over ten years		37,695		4.48
Collateralized mortgage obligations and residential mortgage-backed securities		96,956		2.74
Total	$	184,791		3.43

Sales of available-for-sale securities were as follows for the six months ended:

	June 30,		June 30,
(Dollars in thousands)	2013		2012

Proceeds	$	12,475	$	13,283
Gross gains		444		617
Gross losses		-		-

Accumulated other comprehensive income/(loss) balances, net of tax, related to available-for-sale securities, were as follows:

(Dollars in thousands)	Unrealized gain/(loss)
Beginning balance, December 31, 2012	$	2,284
Current period change		(4,276	)
Ending balance, June 30, 2013	$	(1,992	)

Securities with carrying values of approximately $31,105,000 and $32,935,000 were pledged as of June 30, 2013 and December 31, 2012, respectively, as collateral for repurchase agreements, public funds, and for other purposes as permitted or required by law.

Securities with unrealized losses at June 30, 2013 and December 31, 2012 not recognized in income are as follows:

	Less than 12 months					12 months or longer					Total
	Estimated					Estimated					Estimated
(Dollars in thousands)	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
June 30, 2013
U.S. government sponsored entities	$	18,410	$	(588	)	$	-	$	-		$	18,410	$	(588	)
Collateralized mortgage obligations and residential mortgage-backed securities		43,566		(1,015	)		-		-			43,566		(1,015	)
Municipal securities		24,159		(1,471	)		-		-			24,159		(1,471	)
Collateralized debt obligations		-		-			1,716		(3,492	)		1,716		(3,492	)
Total temporarily impaired	$	86,135	$	(3,074	)	$	1,716	$	(3,492	)	$	87,851	$	(6,566	)
Number of securities				103					4					107

	Less than 12 months					12 months or longer					Total
	Estimated					Estimated					Estimated
(Dollars in thousands)	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
December 31, 2012
U.S. government sponsored entities	$	3,492	$	(7	)	$	-	$	-		$	3,492	$	(7	)
Collateralized mortgage obligations and residential mortgage-backed securities		2,294		(15	)		-		-			2,294		(15	)
Municipal securities		3,330		(28	)		-		-			3,330		(28	)
Collateralized debt obligations		-		-			1,392		(3,816	)		1,392		(3,816	)
Total temporarily impaired	$	9,116	$	(50	)	$	1,392	$	(3,816	)	$	10,508	$	(3,866	)
Number of securities				14					4					18

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 markets. The fair value is expected to recover as the securities approach maturity.

Note 4 - Loans Receivable

Year end loans are summarized below:

		(Dollars in thousands)
	June 30, 2013			December 31, 2012
Loans secured by real estate:
Construction and land development	$	15,808		$	23,984
Residential, including home equity		159,454			154,945
Commercial real estate and other dwelling		183,641			179,825
Total loans secured by real estate		358,903			358,754
Consumer loans		271			350
Commercial business		61,626			69,310
Government and other		13,670			8,869
Subtotal		434,470			437,283
Less:
Net deferred loan origination fees		(234	)		(251	)
Undisbursed loan funds		(96	)		(51	)
Loans receivable	$	434,140		$	436,981

(Dollars in thousands)	Residential Real Estate, Including Home Equity			Consumer Loans			Commercial Real Estate, Construction & Land Development, and Other Dwellings			Commercial Participations Purchased			Commercial Business Loans			Government Loans		Total

The Bancorp's activity in the allowance for loan losses is summarized below for the six months ended June 30, 2013:

Allowance for loan losses:
Beginning Balance	$	1,024		$	19		$	4,550		$	1,608		$	1,220		$	-	$	8,421
Charge-offs		(117	)		(6	)		(333	)		-			(438	)		-		(894	)
Recoveries		1			3			-			-			3			-		7
Provisions		542			(1	)		122			(757	)		297			27		230
Ending Balance	$	1,450		$	15		$	4,339		$	851		$	1,082		$	27	$	7,764

The Bancorp's activity in the allowance for loan losses is summarized below for the six months ended June 30, 2012:

Allowance for loan losses:
Beginning Balance	$	1,161		$	15		$	3,329		$	2,399		$	1,101		$	-	$	8,005
Charge-offs		(205	)		(9	)		(381	)		(484	)		-			-		(1,079	)
Recoveries		-			4			9			-			30			-		43
Provisions		210			22			978			121			(256	)		-		1,075
Ending Balance	$	1,166		$	32		$	3,935		$	2,036		$	875		$	-	$	8,044

The Bancorp's allowance for loan losses impairment evaluation and financing receivables are summarized below at June 30, 2013:

Ending balance: individually evaluated for impairment	$	22		$	-		$	1,437		$	-		$	-		$	-	$	1,459

Ending balance: collectively evaluated for impairment	$	1,428		$	15		$	2,902		$	851		$	1,082		$	27	$	6,305

FINANCING RECEIVABLES
Ending balance	$	159,171		$	267		$	183,319		$	16,130		$	61,583		$	13,670	$	434,140

Ending balance: individually evaluated for impairment	$	1,154		$	-		$	10,301		$	5,235		$	1,299		$	-	$	17,989

Ending balance: collectively evaluated for impairment	$	158,017		$	267		$	173,018		$	10,895		$	60,284		$	13,670	$	416,151

The Bancorp's allowance for loan losses impairment evaluation and financing receivables are summarized below at December 31, 2012:

Ending balance: individually evaluated for impairment	$	9		$	-		$	1,783		$	-		$	209		$	-	$	2,001

Ending balance: collectively evaluated for impairment	$	1,015		$	19		$	2,767		$	1,608		$	1,011		$	-	$	6,420

FINANCING RECEIVABLES
Ending balance	$	154,627		$	347		$	175,769		$	28,040		$	69,329		$	8,869	$	436,981

Ending balance: individually evaluated for impairment	$	692		$	-		$	10,778		$	6,378		$	2,032		$	-	$	19,880

Ending balance: collectively evaluated for impairment	$	153,935		$	347		$	164,991		$	21,662		$	67,297		$	8,869	$	417,101

The Bancorp's credit quality indicators, are summarized below at June 30, 2013 and December 31, 2012:

	(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 Loans
Loan Grades	2013		2012		2013		2012		2013		2012		2013		2012
2 Moderate risk	$	16	$	19	$	-	$	-	$	5,125	$	5,674	$	-	$	-
3 Acceptable risk		118,623		110,416		5,506		15,585		41,251		45,202		13,670		8,869
4 Pass/monitor		51,156		51,100		4,570		1,029		12,764		13,500		-		-
5 Special mention (watch)		3,218		3,630		1,732		5,984		1,101		3,300		-		-
6 Substandard		10,306		10,604		4,322		5,442		1,342		1,653		-		-
7 Doubtful		-		-		-		-		-		-		-		-
Total	$	183,319	$	175,769	$	16,130	$	28,040	$	61,583	$	69,329	$	13,670	$	8,869

	(Dollars in thousands)
	Consumer Credit Exposure - Credit Risk Profile Based On Payment Activity
	Residential Real Estate, Including Home Equity				Consumer Loans
	2013		2012		2013		2012
Performing	$	156,066	$	152,838	$	267	$	337
Non-performing		3,105		1,789		-		10
Total	$	159,171	$	154,627	$	267	$	347

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 risk

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.

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 is 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 troubled debt restructurings for the six month periods presented are summarized below:

	(Dollars in thousands)
	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Number of Contracts		Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment
	June 30, 2013						June 30, 2012
Troubled debt restructurings during the period:
Residential real estate, including home equity		4	$	549	$	533		-	$	-	$	-
Consumer loans		-		-		-		-		-		-
Commercial real estate, construction & land development, and other dwellings		-		-		-		2		893		893
Commercial participations purchased		-		-		-		-		-		-
Commercial business loans		-		-		-		1		108		11
Government loans		-		-		-		-		-		-

No troubled debt restructurings have subsequently defaulted during the periods presented All of the loans classified as troubled debt restructurings are also considered impaired The valuation basis for the Bancorp’s troubled debt restructurings is based on the present value of cash flows, unless consistent cash flows are not present, then the fair value of the collateral securing the loan is the basis for valuation Troubled debt restructurings that subsequently defaulted during the period are loans that were restructured and, subsequent to restructuring, were moved to nonaccrual status and failed to comply with the guidelines of the restructured note Troubled debt restructurings that subsequently defaulted are presented for comparison purposes and are relevant only to the period in which the subsequent default occurred

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

	As of June 30, 2013						For the six months ended June 30, 2013
(Dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Residential real estate, including home equity	$	-	$	-	$	-	$	-	$	-
Commercial real estate, construction & land development, and other dwellings		610		610		-		791		15
Commercial participations purchased		5,235		5,576		-		5,507		29
Commercial business loans		1,298		2,009		-		1,037		4
With an allowance recorded:
Residential real estate, including home equity		1,155		1,167		22		831		12
Commercial real estate, construction & land development, and other dwellings		9,595		9,679		1,437		10,004		142
Commercial participations purchased		-		-		-		189		-
Commercial business loans		96		96		-		652		4
Total:
Residential real estate, including home equity	$	1,155	$	1,167	$	22	$	831	$	12
Commercial real estate, construction & land development, and other dwellings	$	10,205	$	10,289	$	1,437	$	10,795	$	157
Commercial participations purchased	$	5,235	$	5,576	$	-	$	5,696	$	29
Commercial business loans	$	1,394	$	2,105	$	-	$	1,689	$	8

	As of December 31, 2012						For the six months ended June 30, 2012
(Dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Residential real estate, including home equity	$	-	$	-	$	-	$	-	$	-
Commercial real estate, construction & land development, and other dwellings		591		591		-		708		2
Commercial participations purchased		6,378		11,047		-		3,501		-
Commercial business loans		727		1,000		-		645		17
With an allowance recorded:
Residential real estate, including home equity		692		692		9		596		6
Commercial real estate, construction & land development, and other dwellings		10,187		10,271		1,783		9,817		-
Commercial participations purchased		-		-		-		5,406		144
Commercial business loans		1,305		1,305		209		1,103		29
Total:
Residential real estate, including home equity	$	692	$	692	$	9	$	596	$	6
Commercial real estate, construction & land development, and other dwellings	$	10,778	$	10,862	$	1,783	$	10,525	$	2
Commercial participations purchased	$	6,378	$	11,047	$	-	$	8,907	$	144
Commercial business loans	$	2,032	$	2,305	$	209	$	1,748	$	46

The Bancorp's age analysis of past due loans is summarized below:

(Dollars in thousands)
	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days Past Due		Total Past Due		Current		Total Loans		Recorded Investments Greater than 90 Days and Accruing
June 30, 2013
Residential real estate, including home equity	$	2,801	$	621	$	2,082	$	5,504	$	153,667	$	159,171	$	4
Consumer loans		-		-		-		-		267		267		-
Commercial real estate, construction & land development, and other dwellings		729		2,512		2,467		5,708		177,611		183,319		-
Commercial participations purchased		109		-		4,322		4,431		11,699		16,130		-
Commercial business loans		466		-		1,298		1,764		59,819		61,583		-
Government loans		-		-		-		-		13,670		13,670		-
Total	$	4,105	$	3,133	$	10,169	$	17,407	$	416,733	$	434,140	$	4

December 31, 2012
Residential real estate, including home equity	$	4,172	$	1,145	$	1,448	$	6,765	$	147,862	$	154,627	$	-
Consumer loans		-		-		-		-		347		347		-
Commercial real estate, construction & land development, and other dwellings		4,044		390		1,993		6,427		169,342		175,769		229
Commercial participations purchased		5		-		5,442		5,447		22,593		28,040		-
Commercial business loans		689		116		1,525		2,330		66,999		69,329		-
Government loans		-		-		-		-		8,869		8,869		-
Total	$	8,910	$	1,651	$	10,408	$	20,969	$	416,012	$	436,981	$	229

The Bancorp's loans on nonaccrual status are summarized below:

	(Dollars in thousands)
	June 30, 2013		December 31, 2012
Residential real estate, including home equity	$	2,850	$	1,846
Consumer loans		-		10
Commercial real estate, construction & land development, and other dwellings		2,994		2,311
Commercial participations purchased		4,322		5,442
Commercial business loans		1,549		1,644
Government loans		-		-
Total	$	11,715	$	11,253

Note 5 - Foreclosed Real Estate

Foreclosed real estate at period-end is summarized below:

	(Dollars in thousands)
	June 30,		December 31,
	2013		2012
Residential real estate	$	264	$	243
Commercial real estate and other dwelling		124		151
Construction and land development		27		31
Total	$	415	$	425

Note 6 - 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 7 - Earnings Per Share

Earnings per common share is computed by dividing net income 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 computations for the three and six months ended June 30, 2013 and 2012 are as follows:

	Three Months Ended				Six Months Ended
(Dollars in thousands, except per share data)	June 30,				June 30,
	2013		2012		2013		2012
Basic earnings per common share:
Net income as reported	$	1,707	$	1,620	$	3,377	$	2,974
Weighted average common shares outstanding		2,842,820		2,838,892		2,841,308		2,838,393
Basic earnings per common share	$	0.60	$	0.57	$	1.19	$	1.05
Diluted earnings per common share:
Net income as reported	$	1,707	$	1,620	$	3,377	$	2,974
Weighted average common shares outstanding		2,842,820		2,838,892		2,841,308		2,838,393
Add: Dilutive effect of assumed stock option exercises		-		-		-		-
Weighted average common and dilutive potential common shares outstanding		2,842,820		2,838,892		2,841,308		2,838,393
Diluted earnings per common share	$	0.60	$	0.57	$	1.19	$	1.05

Note 8 - 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 awards.

As required by the Compensation – Stock Compensation Topic, companies are required to record compensation cost for stock options and awards provided to employees in return for employment service. For the six months ended June 30, 2013, stock based compensation expense of $16 thousand was recorded, compared to $8 thousand for the six months ended June 30, 2012. It is anticipated that current outstanding vested and unvested options and awards will result in additional compensation expense of approximately $21 thousand in 2013 and $35 thousand in 2014.

There were no incentive stock options granted during the first six months of 2013 or 2012. When options are granted, 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 or awards. Compensation cost will also be recorded for prior option grants that vest after the date of adoption. A summary of option activity under the Bancorp’s incentive stock option plan for the six months ended June 30, 2013 follows:

						Weighted-
				Weighted-		Average
				Average		Remaining		Aggregate
				Exercise		Contractual		Intrinsic
Options	Shares			Price		Term		Value
Outstanding at January 1, 2013		25,950		$	27.06
Granted		-			-
Exercised		-			-
Forfeited		(2,175	)		29.83
Expired		(15,725	)	$	25.25
Outstanding at June 30, 2013		8,050		$	29.86		0.9		-
Exercisable at June 30, 2013		8,050		$	29.86		0.9		-

There were 6,800 shares of restricted stock granted during the first six months of 2013. No shares of restricted stock were granted during the first six months of 2012. These awards were issued with an award price equal to the market price of the Bancorp’s common stock on the award date and with a five year vesting period. Forfeiture provisions exist for personnel that separate employment before the vesting period expires. During the first six months of 2013, 100 shares of restricted stock vested. At June 30, 2013, there were 10,100 shares of restricted stock outstanding.

Note 9 - Adoption of New Accounting Standards

Update Number 2013-02 – Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. The amendments in this Update supersede and replace the presentation requirements for reclassifications out of accumulated other comprehensive income in ASUs 2011-05 (issued in June 2011) and 2011-12 (issued in December 2011) for all public and private organizations. The amendments require an entity to provide additional information about reclassifications out of accumulated other comprehensive income. For public entities, the amendments are effective prospectively for reporting periods beginning after December 15, 2012. The amendments did not change the Bancorp’s presentation of the Consolidated Statements of Comprehensive Income.

Note 10 - 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 an 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 judgments and assumptions used in pricing could result in different estimates of value. In certain cases where market data is not readily available because of a 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. Impairment is other-than-temporary if the decline in the fair value 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. The Bancorp considers 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 (1) has the intent to sell the debt securities or (2) more likely than not will be required to sell the debt securities before their 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 June 30, 2013, the Bancorp’s management utilized a specialist to perform 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 then tested for impairment consistent with the Investments – Other Topic and the Investments – Debt and Equity Securities Topic. 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 of cash flows 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 contain principal and interest tests, waterfall distributions, note valuations, collection detail and credit ratings for each pooled trust preferred security. In addition, a detailed review of the performing collateral was performed. The review of the collateral began with a review of financial information provided by SNL Financial, a comprehensive database, widely used in the industry, which gathers financial data on banks and thrifts from U.S. GAAP financial statements for public companies (annual and quarterly reports on Forms 10-K and 10-Q, respectively), as well as regulatory reports for private companies, including consolidated financial statements for bank holding companies (FR Y-9C reports) and parent company-only financial statements for bank holding companies (FR Y-9LP reports) filed with the Federal Reserve, bank call reports filed with the FDIC and thrift financial reports provided by the Office of the Comptroller of Currency. Using the information sources described above, for each bank and thrift examined the following items were examined: nature of the issuer’s business, years of operating history, corporate structure, loan composition and loan concentrations, deposit mix, asset growth rates, geographic footprint and local economic environment. The issuers’ historical financial performance was reviewed and their financial ratios were compared to appropriate peer groups of regional banks or thrifts with similar asset sizes. The analysis focused on six broad categories: profitability (revenue streams and earnings quality, return on assets and shareholder’s equity, net interest margin and interest rate sensitivity), credit quality (charge-offs and recoveries, non-current loans and total non-performing assets as a percentage of total loans, loan loss reserve coverage and the adequacy of the loan loss provision), operating efficiency (non-interest expense compared to total revenue), capital adequacy (Tier-1, total capital and leverage ratios and equity capital growth), leverage (tangible equity as a percentage of tangible assets, short-term and long-term borrowings and double leverage at the holding company) and liquidity (the nature and availability of funding sources, net non-core funding dependence and quality of deposits). In addition, for publicly traded companies’ stock price movements were reviewed and the market price of publicly traded debt instruments was examined. The other-than-temporary impairment analysis indicated that the Bancorp’s four pooled trust preferred securities had no additional other-than-temporary impairment during the quarter ended June 30, 2013.

The table below shows the credit loss roll forward on a year-to-date basis for the Bancorp’s pooled trust preferred securities that have been classified with other-than-temporary impairment:

	(Dollars in thousands)
	Other-than-temporary impairment
Ending balance, December 31, 2012	$	271
Additions not previously recognized		-
Ending balance, June 30, 2013	$	271

The following table contains information regarding the Bancorp’s pooled trust preferred securities as of June 30, 2013:

(Dollars in thousands)
Cusip	74043CAC1			74042TAJ0			01449TAB9			01450NAC6
Deal name	PreTSL XXIV			PreTSL XXVII			Alesco IX			Alesco XVII
Class		B-1			C-1			A-2A			B
Book value	$	1,257		$	1,296		$	1,303		$	1,352
Fair value	$	351		$	303		$	659		$	403
Unrealized gains/(losses)	$	(906	)	$	(993	)	$	(644	)	$	(949	)
Lowest credit rating assigned		CC			C			BB			C
Number of performing banks		50			28			53			44
Number of performing insurance companies		13			7			10			n/a
Number of issuers in default		17			9			1			2
Number of issuers in deferral		13			5			12			10
Defaults & deferrals as a % of performing collateral		49.14	%		33.47	%		19.11	%		32.67	%
Subordination:
As a % of performing collateral		-2.91	%		-10.74	%		34.99	%		14.10	%
As a % of performing collateral - adjusted for projected future defaults		-10.19	%		-19.33	%		30.61	%		9.48	%
Other-than-temporary impairment model assumptions:
Defaults:
Year 1 - issuer average		2.20	%		2.40	%		2.10	%		1.70	%
Year 2 - issuer average		2.20	%		2.40	%		2.10	%		1.70	%
Year 3 - issuer average		2.20	%		2.40	%		2.10	%		1.70	%
> 3 Years - issuer average		(1	)		(1	)		(1	)		(1	)
Discount rate - 3 month Libor, plus implicit yield spread at purchase		1.48	%		1.23	%		1.27	%		1.44	%
Recovery assumptions		(2	)		(2	)		(2	)		(2	)
Prepayments		0.00	%		0.00	%		0.00	%		0.00	%
Other-than-temporary impairment	$	41		$	132		$	36		$	62

(1) - Default rates > 3 years are evaluated on a issuer by issuer basis and range from 0.25% to 5.00%.

(2) - Recovery assumptions are evaluated on a issuer by issuer basis and range from 0% to 15% with a five year lag.

In the table above, the Bancorp’s 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 subordination assuming future collateral defaults by utilizing the default/deferral assumptions in the Bancorp’s other-than-temporary-impairment analysis. Subordination assuming future default/deferral assumptions is calculated by deducting future defaults from the current performing collateral. At June 30, 2013, management reviewed the 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.

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: For collateral that has already defaulted, no recovery was assumed; no cash flows were assumed from collateral currently in deferral, with the exception of the recovery assumptions. The default and recovery assumptions were calculated based on a detailed collateral review. 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.

At June 30, 2013, three of the trust preferred securities with a cost basis of $3.9 million continue to be 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

There were no transfers to or from Levels 1 and 2 during the six months ended June 30, 2013. Assets measured at fair value on a recurring basis are summarized below:

			Fair Value Measurements at June 30, 2013 Using
(Dollars in thousands)	Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Available-for-sale debt securities
U.S. government sponsored entities	$	19,915	$	-	$	19,915	$	-
Collateralized mortgage obligations and residential mortgage-backed securities		96,956		-		96,956		-
Municipal securities		66,204		-		66,204		-
Collateralized debt obligations		1,716		-		-		1,716
Total securities available-for-sale	$	184,791	$	-	$	183,075	$	1,716

			Fair Value Measurements at December 31, 2012 Using
(Dollars in thousands)	Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Available-for-sale debt securities
U.S. government sponsored entities	$	23,096	$	-	$	23,096	$	-
Collateralized mortgage obligations and residential mortgage-backed securities		99,914		-		99,914		-
Municipal securities		63,073		-		63,073		-
Collateralized debt obligations		1,392		-		-		1,392
Total securities available-for-sale	$	187,475	$	-	$	186,083	$	1,392

A roll forward of available-for-sale securities, which require significant adjustment based on unobservable data, are presented in the following table:

(Dollars in thousands)	Fair Value Measurements at June 30, 2013 Using Significant Unobservable Inputs (Level 3)
	Available-for- sale securities
	Collateralized Debt Obligations
Beginning balance, December 31, 2012	$	1,392
Transfers in and/or (out) of Level 3		-
Total gains or (losses)
Included in earnings		-
Included in other comprehensive income		324
Purchases, issuances, sales, and settlements
Purchases		-
Issuances		-
Sales		-
Settlements		-
Ending balance, June 30, 2013	$	1,716

Assets measured at fair value on a non-recurring basis are summarized below:

			Fair Value Measurements at June 30, 2013 Using
(Dollars in thousands)	Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired loans	$	16,530	$	-	$	-	$	16,530
Foreclosed real estate		415		-		-		415

			Fair Value Measurements at December 31, 2012 Using
(Dollars in thousands)	Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired loans	$	17,879	$	-	$	-	$	17,879
Foreclosed real estate		425		-		-		425

The fair value of impaired loans with specific allocations of the allowance for loan losses or loans for which charge-offs have been taken is generally based on a present value of cash flows or, for collateral dependent loans, based on recent real estate appraisals. Appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. The unpaid principal balance of impaired loans was $18.0 million and the related specific reserves totaled $1.5 million, resulting in a fair value of impaired loans totaling $16.5 million, at June 30, 2013. The unpaid principal balance of impaired loans was $19.9 million and the related specific reserves totaled $2.0 million, resulting in a fair value of impaired loans totaling $17.9 million, at December 31, 2012. Fair value is determined, where possible, using market prices derived from an appraisal or evaluation, which are considered to be Level 2 inputs. However, certain assumptions and unobservable inputs are often used by the appraiser, therefore, qualifying the assets as Level 3 in the fair value hierarchy. The fair value of foreclosed real estate is similarly determined by using the results of recent real estate appraisals. The numerical range of unobservable inputs for these valuation assumptions is not meaningful.

The following table shows carrying values and related estimated fair values of financial instruments as of the dates indicated. Estimated fair values are further categorized by the inputs used to measure fair value. Items that are not financial instruments are not included.

	June 30, 2013				Estimated Fair Value Measurements at June 30, 2013 Using
(Dollars in thousands)	Carrying Value		Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Financial assets:
Cash and cash equivalents	$	42,766	$	42,766	$	42,766	$	-	$	-
Securities available-for-sale		184,791		184,791		-		183,075		1,716
Loans held-for-sale		522		528		528		-		-
Loans receivable, net		426,376		425,346		-		-		425,346
Federal Home Loan Bank stock		3,086		3,086		-		3,086		-
Accrued interest receivable		2,334		2,334		-		2,334		-

Financial liabilities:
Non-interest bearing deposits		72,182		72,182		72,182		-		-
Interest bearing deposits		500,546		500,573		339,582		160,991		-
Repurchase agreements		19,360		19,368		13,332		6,036		-
Borrowed funds		33,406		33,428		406		33,022		-
Accrued interest payable		45		45		-		45		-

	December 31, 2012				Estimated Fair Value Measurements at December 31, 2012 Using
(Dollars in thousands)	Carrying Value		Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Financial assets:
Cash and cash equivalents	$	33,751	$	33,751	$	33,751	$	-	$	-
Securities available-for-sale		187,475		187,475		-		186,083		1,392
Loans held-for-sale		323		332		332		-		-
Loans receivable, net		428,560		429,733		-		-		429,733
Federal Home Loan Bank stock		3,086		3,086		-		3,086		-
Accrued interest receivable		2,483		2,483		-		2,483		-

Financial liabilities:
Non-interest bearing deposits		75,228		75,228		75,228		-		-
Interest bearing deposits		491,181		491,295		319,520		171,775		-
Repurchase agreements		16,298		16,310		10,131		6,179		-
Borrowed funds		33,207		33,658		207		33,451		-
Accrued interest payable		52		52		-		52		-

The following methods were used to estimate the fair value of financial instruments presented in the preceding table for the periods ended June 30, 2013 and December 31, 2012:

Cash and cash equivalent carrying amounts approximate fair value. The fair values of securities available-for-sale are obtained from broker pricing (Level 2), with the exception of collateralized debt obligations, which are valued by a third-party specialist (Level 3). Loans held-for-sale comprise residential mortgages and are priced based on values established by the secondary mortgage markets. The estimated fair value for net loans receivable is based on estimates of the rate the Bancorp would charge for similar such loans, applied for the time period until estimated repayment, in addition to appraisals which may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Federal Home Loan Bank stock is estimated at book value due to restrictions that limit the sale or transfer the security. Fair value of accrued interest receivable and payable approximates book value, as the carrying values are determined using the observable interest rate, balance, and last payment date.

Non-interest and interest bearing deposits, which include checking, savings, and money market deposits, are estimated to have fair values based on the amount payable as of the reporting date (Level 1). The fair value of fixed-maturity certificates of deposit (included in interest bearing deposits) are based on estimates of the rate the Bancorp would pay on similar deposits, applied for the time period until maturity (Level 2). Estimated fair values for short-term repurchase agreements, which represent sweeps from demand deposits to accounts secured by pledged securities, are estimated based on the amount payable as of the reporting date (Level 1). Longer-term repurchase agreements, with contractual maturity dates of three months or more, are based on estimates of the rate the Bancorp would pay on similar deposits, applied for the time period until maturity (Level 2). Short-term borrowings are generally only held overnight, therefore, their carrying amount is a reasonable estimate of fair value (Level 1). The fair value of FHLB Advances (included in borrowed funds) are estimated by discounting the future cash flows using quoted rates from the FHLB similar advances with similar maturities. The estimated fair value of other financial instruments, and off-balance sheet loan commitments, approximate cost and are not considered significant to this presentation.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Summary

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 the Bank.

At June 30, 2013, the Bancorp had total assets of $697.0 million, total loans of $434.1 million and total deposits of $572.7 million. Stockholders' equity totaled $65.6 million or 9.41% of total assets, with book value per share of $23.05. Net income for the quarter ended June 30, 2013, was $1.7 million, or $0.60 earnings per common share for both basic and diluted calculations. For the quarter ended June 30, 2013, the return on average assets (ROA) was 0.99%, while the return on average stockholders’ equity (ROE) was 9.65%. For the six months ended June 30, 2013, the Bancorp recorded net income of $3.4 million, or $1.19 earnings per basic and diluted share. For the six months ended June 30, 2013, the ROA was 0.98%, while the ROE was 9.58%.

Recent Developments

The Current Economic Environment. We continue to operate in a challenging and uncertain economic environment, including generally uncertain national conditions and local conditions in our markets. Overall economic growth continues to be slow and national and regional unemployment rates remain at elevated levels. The risks associated with our business remain acute in periods of slow economic growth and high unemployment. Moreover, many financial institutions continue to be affected by an uncertain real estate market. While we are continuing to take steps to decrease and limit our exposure to problem loans, we nonetheless retain direct exposure to the residential and commercial real estate markets, and we are affected by these events.

Our loan portfolio includes residential mortgage loans, construction loans, and commercial real estate loans. Declines in real estate values, home sales volumes and financial stress on borrowers as a result of the uncertain economic environment, including job losses, could have an adverse effect on our borrowers or their customers, which could adversely affect our financial condition and results of operations. In addition, the current level of low economic growth on a national scale, the occurrence of another national recession, or a deterioration in local economic conditions in our markets could drive loan losses beyond that which are provided for in our allowance for loan losses and result in the following other consequences: increases in loan delinquencies; problem assets and foreclosures may increase; demand for our products and services may decline; deposits may decrease, which would adversely impact our liquidity position; and collateral for our loans, especially real estate, may decline in value, in turn reducing customers’ borrowing power, and reducing the value of assets and collateral associated with our existing loans.

Impact of Legislation. Over the last four-and-a-half years, Congress and the U.S. Department of the Treasury have enacted legislation and taken actions to address the disruptions in the financial system, declines in the housing market, and the overall regulation of financial institutions and the financial system. In this regard, the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), includes provisions affecting large and small financial institutions alike, including several provisions that profoundly affect the regulation of community banks, thrifts, and small bank and thrift holding companies, such as the Bancorp. Among other things, the Dodd-Frank Act abolished the Office of Thrift Supervision effective July 21, 2011 and transferred its functions to the Office of the Comptroller of the Currency (“OCC”), FDIC, and Federal Reserve. The Dodd-Frank Act also relaxes rules regarding interstate branching, allows financial institutions to pay interest on business checking accounts, changes the scope of federal deposit insurance coverage, imposes new capital requirements on bank and thrift holding companies, and imposes limits on debit card interchange fees charged by issuer banks (commonly known as the Durbin Amendment).

The Dodd-Frank Act also established the Consumer Financial Protection Bureau (the “CFPB”) within the Federal Reserve, which has broad authority to regulate consumer financial products and services and entities offering such products and services, including banks. Many of the consumer financial protection functions formerly assigned to the federal banking and other designated agencies are now performed by the CFPB. The CFPB has a large budget and staff, and has broad rulemaking authority over providers of credit, savings, and payment services and products. In this regard, the CFPB has the authority to implement regulations under federal consumer protection laws and enforce those laws against, and examine, financial institutions. State officials also will be authorized to enforce consumer protection rules issued by the CFPB. This bureau also is authorized to collect fines and provide consumer restitution in the event of violations, engage in consumer financial education, track consumer complaints, request data, and promote the availability of financial services to underserved consumers and communities. The CFPB also is directed to prevent “unfair, deceptive or abusive acts or practices” and ensure that all consumers have access to markets for consumer financial products and services, and that such markets are fair, transparent, and competitive. Although the CFPB has begun to implement its regulatory, supervisory, examination, and enforcement authority, there continues to be significant uncertainty as to how the agency’s strategies and priorities will impact the Bancorp.

The CFPB has indicated that mortgage lending is an area of supervisory focus and that it will concentrate its examination and rulemaking efforts on the variety of mortgage-related topics required under the Dodd-Frank Act, including steering consumers to less-favorable products, discrimination, abusive or unfair lending practices, predatory lending, origination disclosures, minimum mortgage underwriting standards, mortgage loan originator compensation, and servicing practices. The CFPB recently published several final regulations impacting the mortgage industry, including rules related to ability-to-pay, mortgage servicing, and mortgage loan originator compensation. The ability-to-repay rule makes lenders liable if they fail to assess ability to repay under a prescribed test, but also creates a safe harbor for so called “qualified mortgages.” The “qualified mortgages” standards include a tiered cap structure that places limits on the total amount of certain fees that can be charged on a loan, a 43% cap on debt-to-income (i.e., total monthly payments on debt to monthly gross income), exclusion of interest-only products, and other requirements. The 43% debt-to-income cap does not apply for the first seven years the rule is in effect for loans that are eligible for sale to Fannie Mae or Freddie Mac or eligible for government guarantee through the FHA or the Veterans Administration. Failure to comply with the ability-to-repay rule may result in possible CFPB enforcement action and special statutory damages plus actual, class action, and attorneys fees damages, all of which a borrower may claim in defense of a foreclosure action at any time. The Bancorp’s management is continuing to assess the impact of these requirements on our mortgage lending business.

In addition, the Federal Reserve and other federal bank regulatory agencies have issued a proposed rule under the Dodd-Frank Act that would exempt “qualified residential mortgages” from the securitization risk retention requirements of the Dodd-Frank Act. Although the Bancorp is primarily a portfolio lender, the final definition of what constitutes a “qualified residential mortgage” may impact the pricing and depth of the secondary market into which we may sell mortgages we originate. At this time, we cannot predict the content of final CFPB and other federal agency regulations or the impact they might have on the Bancorp’s financial results. The CFPB’s authority over mortgage lending, and its authority to change regulations adopted in the past by other regulators (i.e., regulations issued under the Truth in Lending Act, for example), or to rescind or ignore past regulatory guidance, could increase the Bancorp’s compliance costs and litigation exposure.

In addition to the CFPB’s authority over mortgage lending, the Dodd-Frank Act includes a series of provisions covering mortgage loan origination standards affecting, among other things, originator compensation, minimum repayment standards, and pre-payments. Moreover, the Dodd-Frank Act requires public companies like the Bancorp to hold shareholder advisory “say-on-pay” votes on executive compensation at least once every three years and submit related proposals to a vote of shareholders. The Bancorp held its first such “say-on-pay” vote at its 2013 annual meeting of shareholders. The Dodd-Frank Act contains numerous other provisions affecting financial institutions of all types, many of which may have an impact on the operating environment of the Bancorp in substantial and unpredictable ways. Consequently, the Dodd-Frank Act is expected to increase our cost of doing business, it may limit or expand our permissible activities, and it may affect the competitive balance within our industry and market areas. The Bancorp’s management continues to actively monitor the implementation of the Dodd-Frank Act and the regulations promulgated thereunder and assess its probable impact on the business, financial condition, and results of operations of the Bancorp. However, the ultimate effect of the Dodd-Frank Act on the financial services industry in general, and the Bancorp in particular, continues to be uncertain.

New Capital Rules. On July 2, 2013, the Federal Reserve approved final rules that substantially amend the regulatory risk-based capital rules applicable to the Bancorp and the Bank. The FDIC and the OCC have subsequently approved these rules. The final rules were adopted following the issuance of proposed rules by the Federal Reserve in June 2012, and implement the “Basel III” regulatory capital reforms and changes required by the Dodd-Frank Act. “Basel III” refers to two consultative documents released by the Basel Committee on Banking Supervision in December 2009, the rules text released in December 2010, and loss absorbency rules issued in January 2011, which include significant changes to bank capital, leverage and liquidity requirements.

The rules include new risk-based capital and leverage ratios, which would be phased in from 2015 to 2019, and would refine the definition of what constitutes “capital” for purposes of calculating those ratios. The new minimum capital level requirements applicable to the Bancorp and the Bank under the final rules would be: (i) a new common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 capital ratio of 6% (increased from 4%); (iii) a total capital ratio of 8% (unchanged from current rules); and (iv) a Tier 1 leverage ratio of 4% for all institutions. The final rules also establish a “capital conservation buffer” above the new regulatory minimum capital requirements, which must consist entirely of common equity Tier 1 capital. The capital conservation buffer will be phased-in over four years beginning on January 1, 2016, as follows: the maximum buffer will be 0.625% of risk-weighted assets for 2016, 1.25% for 2017, 1.875% for 2018, and 2.5% for 2019 and thereafter. This will result in the following minimum ratios beginning in 2019: (i) a common equity Tier 1 capital ratio of 7.0%, (ii) a Tier 1 capital ratio of 8.5%, and (iii) a total capital ratio of 10.5%. Under the final rules, institutions are subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. These limitations establish a maximum percentage of eligible retained income that could be utilized for such actions.

Basel III provided discretion for regulators to impose an additional buffer, the “countercyclical buffer,” of up to 2.5% of common equity Tier 1 capital to take into account the macro-financial environment and periods of excessive credit growth. However, the final rules permit the countercyclical buffer to be applied only to “advanced approach banks” ( i.e. , banks with $250 billion or more in total assets or $10 billion or more in total foreign exposures), which currently excludes the Bancorp and the Bank. The final rules also implement revisions and clarifications consistent with Basel III regarding the various components of Tier 1 capital, including common equity, unrealized gains and losses, as well as certain instruments that will no longer qualify as Tier 1 capital, some of which will be phased out over time. However, the final rules provide that small depository institution holding companies with less than $15 billion in total assets as of December 31, 2009 (which includes the Bancorp) will be able to permanently include non-qualifying instruments that were issued and included in Tier 1 or Tier 2 capital prior to May 19, 2010 in additional Tier 1 or Tier 2 capital until they redeem such instruments or until the instruments mature.

The final rules also contain revisions to the prompt corrective action framework, which is designed to place restrictions on insured depository institutions, including the Bank, if their capital levels begin to show signs of weakness. These revisions take effect January 1, 2015. Under the prompt corrective action requirements, which are designed to complement the capital conservation buffer, insured depository institutions will be required to meet the following increased capital level requirements in order to qualify as “well capitalized:” (i) a new common equity Tier 1 capital ratio of 6.5%; (ii) a Tier 1 capital ratio of 8% (increased from 6%); (iii) a total capital ratio of 10% (unchanged from current rules); and (iv) a Tier 1 leverage ratio of 5% (increased from 4%).

The final rules set forth certain changes for the calculation of risk-weighted assets, which we will be required to utilize beginning January 1, 2015. The standardized approach final rule utilizes an increased number of credit risk exposure categories and risk weights, and also addresses: (i) an alternative standard of creditworthiness consistent with Section 939A of the Dodd-Frank Act Act; (ii) revisions to recognition of credit risk mitigation; (iii) rules for risk weighting of equity exposures and past due loans; (iv) revised capital treatment for derivatives and repo-style transactions; and (v) disclosure requirements for top-tier banking organizations with $50 billion or more in total assets that are not subject to the “advance approach rules” that apply to banks with greater than $250 billion in consolidated assets. Based on our current capital composition and levels, we believe that we would be in compliance with the requirements as set forth in the final rules if they were presently in effect.

Financial Condition

During the six months ended June 30, 2013, total assets increased by $5.2 million (0.7%), with interest-earning assets increasing by $5.7 million (0.9%). At June 30, 2013, interest-earning assets totaled $658.8 million compared to $653.1 million at December 31, 2012. Earning assets represented 94.5% of total assets at June 30, 2013, compared to 94.4% at December 31, 2012.

Loans receivable totaled $434.1 million at June 30, 2013, compared to $437.0 million at December 31, 2012. The loan portfolio, which is the Bancorp’s largest asset, is the primary source of both interest and fee income. The Bancorp’s lending strategy stresses quality loan growth, product diversification, and competitive and profitable pricing. The Bancorp’s end-of-period loan balances were as follows:

	June 30,
	2013					December 31,
(Dollars in thousands)	(unaudited)					2012
	Balance		% Loans			Balance		% Loans

Construction & land development	$	15,808		3.6	%	$	23,984		5.5	%
1-4 first liens		139,582		32.2	%		135,143		30.9	%
Multifamily		32,696		7.5	%		31,669		7.2	%
Commercial real estate		150,945		34.8	%		148,156		33.9	%
Commercial business		61,583		14.2	%		69,329		15.9	%
1-4 Junior Liens		1,360		0.3	%		1,587		0.4	%
HELOC		15,465		3.6	%		15,249		3.5	%
Lot loans		2,764		0.6	%		2,648		0.6	%
Consumer		267		0.1	%		347		0.1	%
Government and other		13,670		3.1	%		8,869		2.0	%
Total loans	$	434,140		100.0	%	$	436,981		100.0	%

Adjustable rate loans / total loans	$	240,816		55.5	%	$	250,162		57.2	%

	June 30,
	2013			December 31,
	(unaudited)			2012

Total loans to total assets		62.3	%		63.2	%
Total loans to earning assets		65.9	%		66.9	%
Total loans to total deposits		75.8	%		77.1	%

The Bancorp is primarily a portfolio lender. Mortgage banking activities historically have been limited to the sale of fixed rate mortgage loans with contractual maturities greater than 15 years. These loans are identified as held for sale when originated and sold, on a loan-by-loan basis, in the secondary market. During the six months ended June 30, 2013, the Bancorp sold $9.5 million in newly originated fixed rate mortgage loans, compared to $9.4 million during the six months ended June 30, 2012. Net gains realized from the mortgage loan sales totaled $298 thousand for the six months ended June 30, 2013, compared to $347 thousand for the six months end June 30, 2012. Included in loan sales for the six months ended June 30, 2012, was the sale of $3.4 million of seasoned fixed rate mortgages, which resulted in a one-time gain of $183 thousand. At June 30, 2013, the Bancorp had $522 thousand in loans that were classified as held for sale, compared to $323 thousand at December 31, 2012.

The allowance for loan losses (ALL) is a valuation allowance for probable incurred credit losses, increased by the provision for loan losses, and decreased by charge-offs net of recoveries. A loan is charged-off against the allowance by management as a loss when deemed uncollectible, although collection efforts continue and future recoveries may occur. The determination of the amounts 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 collectability as of the reporting date. The appropriateness of the current period provision and the overall adequacy of the ALL are determined through a disciplined and consistently applied quarterly process that reviews the Bancorp’s current credit risk within the loan portfolio and identifies the required allowance for loan losses given the current risk estimates.

Historically, the Bancorp has successfully originated commercial real estate loans within its primary lending area. However, beginning in the fourth quarter of 2005, in response to a decrease in local loan demand and in an effort to reduce the potential credit risk associated with geographic concentrations, a strategy was implemented to purchase commercial real estate participation loans outside of the Bancorp’s primary lending area. The strategy to purchase these commercial real estate participation loans was limited to 10% of the Bancorp’s loan portfolio. The Bancorp’s management discontinued the out of market strategy during the third quarter of 2007. As of June 30, 2013, the Bancorp’s commercial real estate participation loan portfolio carried an aggregate balance of $16.1 million, of which $7.3 million has been purchased within the Bancorp’s primary lending area and $8.8 million outside of the primary lending area. At June 30, 2013, one loan with a balance of $4.3 million, or 26.7%, of the Bancorp’s commercial real estate participation loans has been internally classified as substandard and has been placed on non-accrual status. This one substandard, commercial real estate participation loan placed on non-accrual status is located outside of the Bancorp’s primary lending area. The discussion in the paragraphs that follow regarding non-performing loans, internally classified loans and impaired loans includes loans from the Bancorp’s commercial real estate participation loan portfolio.

For all of its commercial real estate participation loans, consistent with current regulatory guidelines the Bancorp’s management requires that the lead lenders obtain external appraisals to determine the fair value of the underlying collateral for any collateral dependent loans. The Bancorp’s management requires current external appraisals when entering into a new lending relationship or when events have occurred that materially change the assumptions in the existing appraisal. The lead lenders receive external appraisals from qualified appraisal firms that have expertise in valuing commercial properties and are able to comply with the required scope of the engagement. After the lead lender receives the external appraisal and performs its compliance review, the appraisal is forwarded to the Bancorp for review. The Bancorp’s management validates the external appraisal by conducting an internal in-house review by personnel with expertise in commercial real estate developments. If additional expertise is needed, an independent review appraiser is hired to assist in the evaluation of the appraisal. The Bancorp is not aware of any significant time lapses during this process. Periodically, the Bancorp’s management may make adjustments to the external appraisal assumptions if additional known quantifiable data becomes available that materially impacts the value of a project. Examples of adjustments that may occur are changes in property tax assumptions or changes in capitalization rates. The Bancorp’s management relies on up-to-date external appraisals to determine the current value of its impaired commercial real estate participation loans. These values are appropriately adjusted to reflect changes in market value and, when necessary, is the basis for establishing the appropriate allowance for loan losses (ALL). If an updated external appraisal for a commercial real estate participation loan is received after the balance sheet date, but before the annual or quarterly financial statements are issued, material changes in appraised values are “pushed back” in the yet to be issued financial statements in order that appropriate loan loss provision is recorded for the current reporting period. The Bancorp’s management consistently records loan charge-offs based on the fair value or income approach of the collateral as presented in the current external appraisal.

Non-performing loans include those loans that are 90 days or more past due and those loans that have been placed on non-accrual status. Non-performing loans totaled $11.7 million at June 30, 2013, compared to $11.5 million at December 31, 2012, an increase of $0.2 million or 1.7%. The ratio of non-performing loans to total loans was 2.70% at June 30, 2013, compared to 2.63% at December 31, 2012. The ratio of non-performing loans to total assets was 1.68% at June 30, 2013, compared to 1.66% at December 31, 2012. The increase in non-performing loans for the first six months of 2013 is primarily the result of the addition of eleven, residential real estate properties, while the sale of a commercial real estate loan that had been considered impaired and internally classified as substandard at December 31, 2012 helped to lower non-performing loans. At June 30, 2013, all non-performing loans are also accounted for on a non accrual basis, except for one loan totaling $4 thousand that was classified as accruing and 90 days past due. The current level of non-performing loans is concentrated in one previously reported out of market commercial real estate participation loan totaling $4.3 million. This non-performing commercial real estate participation loan is a hotel loan and is carried at its fair value based on the current fair value of the respective project’s collateral, less estimated selling costs. During July 2013, the previously mentioned $4.3 million participation loan was paid-off without a loss.

Loans, internally classified as substandard, totaled $19.0 million at June 30, 2013, compared to $19.7 million at December 31, 2012 a decrease of $761 thousand or 3.9%. The current level of substandard loans is concentrated in the previously mentioned non-performing commercial real estate participation loan and one accruing commercial real estate hotel loan in the amount of $4.8 million, which is the largest loan in this group. 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. No loans were internally classified as doubtful or loss at June 30, 2013 or December 31, 2012. 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 as substandard. Watch loans totaled $10.7 million at June 30, 2013, compared to $17.7 million at December 31, 2012 a decrease of $7.0 million or 39.5%. The decrease in watch loans is related to the upgrades and balance reductions in $6.6 million of commercial real estate and commercial business loan balances.

A loan is considered impaired when, based on current information and events, it is probable that a borrower will be unable to pay all amounts due according to the contractual terms of the loan agreement. At June 30, 2013, impaired loans totaled $18.0 million, compared to $19.9 million at December 31, 2012 a decrease of $1.9 million or 9.5%. The June 30, 2013, impaired loan balances consist of eighteen commercial real estate and commercial business loans totaling $16.8 million that are secured by business assets and real estate, and are personally guaranteed by the owners of the businesses. In addition, eight mortgage loans totaling $1.2 million, which are troubled debt restructurings have also been classified as impaired. The June 30, 2013 ALL contained $1.5 million in specific allowances for collateral deficiencies, compared to $2.0 million at December 31, 2012. During the second quarter of 2013, two new mortgage loans with a balance of $416 thousand were added to the impaired loan listing. There were no other loans considered to be impaired loans as of June 30, 2013. Typically, management does not individually classify smaller-balance homogeneous loans, such as residential mortgages or consumer loans, as impaired, unless they are troubled debt restructurings.

At June 30, 2013, the Bancorp classified fourteen loans totaling $14.8 million as troubled debt restructurings, which involves modifying the terms of a loan to forego a portion of interest or principal or reducing the interest rate on the loan to a rate materially less than market rates, or materially extending the maturity date of a loan. The Bancorp’s troubled debt restructurings include two commercial real estate participation hotel loans in the amount of $5.2 million and one commercial real estate hotel loan in the amount of $4.8 million, for which significant deferrals of principal repayments were granted; one commercial real estate loan in the amount of $2.4 million for which a significant deferral of principal and interest repayment was granted; one commercial real estate loan in the amount of $527 thousand for which a significant deferral of principal and interest repayment was granted by the Bank as required by a bankruptcy plan; one development loan in the amount of $664 thousand for which credit underwriting concessions were granted; and eight mortgage loans totaling $1.2 million, for which maturity dates were materially extended. At June 30, 2013, $8.7 million of the Bancorp’s loans classified as troubled debt restructurings are accruing loans. The valuation basis for the Bancorp’s troubled debt restructurings is based on the present value of cash flows, unless consistent cash flows are not present, then the fair value of the collateral securing the loan is the basis for valuation.

At June 30, 2013, 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 will imminently result in such loans being classified as past due, non-accrual or a troubled debt restructure. Management does not presently anticipate that any of the non-performing loans or classified loans would materially impact future operations, liquidity or capital resources.

For the three months ended June 30, 2013, $95 thousand in provisions to the ALL were required, compared to $550 thousand for the three months ended June 30, 2012, a decrease of $455 thousand or 82.7%. For the six months ended June 30, 2013, $230 thousand in provisions to the ALL were required, compared to $1.1 million for the six months ended June 30, 2012, a decrease of $845 thousand or 78.6%. The ALL provision decrease for both the three and six month periods are primarily a result of improved asset quality. The current year ALL provisions were primarily related to the current credit risk in the commercial real estate loan portfolio and 2013 loan originations. For the six months ended June 30, 2013, charge-offs, net of recoveries, totaled $887 thousand, compared to $1.0 million for the six months ended June 30, 2012. The net loan charge-offs for 2013 were comprised of $435 thousand in commercial business loans, $333 thousand in commercial real estate loans, $116 thousand in residential real estate loans, and $3 thousand in consumer loans. 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 losses for the current period, management has given consideration to historically elevated risks associated with the local economy, changes in loan balances and mix, and asset quality.

The ALL to total loans was 1.79% at June 30, 2013, compared to 1.93% at December 31, 2012. The ALL to non-performing loans (coverage ratio) was 66.25% at June 30, 2013, compared to 73.34% at December 31, 2012. The June 30, 2013 balance in the ALL account of $7.8 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 reserves to both performing and non-performing loans based on current information available.

At June 30, 2013, foreclosed real estate totaled $415 thousand, which was comprised of nine properties, compared to $425 thousand and ten properties at December 31, 2012. During the six months ended June 30, 2013, loans totaling $95 thousand were transferred into foreclosed real estate, while net sales and market value adjustments of foreclosed real estate totaled $105 thousand. Net losses from sales totaled $1 thousand for the six months ended June 30, 2013. At the end of June 2013 all of the Bancorp’s foreclosed real estate is located within its primary market area.

The primary objective of the Bancorp’s investment portfolio is to provide for the liquidity needs of the Bancorp and to contribute to profitability by providing a stable flow of dependable earnings. Funds are generally invested in federal funds, interest bearing balances in financial institutions, U.S. government securities, federal agency obligations, obligations of state and local municipalities and corporate securities. The securities portfolio, all of which is designated as available-for-sale, totaled $184.8 million at June 30, 2013, compared to $187.5 million at December 31, 2012, a decrease of $2.7 million (1.4%). The decrease in securities is a result of market value adjustments for unrealized losses due to interest rate increases. At June 30, 2013, the securities portfolio represented 28.0% of interest-earning assets and 26.5% of total assets compared to 28.7% of interest-earning assets and 27.1% of total assets at December 31, 2012. The Bancorp’s end-of-period investment portfolio and other short-term investments and stock balances were as follows:

	June 30,
	2013					December 31,
(Dollars in thousands)	(unaudited)					2012
	Balance		% Securities			Balance		% Securities

U.S. government sponsored entities	$	19,915		10.8	%	$	23,096		12.3	%
Collateralized Mortgage Obligations and residential mortgage-backed securities		96,956		52.5	%		99,914		53.3	%
Municipal securities		66,204		35.8	%		63,073		33.6	%
Collateralized debt obligations		1,716		0.9	%		1,392		0.8	%
Total securities	$	184,791		100.0	%	$	187,475		100.0	%

	June 30,
	2013		December 31,		YTD
(Dollars in thousands)	(unaudited)		2012		Change
	Balance		Balance		$			%

Interest bearing balances in financial institutions	$	35,314	$	19,832	$	15,482			78.1	%
Fed funds sold		987		5,407		(4,420	)		-81.7	%
Federal Home Loan Bank stock		3,086		3,086		-			0.0	%

The increase in interest bearing balances in financial institutions is a result of deposit growth at the end of the quarter that could be temporary in nature. The decrease in fed funds sold was the result of continued investment in the securities portfolio.

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. The Bancorp’s end-of-period deposit portfolio balances were as follows:

	June 30,
	2013		December 31,		YTD
(Dollars in thousands)	(unaudited)		2012		Change
	Balance		Balance		$			%

Checking	$	184,551	$	193,067	$	(8,516	)		-4.4	%
Savings		82,717		77,650		5,067			6.5	%
Money market		144,497		124,031		20,466			16.5	%
Certificates of deposit		160,963		171,661		(10,698	)		-6.2	%
Total deposits	$	572,728	$	566,409	$	6,319			1.1	%

The Bancorp’s core deposits include checking, savings, and money market accounts. The overall increase in core deposits is a result of managements’ sales efforts along with current customer preferences for short-term, liquid investment alternatives.

The Bancorp’s borrowed funds are primarily used to fund asset growth not supported by deposit generation. The Bancorp’s end-of-period borrowing balances were as follows:

	June 30,
	2013		December 31,		YTD
(Dollars in thousands)	(unaudited)		2012		Change
	Balance		Balance		$		%

Repurchase agreements	$	19,360	$	16,298	$	3,062		18.8	%
Borrowed funds		33,406		33,207		199		0.6	%
Total borrowed funds	$	52,766	$	49,505	$	3,261		6.6	%

Repurchase agreements increased as a result of growth in the Bancorp’s business sweep accounts.

Liquidity and Capital Resources

For the Bancorp, liquidity management refers to the ability to generate sufficient cash to fund current loan demand, meet deposit withdrawals, and pay dividends and operating expenses. Because profitability and liquidity are often conflicting objectives, management attempts to maximize the Bancorp’s net interest margin by making adequate, but not excessive, liquidity provisions.

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, and the purchase, sale, and maturity of investment securities. Financing activities focus almost entirely on the generation of customer deposits. In addition, the Bancorp utilizes borrowings (i.e., retail repurchase agreements, advances from the FHLB and federal funds purchased) as a source of funds.

During the six months ended June 30, 2013, cash and cash equivalents increased by $9.0 million compared to a $7.0 million decrease for the six months ended June 30, 2012. The primary sources of cash were proceeds from maturities, pay downs, and calls of available-for-sale securities and proceeds from FHLB advances. The primary uses of cash were the purchase of securities, repayment of FHLB advances, loan originations, stock repurchases, and the payment of common stock dividends. Cash provided by operating activities totaled $2.8 million for the six months ended June 30, 2013, compared to cash provided of $3.2 million for the six month period ended June 30, 2012. The decrease in cash from operating activities was primarily a result of timing differences of customer ACH deposit activity. Cash outflows from investing activities totaled $2.3 million for the current period, compared to cash outflows of $37.0 million for the six months ended June 30, 2012. The decreased cash outflows for the current six months were primarily related to decreased loan originations. Net cash inflows from financing activities totaled $8.5 million during the current period compared to net cash inflows of $26.9 million for the six months ended June 30, 2012. The decrease in net cash inflows from financing activities was a result of deposit outflows, reduced borrowed fund inflows, and higher dividend payments. On a cash basis, the Bancorp paid dividends on common stock of $1.1 million for the six months ended June 30, 2013, compared to $850 thousand for the six months ended June 30, 2012.

At June 30, 2013, outstanding commitments to fund loans totaled $78.2 million. Approximately 48.3% of the commitments were at variable rates. Standby letters of credit, which are conditional commitments issued by the Bancorp to guarantee the performance of a customer to a third party, totaled $8.5 million at June 30, 2013. Management believes that the Bancorp has sufficient cash flow and borrowing capacity to fund all outstanding commitments and letters of credit, while maintaining proper levels of liquidity.

Management strongly believes that maintaining a high level of capital enhances safety and soundness. During the six months ended June 30, 2013, stockholders' equity decreased by $2.1 million (3.1%). During the six months ended June 30, 2013, stockholders’ equity was primarily increased by net income of $3.4 million. Decreasing stockholders’ equity was the declaration of $1.2 million in cash dividends and the net change in the valuation of the available-for-sale securities of $4.3 million. On April 18, 2000 the Bancorp’s Board of Directors authorized a stock repurchase program to repurchase up to 50,000 shares of the Bancorp’s outstanding common stock, from time to time and subject to market conditions, on the open market or in privately negotiated transactions. This stock repurchase program does not expire and is only limited by the number of shares that can be purchased. As of June 30, 2013, the Bancorp has repurchased 38,850 shares of its outstanding common stock under the program at an average price per share of $22.55.

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. See “Recent Developments - New Capital Rules” for a description of the new capital ratios that will be phased-in beginning in 2015.

The following table shows that, at June 30, 2013, and December 31, 2012, the Bancorp’s capital exceeded all regulatory capital requirements. During the six months ended June 30, 2013, the Bancorp’s regulatory capital ratios continued to be negatively impacted by regulatory requirements regarding collateralized debt obligations. The regulatory requirements state that for collateralized debt obligations that have been downgraded below investment grade by the rating agencies, increased risk based asset weightings are required. The Bancorp currently holds four pooled trust preferred securities with a cost basis of $5.2 million. These investments currently have ratings that are below investment grade. As a result, approximately $28.1 million of risk based assets are generated by the trust preferred securities in the Bancorp’s and Bank’s total risk based capital calculation. The Bancorp’s and the Bank’s regulatory capital ratios were substantially the same at both June 30, 2013 and December 31, 2012. The dollar amounts are in millions.

(Dollars in millions)						Required for					To be well
	Actual					adequate capital					capitalized
At June 30, 2013	Amount		Ratio			Amount		Ratio			Amount		Ratio

Total capital to risk-weighted assets	$	72.0		15.3	%	$	37.7		8.0	%	$	47.1		10.0	%
Tier 1 capital to risk-weighted assets	$	66.1		14.0	%	$	18.8		4.0	%	$	28.3		6.0	%
Tier 1 capital to adjusted average assets	$	66.1		9.6	%	$	20.6		3.0	%	$	34.3		5.0	%

(Dollars in millions)						Required for					To be well
	Actual					adequate capital					capitalized
At December 31, 2012	Amount		Ratio			Amount		Ratio			Amount		Ratio

Total capital to risk-weighted assets	$	70.1		14.6	%	$	38.3		8.0	%	$	47.9		10.0	%
Tier 1 capital to risk-weighted assets	$	64.1		13.4	%	$	19.1		4.0	%	$	28.7		6.0	%
Tier 1 capital to adjusted average assets	$	64.1		9.4	%	$	20.5		3.0	%	$	34.2		5.0	%

The Bancorp’s ability to pay dividends to its shareholders is entirely dependent upon the Bank’s ability to pay dividends to the Bancorp. Under Indiana law, the Bank may pay dividends from its undivided profits (generally, earnings less losses, bad debts, taxes and other operating expenses) as is considered expedient by the Bank’s Board of Directors. However, if the total of all dividends declared by the Bank during the current year, including the proposed dividend, would exceed the sum of retained net income for the year to date plus its retained net income for the previous two years, the Bank may be required to obtain approval from the Indiana Department of Financial Institutions (DFI). For this purpose, “retained net income,” means net income as calculated for call report purposes, less all dividends declared for the applicable period. An exemption from DFI approval would require that the Bank have been assigned a composite uniform financial institutions rating of 1 or 2 as a result of the most recent federal or state examination; the proposed dividend would not result in a Tier 1 leverage ratio below 7.5%; and that the Bank not be subject to any corrective action, supervisory order, supervisory agreement, or board approved operating agreement. The aggregate amount of dividends that may be declared by the Bank in 2013, without the need for qualifying for an exemption or prior DFI approval is $8.7 million plus 2013 net profits. Moreover, the FDIC and the Federal Reserve Board may prohibit the payment of dividends if it determines that the payment of dividends would constitute an unsafe or unsound practice in light of the financial condition of the Bank. On June 28, 2013, the Board of Directors of the Bancorp declared a second quarter dividend of $0.22 per share. The Bancorp’s second quarter dividend was paid to shareholders on July 8, 2013.

Results of Operations - Comparison of the Quarter Ended June 30, 2013 to the Quarter Ended June 30, 2012

For the quarter ended June 30, 2013, the Bancorp reported net income of $1.7 million, compared to net income of $1.6 million for the quarter ended June 30, 2012, an increase of $87 thousand (5.4%). For the current quarter the ROA was 0.99%, compared to 0.97% for the quarter ended June 30, 2012. The ROE was 9.65% for the quarter ended June 30, 2013, compared to 9.91% for the quarter ended June 30, 2012.

Net interest income for the three months ended June 30, 2013 was $5.8 million, a decrease of $170 thousand (2.9%), compared to $5.9 million for the quarter ended June 30, 2012. During the current quarter, the Bancorp’s cost of funds continues to be positively impacted by the Federal Reserve’s continued action in maintaining a low short-term interest rate environment, however, the Bancorp’s yield on interest earning assets is being negatively impacted by lower long-term interest rates. The weighted-average yield on interest-earning assets was 3.84% for the three months ended June 30, 2013, compared to 4.17% for the three months ended June 30, 2012. The weighted-average cost of funds for the quarter ended June 30, 2013, was 0.29%, compared to 0.41% for the quarter ended June 30, 2012. The impact of the 3.84% return on interest earning assets and the 0.29% cost of funds resulted in an interest rate spread of 3.55% for the current quarter, compared to 3.76% for the quarter ended June 30, 2012. During the current quarter, total interest income decreased by $347 thousand (5.3%) while total interest expense decreased by $177 thousand (28.8%). The net interest margin was 3.57% for the three months ended June 30, 2013, compared to 3.78% for the quarter ended June 30, 2012. On a tax equivalent basis, the Bancorp’s net interest margin was 3.76% for the three months ended June 30, 2013, compared to 3.97% for the quarter ended June 30, 2012. Comparing the net interest margin on a tax equivalent basis more accurately compares the returns on tax-exempt loans and securities to those on taxable interest-earning assets.

During the three months ended June 30, 2013, interest income from loans decreased by $206 thousand (4.0%), compared to the three months ended June 30, 2012. The change was due to a decrease in loan portfolio weighted-average yields. The weighted-average yield on loans outstanding was 4.48% for the current quarter, compared to 4.92% for the three months ended June 30, 2012. Loan balances averaged $442.1 million for the current quarter, an increase of $22.6 million (5.4%) from $419.5 million for the three months ended June 30, 2012. During the three months ended June 30, 2013, interest income on securities and other interest bearing balances decreased by $141 thousand (10.1%), compared to the quarter ended June 30, 2012. The change was due to a decrease in the weighted-average yield and average balances of the securities portfolio. The weighted-average yield on securities and other interest bearing balances was 2.44%, for the current quarter, compared to 2.66% for the three months ended June 30, 2012. Securities balances averaged $191.4 million for the current quarter, down $1.2 million (0.6%) from $192.6 million for the three months ended June 30, 2012. Other interest bearing balances averaged $13.4 million for the current period, down $3.4 million (20.2%) from $16.8 million for the three months ended June 30, 2012. The decrease in other interest bearing balances is a result of growth in the loan portfolio.

Interest expense on deposits decreased by $127 thousand (31.0%) during the current quarter compared to the three months ended June 30, 2012. The change was due to a decrease in the weighted-average rate paid on deposits, which was the result of a change in the deposit mix as well as lower rates paid. The weighted-average rate paid on deposits for the three months ended June 30, 2013 was 0.20%, compared to 0.31%, for the quarter ended June 30, 2012. Total deposit balances averaged $556.2 million for the current quarter, an increase of $19.1 million (3.6%) from $537.1 million for the quarter ended June 30, 2012. Interest expense on borrowed funds decreased by $50 thousand (24.5%) during the current quarter due to a decrease in average daily balances and a decrease in the weighted-average cost compared to the three months ended June 30, 2012. The weighted-average cost of borrowed funds was 1.14% for the current quarter, compared to 1.33% for the three months ended June 30, 2012. Borrowed funds averaged $53.6 million during the quarter ended June 30, 2013, a decrease of $7.6 million (12.4%) from $61.2 million for the quarter ended June 30, 2012.

Noninterest income for the quarter ended June 30, 2013 was $1.5 million, an increase of $61 thousand (4.3%) from $1.4 million for the quarter ended June 30, 2012. During the current quarter, fees and service charges totaled $625 thousand, an increase of $15 thousand (2.5%) from $610 thousand for the quarter ended June 30, 2012. Fees from Wealth Management operations totaled $330 thousand for the quarter ended June 30, 2013, an increase of $16 thousand (5.1%) from $314 thousand for the quarter ended June 30, 2012. The increase in Wealth Management income is related to growth in assets under management and market value changes. Gains from the sale of securities totaled $316 thousand for the current quarter, an increase of $65 thousand (25.9%) from $251 thousand for the quarter ended June 30, 2012. Current market conditions continued to provide some opportunities to maintain securities cash flows, while recognizing gains from the sales of securities. Gains from loan sales totaled $139 thousand for the current quarter, a decrease of $133 thousand (48.9%), compared to $272 thousand for the quarter ended June 30, 2012. The decrease in gains from the sale of loans is the result of a sale of seasoned fixed rate mortgages with high prepayment speeds, which resulted in a one-time gain of $183 thousand for the quarter ended June 30, 2012. Income from an increase in the cash value of bank owned life insurance totaled $88 thousand for the quarter ended June 30, 2013, a decrease of $9 thousand (9.3%) from $97 thousand the quarter ended June 30, 2012. Loss on foreclosed real estate totaled $18 thousand for the quarter ended June 30, 2013, a decrease of $102 thousand (85.0%) from losses of $120 thousand for the quarter ended June 30, 2012. Other noninterest income totaled $4 thousand for the quarter, a decrease of $1 thousand (20.0%) compared to $5 thousand for the quarter ended June 30, 2012.

Noninterest expense for the quarter ended June 30, 2013 was $4.8 million, an increase of $123 thousand (2.6%) from $4.7 million for the three months ended June 30, 2012. During the current quarter, compensation and benefits totaled $2.6 million, an increase of $121 thousand (4.8%) from $2.5 million for the quarter ended June 30, 2012. The increase is the result of ordinary course annual compensation increases. Occupancy and equipment totaled $741 thousand for the current quarter, a decrease of $22 thousand (2.9%), compared to $763 thousand for the quarter ended June 30, 2012. The decrease in occupancy and equipment expense is the result of lower required depreciation expense and building expenses during the second quarter. Data processing expense totaled $232 thousand for the three months ended June 30, 2013, a decrease of $45 thousand (16.2%) from $277 thousand for the three months ended June 30, 2012. Data processing expense has decreased as a result of contract renegotiations. Marketing expense related to banking products totaled $159 thousand for the current quarter, an increase of $76 thousand (91.6%) from $83 thousand for the three months ended June 30, 2012. The Bancorp proactively markets its products, but varies its timing based on projected benefits and needs. Federal deposit insurance premium expense totaled $131 thousand for the three months ended June 30, 2013, a decrease of $16 thousand (10.9%) from $147 thousand for the quarter ended June 30, 2012. The decrease was the result of lower FDIC assessment rates. Other expenses related to banking operations totaled $937 thousand for the quarter ended June 30, 2013, a decrease of $9 thousand (1.0%) from $928 thousand for the quarter ended June 30, 2012. The Bancorp’s efficiency ratio was 66.6% for the quarter ended June 30, 2013, compared to 63.9% for the three months ended June 30, 2012. The ratio is determined by dividing total noninterest expense by the sum of net interest income and total noninterest income for the period and the increase can be attributed to lower net interest income and higher noninterest expense.

Income tax expenses for the three months ended June 30, 2013 totaled $624 thousand, compared to income tax expense of $488 thousand for the three months ended June 30, 2012, an increase of $136 thousand (27.9%). The combined effective federal and state tax rates for the Bancorp was 26.8% for the three months ended June 30, 2013, compared to 23.1% for the three months ended June 30, 2012. The Bancorp’s higher current quarter effective tax rate is a result of lower tax preferred income, as well as an adjustment to the Bancorp’s state deferred tax asset for a reduction in tax rates.

Results of Operations - Comparison of the Six Months Ended June 30, 2013 to the Six Months Ended June 30, 2012

For the six months ended June 30, 2013, the Bancorp reported net income of $3.4 million, compared to net income of $3.0 million for the six months ended June 30, 2012, an increase of $403 thousand (13.6%). For the current six months the ROA was 0.98%, compared to 0.90% for the six months ended June 30, 2012. The ROE was 9.58% for the six months ended June 30, 2013, compared to 9.16% for the six months ended June 30, 2012.

Net interest income for the six months ended June 30, 2013 was $11.6 million, a decrease of $223 thousand (1.9%), compared to $11.8 million for the six months ended June 30, 2012. During the current six months, the Bancorp’s cost of funds continues to be positively impacted by the Federal Reserve’s continued action in maintaining a low short-term interest rate environment, however, the Bancorp’s yield on interest earning assets is being negatively impacted by lower long-term interest rates. The weighted-average yield on interest-earning assets was 3.85% for the six months ended June 30, 2013, compared to 4.20% for the six months ended June 30, 2012. The weighted-average cost of funds for the six months ended June 30, 2013, was 0.29%, compared to 0.43% for the six months ended June 30, 2012. The impact of the 3.85% return on interest earning assets and the 0.29% cost of funds resulted in an interest rate spread of 3.56% for the current six months, compared to 3.78% for the six months ended June 30, 2012. During the current six months, total interest income decreased by $583 thousand (4.5%) while total interest expense decreased by $360 thousand (28.6%). The net interest margin was 3.57% for the six months ended June 30, 2013, compared to 3.80% for the six months ended June 30, 2012. On a tax equivalent basis, the Bancorp’s net interest margin was 3.77% for the six months ended June 30, 2013, compared to 3.99% for the six months ended June 30, 2012. Comparing the net interest margin on a tax equivalent basis more accurately compares the returns on tax-exempt loans and securities to those on taxable interest-earning assets.

During the six months ended June 30, 2013, interest income from loans decreased by $309 thousand (3.0%), compared to the six months ended June 30, 2012. The change was primarily due to a decrease in the weighted-average yield of the loan portfolio. The weighted-average yield on loans outstanding was 4.49% for the current six months, compared to 4.95% for the six months ended June 30, 2012. Loan balances averaged $443.2 million for the current six months, an increase of $28.2 million (6.8%) from $415.0 million for the six months ended June 30, 2012. During the six months ended June 30, 2013, interest income on securities and other interest bearing balances decreased by $274 thousand (9.8%), compared to the six months ended June 30, 2012. The decrease was due to a decrease in the weighted-average yield. The weighted-average yield on securities and other interest bearing balances was 2.46%, for the current six months, compared to 2.70% for the six months ended June 30, 2012. Securities balances averaged $191.4 million for the current six months, up $2.2 million (1.2%) from $189.2 million for the six months ended June 30, 2012. The increase in security average balances is a result of ongoing, consistent investment growth. Other interest bearing balances averaged $12.9 million for the current period, down $3.8 million (22.8%) from $16.7 million for the six months ended June 30, 2012.

Interest expense on deposits decreased by $268 thousand (31.4%) during the current six months compared to the six months ended June 30, 2012. The change was primarily due to a decrease in the weighted-average rate paid on deposits. The weighted-average rate paid on deposits for the six months ended June 30, 2013 was 0.21%, compared to 0.32%, for the six months ended June 30, 2012. Total deposit balances averaged $558.4 million for the current six months, up $27.6 million (5.2%) from $530.8 million for the six months ended June 30, 2012. Interest expense on borrowed funds decreased by $92 thousand (22.7%) during the current six months due to decreased average daily balances and a lower weighted average cost, as compared to the six months ended June 30, 2012. The weighted-average cost of borrowed funds was 1.20% for the current six months, compared to 1.36% for the six months ended June 30, 2012. Borrowed funds averaged $52.1 million during the six months ended June 30, 2013, a decrease of $7.6 million (12.4%) from $59.4 million for the six months ended June 30, 2012.

Noninterest income for the six months ended June 30, 2013 was $2.8 million, a decrease of $173 thousand (5.7%) from $3.0 million for the six months ended June 30, 2012. During the current six months, fees and service charges totaled $1.22 million, an decrease of $32 thousand (2.6%) from $1.25 million for the six months ended June 30, 2012. Fees from Wealth Management operations totaled $697 thousand for the six months ended June 30, 2013, an increase of $51 thousand (7.9%) from $646 thousand for the six months ended June 30, 2012. The increase in Wealth Management income is related to growth in assets under management and market value changes. Gains from the sale of securities totaled $444 thousand for the current six months, a decrease of $173 thousand (28.0%) from $617 thousand for the six months ended June 30, 2012. Current market conditions provided opportunities to manage securities cash flows, while recognizing gains from the sales of securities. Gains from loan sales totaled $298 thousand for the current six months, a decrease of $49 thousand (14.1%), compared to $347 thousand for the six months ended June 30, 2012. The decrease in gains from the sale of loans is the result of a sale of seasoned fixed rate mortgages with high prepayment speeds, which resulted in a one-time gain of $183 thousand for the six months ended June 30, 2012. Income from an increase in the cash value of bank owned life insurance totaled $175 thousand for the six months ended June 30, 2013, a decrease of $19 thousand (9.8%), compared to $194 thousand for the six months ended June 30, 2012. Losses on foreclosed real estate totaled $1 thousand for the six months ended June 30, 2013, a decrease of $83 thousand (98.8%) from $84 thousand in loss for the six months ended June 30, 2012. The Bancorp recognized no other-than-temporary impairment during the first six months of 2013. Other noninterest income totaled $18 thousand for the six months ended June 30, 2013 and $58 thousand for the six months ended June 30, 2012.

Noninterest expense for the six months ended June 30, 2013 was $9.6 million, an increase of $304 thousand (3.1%) from $9.9 million for the six months ended June 30, 2012. During the current six months, compensation and benefits totaled $5.3 million, an increase of $138 thousand (2.7%) from $5.1 million for the six months ended June 30, 2012. The increase is the result of ordinary course annual compensation increases. Occupancy and equipment totaled $1.5 million for the current six months, a decrease of $59 thousand (3.7%), compared to $1.6 million for the six months ended June 30, 2012. The decrease in occupancy and equipment expense is the result of lower required building expenses during the current six months. Data processing expense totaled $472 thousand for the six months ended June 30, 2013, a decrease of $76 thousand (13.9%) from $548 thousand for the six months ended June 30, 2012. Data processing expense has decreased as a result of contract renegotiations. Marketing expense related to banking products totaled $267 thousand for the current six months, an increase of $109 thousand (69.0%) from $158 thousand for the six months ended June 30, 2012. The Bancorp continues to proactively market its products, but varies its timing based on projected benefits and needs. Federal deposit insurance premium expense totaled $253 thousand for the six months ended June 30, 2013, a decrease of $38 thousand (13.1%) from $291 thousand for the six months ended June 30, 2012. The decrease was the result of lower FDIC assessment rates. Other expenses related to banking operations totaled $1.8 million for the six months ended June 30, 2013, a decrease of $378 thousand (17.1%) from $2.2 million for the six months ended June 30, 2012. The decrease to other expense was primarily the result of one time litigation costs that settled in March 2012. The Bancorp’s efficiency ratio was 66.7% for the six months ended June 30, 2013, compared to 67.0% for the six months ended June 30, 2012. The improved efficiency ratio is the result of controlling noninterest expense.

Income tax expenses for the six months ended June 30, 2013 totaled $1.2 million, compared to income tax expense of $838 thousand for the six months ended June 30, 2012, an increase of $350 thousand (41.8%). The combined effective federal and state tax rates for the Bancorp was 26.0% for the six months ended June 30, 2013, compared to 22.0% for the six months ended June 30, 2012. The Bancorp’s higher current year effective tax rate is a result of higher earnings and lower tax preferred income, as well as an adjustment to the Bancorp’s state deferred tax asset for a reduction in tax rates.

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 critical accounting policies from December 31, 2012 remain unchanged.

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, including those identified in the Bancorp’s 2012 Form 10-K.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not Applicable.

Item 4. Controls and Procedures

(a)

Evaluation of Disclosure Controls and Procedures.

The Bancorp maintains disclosure controls and procedures (as defined in Sections 13a – 15(e) and 15d – 15(e)) of regulations promulgated under the Securities Exchange Act of 1934 (the “Exchange Act”) that are designed to ensure that information required to be disclosed by the Bancorp in the reports that it files or submits under the "Exchange Act" is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. These disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed by the Bancorp in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Bancorp's management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. The Bancorp's chief executive officer and chief financial officer evaluate the effectiveness of the Bancorp's disclosure controls and procedures as of the end of each quarter. Based on that evaluation as of June 30, 2013, the Bancorp’s chief executive officer and chief financial officer have concluded that such disclosure controls and procedures were effective as of that date in ensuring that information required to be disclosed by the Bancorp under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

(b) Changes in Internal Control Over Financial Reporting.

There was no change in the Bancorp's internal control over financial reporting identified in connection with the Bancorp’s evaluation of controls that occurred during the six months ended June 30, 2013 that has materially affected, or is reasonably likely to materially affect, the Bancorp's internal control over financial reporting.

PART II - Other Information

Item 1.

Legal Proceedings

There are no matters reportable under this item.

Item 1A.

Risk Factors

Not Applicable.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

On April 18, 2000 the Bancorp’s Board of Directors authorized a stock repurchase program to repurchase up to 50,000 shares of the Bancorp’s outstanding common stock, from time to time and subject to market conditions, on the open market or in privately negotiated transactions. This stock repurchase program does not expire and is only limited by the number of shares that can be purchased. As of June 30, 2013, the Bancorp has repurchased 38,850 shares of its outstanding common stock under the program at an average price per share of $22.55. No shares were repurchased during the quarter ended June 30, 2013. Information on the shares repurchased under the program during the six months ended June 30, 2013 is as follows:

Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number of Shares That May Yet Be Purchased Under the Program(1)
January 1, 2013 – January 31, 2013		2,833	$	20.05		38,850		11,150
February 1, 2013 – February 28, 2013		-		N/A		38,850		11,150
March 1, 2013 – March 31, 2013		-		N/A		38,850		11,150
April 1, 2013 – March 30, 2013		-		N/A		38,850		11,150
May 1, 2013 – May 31, 2013		-		N/A		38,850		11,150
June 1, 2013 – June 30, 2013		-		N/A		38,850		11,150
		2,833	$	20.05		38,850		11,150

(1)

The stock repurchase plan was announced on April 18, 2000, whereby the Bancorp is authorized to repurchase up to 50,000 shares of the Bancorp’s common stock outstanding. There is no expiration date for this plan.

Item 3.

Defaults Upon Senior Securities

There are no matters reportable under this item.

Item 4.

Mine Safety Disclosures

Not Applicable.

Item 5.

Other Information

There are no matters reportable under this item.

Item 6.

Exhibits

Exhibit
Number		Description

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

101		The following materials from the Bancorp’s Form 10-Q for the quarterly period ended June 30, 2013, formatted in an XBRL Interactive Data File: (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Income; (iii) Consolidated Statements of Changes in Stockholders’ Equity; (iv) Consolidated Statements of Cash Flows; and (v) Notes to Consolidated Financial Statements, with detailed tagging of notes and financial statement schedules.*

Users of the XBRL-related information in Exhibit 101 of this Quarterly Report on Form 10-Q are advised, in accordance with Regulation S-T Rule 406T, that this Interactive Data File is deemed not filed or as a part of a registration statement for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections. The financial information contained in the XBRL-related documents is unaudited and unreviewed.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	NORTHWEST INDIANA BANCORP

Date: July 22, 2013	/s/ David A. Bochnowski
	David A. Bochnowski
	Chairman of the Board, Chief Executive
	Officer and President

Date: July 22, 2013	/s/ Robert T. Lowry
	Robert T. Lowry
	Executive Vice President, Chief Financial
	Officer and Treasurer