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, ~~2017~~2018 or

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

For the transition period from~~_____ to _____~~ ______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. YesxNo¨

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).

Yesx No¨

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

Large accelerated filer¨Accelerated filerxNon-accelerated filer¨ ~~Non-accelerated filer~~¨

(Do not check if a smaller reporting company)

Smaller Reporting Companyx¨Emerging growth company¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes¨Nox

There were ~~2,864,007~~2,867,911 shares of the registrant’s Common Stock, without par value, outstanding at July ~~21, 2017.~~20, 2018.

NorthWest Indiana Bancorp

Index

			Page
			Number
PART I.	Financial Information

Item 1. Unaudited Financial Statements and Notes	1

	~~Item 1.~~	~~Unaudited Financial Statements~~

		~~Consolidated Balance Sheets, June 30, 2017 and December 31, 2016~~	1

		~~Consolidated Statements of Income, Three and Six Months Ended June 30, 2017 and 2016~~	2

		~~Consolidated Statements of Comprehensive Income, Three and Six Months Ended June 30, 2017 and 2016~~	3

		~~Consolidated Statements of Changes in Stockholders' Equity, Three and Six Months Ended June 30, 2017 and 2016~~	3

		~~Consolidated Statements of Cash Flows, Six Months Ended June 30, 2017 and 2016~~	4

		~~Notes to Consolidated Financial Statements~~	~~5-19~~

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	~~20-30~~

	~~Item 3.~~	~~Quantitative and Qualitative Disclosures About Market Risk~~21	30

	~~Item 4.~~	~~Controls and Procedures~~	30

~~PART II. Other Information~~			32

Item 3. Quantitative and Qualitative Disclosures about Market Risk	33

Item 4. Controls and Procedures	35

PART II. Other Information	36

SIGNATURES	3337

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,
(Dollars in thousands)	June 30, 2017			December 31,			2018			December 31,
	(unaudited)			2016			(unaudited)			2017
ASSETS

Cash and non-interest bearing deposits in other financial institutions	$	13,878		$	15,338		$	16,429		$	10,529
Interest bearing deposits in other financial institutions		10,588			29,556			2,524			139
Federal funds sold		3,293			215			839			357

Total cash and cash equivalents		27,759			45,109			19,792			11,025

Certificates of deposit in other financial institutions								1,526			1,676

Securities available-for-sale		240,748			233,625			238,164			244,490
Loans held-for-sale		2,677			2,193			4,329			1,592
Loans receivable		600,944			583,650			646,288			620,211
Less: allowance for loan losses		(7,073	)		(7,698	)		(7,448	)		(7,482	)
Net loans receivable		593,871			575,952			638,840			612,729
Federal Home Loan Bank stock		3,000			3,000			3,017			3,000
Accrued interest receivable		3,006			3,086			3,253			3,262
Premises and equipment		19,640			19,287			19,221			19,559
Foreclosed real estate		2,167			2,665			1,087			1,699
Cash value of bank owned life insurance		19,125			18,895			19,583			19,355
Goodwill		2,792			2,792			2,792			2,792
Other assets		6,458			7,022			7,347			6,080

Total assets	$	921,243		$	913,626		$	958,951		$	927,259

LIABILITIES AND STOCKHOLDERS' EQUITY

Deposits:
Non-interest bearing	$	119,874		$	111,800		$	120,418		$	120,556
Interest bearing		667,107			667,971			685,559			672,448
Total		786,981			779,771			805,977			793,004
Repurchase agreements		15,635			13,998			14,236			11,300
Borrowed funds		19,610			25,828			35,679			20,881
Accrued expenses and other liabilities		9,709			9,921			12,482			10,014

Total liabilities		831,935			829,518			868,374			835,199

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, 2017 - 2,920,045 December 31, 2016 - 2,916,195 shares outstanding: June 30, 2017 - 2,864,007 December 31, 2016 - 2,860,157		361			361
Common stock, no par or stated value; 10,000,000 shares authorized; shares issued: June 30, 2018 - 2,924,978 December 31, 2017 - 2,920,545 shares outstanding: June 30, 2018 - 2,867,911 December 31, 2017 - 2,864,507								361			361
Additional paid-in capital		4,391			4,300			4,565			4,506
Accumulated other comprehensive gain/(loss)		409			(1,506	)
Accumulated other comprehensive income/(loss)								(4,237	)		684
Retained earnings		84,147			80,953			89,888			86,509

Total stockholders' equity		89,308			84,108			90,577			92,060

Total liabilities and stockholders' equity	$	921,243		$	913,626		$	958,951		$	927,259

See accompanying notes to consolidated financial statements.

NorthWest Indiana Bancorp

Consolidated Statements of Income

(unaudited)

	Three Months Ended				Six Months Ended				Three Months Ended				Six Months Ended
(Dollars in thousands, except per share data)	June 30,				June 30,
(Dollars in thousands)									June 30,				June 30,
	2017		2016		2017		2016		2018		2017		2018		2017
Interest income:
Loans receivable
Real estate loans	$	5,606	$	5,514	$	11,027	$	11,190	$	6,134	$	5,606	$	12,051	$	11,027
Commercial loans		1,053		907		2,066		1,789		1,119		1,053		2,191		2,066
Consumer loans		5		6		10		12		4		5		9		10
Total loan interest		6,664		6,427		13,103		12,991		7,257		6,664		14,251		13,103
Securities		1,599		1,523		3,216		3,068		1,696		1,599		3,418		3,216
Other interest earning assets		9		2		31		8		43		9		60		31

Total interest income		8,272		7,952		16,350		16,067		8,996		8,272		17,729		16,350

Interest expense:
Deposits		498		441		957		870		838		498		1,513		957
Repurchase agreements		28		25		49		49		45		28		77		49
Borrowed funds		88		126		171		253		237		88		428		171

Total interest expense		614		592		1,177		1,172		1,120		614		2,018		1,177

Net interest income		7,658		7,360		15,173		14,895		7,876		7,658		15,711		15,173
Provision for loan losses		323		288		557		584		297		323		638		557

Net interest income after provision for loan losses		7,335		7,072		14,616		14,311		7,579		7,335		15,073		14,616

Noninterest income:
Fees and service charges		821		716		1,561		1,379	$	947	$	821	$	1,839	$	1,561
Gain on sale of securities, net										246		252		1,004		545
Wealth management operations		398		434		808		857		424		398		839		808
Gain on sale of securities, net		252		165		545		418
Gain on sale of loans held-for-sale, net		271		291		471		541		359		271		570		471
Increase in cash value of bank owned life insurance		115		121		230		237		120		115		228		230
Gain on sale of foreclosed real estate, net		93		42		93		74		68		93		100		93
Other		10		1		37		2		39		10		72		37

Total noninterest income		1,960		1,770		3,745		3,508	$	2,203	$	1,960	$	4,652	$	3,745

Noninterest expense:
Compensation and benefits		3,140		3,071		6,753		6,633	$	3,516	$	3,140	$	7,376	$	6,753
Occupancy and equipment		815		964		1,697		1,868		842		815		1,695		1,697
Data processing		360		338		728		663		703		360		1,064		728
Marketing		199		130		334		244		166		199		300		334
Federal deposit insurance premiums		81		131		158		268		75		81		159		158
Other		1,433		1,308		2,658		2,371		1,604		1,433		3,279		2,658

Total noninterest expense		6,028		5,942		12,328		12,047	$	6,906	$	6,028	$	13,873	$	12,328

Income before income tax expenses		3,267		2,900		6,033		5,772		2,876		3,267		5,852		6,033
Income tax expenses		738		658		1,206		1,286		365		738		780		1,206

Net income	$	2,529	$	2,242	$	4,827	$	4,486	$	2,511	$	2,529	$	5,072	$	4,827

Earnings per common share:
Basic	$	0.89	$	0.78	$	1.69	$	1.57	$	0.88	$	0.89	$	1.77	$	1.69
Diluted	$	0.89	$	0.78	$	1.69	$	1.57	$	0.88	$	0.89	$	1.77	$	1.69

Dividends declared per common share	$	0.29	$	0.28	$	0.57	$	0.55	$	0.30	$	0.29	$	0.59	$	0.57

See accompanying notes to consolidated financial statements.

NorthWest Indiana Bancorp

Consolidated Statements of Comprehensive Income

(unaudited)

	Three Months Ended						Six Months Ended						Three Months Ended						Six Months Ended
(Dollars in thousands)	June 30,						June 30,						June 30,						June 30,
	2017			2016			2017			2016			2018			2017			2018			2017

Net income	$	2,529		$	2,242		$	4,827		$	4,486		$	2,511		$	2,529		$	5,072		$	4,827

Net change in net unrealized gains and losses on securities available-for-sale:
Unrealized gains arising during the period		1,978			1,956			3,446			4,315
Unrealized gains/(losses) arising during the period														(880	)		1,978			(5,230	)		3,446
Less: reclassification adjustment for gains included in net income		(252	)		(165	)		(545	)		(418	)		(246	)		(252	)		(1,004	)		(545	)
Net securities gain during the period		1,726			1,791			2,901			3,897
Net securities gain/(loss) during the period														(1,126	)		1,726			(6,234	)		2,901
Tax effect		(586	)		(608	)		(986	)		(1,323	)		237			(586	)		1,313			(986	)
Net of tax amount		1,140			1,183			1,915			2,574			(889	)		1,140			(4,921	)		1,915

Net change in unrealized gain on postretirement benefit:
Amortization of net actuarial gain		-			(1	)		-			(1	)
Net loss during the period		-			(1	)		-			(1	)
Net of tax amount		-			(1	)		-			(1	)
Other comprehensive income, net of tax		1,140			1,182			1,915			2,573
Other comprehensive income/(loss), net of tax														(889	)		1,140			(4,921	)		1,915

Comprehensive income, net of tax	$	3,669		$	3,424		$	6,742		$	7,059		$	1,622		$	3,669		$	151		$	6,742

See accompanying notes to consolidated financial statements.

NorthWest Indiana Bancorp

Consolidated Statements of Changes in Stockholders' Equity

(unaudited)

	Three Months Ended						Six Months Ended						Three Months Ended						Six Months Ended
(Dollars in thousands)	June 30,						June 30,						June 30,						June 30,
	2017			2016			2017			2016			2018			2017			2018			2017

Balance at beginning of period	$	86,427		$	83,802		$	84,108		$	80,909		$	89,808		$	86,427		$	92,060		$	84,108

Comprehensive income:
Net income		2,529			2,242			4,827			4,486			2,511			2,529			5,072			4,827
Net unrealized gains on securities available-for-sale, net of reclassifications and tax effects		1,140			1,183			1,915			2,574
Amortization of unrecognized gain on postretirement benefit		-			(1	)		-			(1	)
Net unrealized gains/(losses) on securities available-for-sale, net of reclassifications and tax effects														(889	)		1,140			(4,921	)		1,915
Comprehensive income, net of tax		3,669			3,424			6,742			7,059			1,622			3,669			151			6,742

Stock based compensation expense		43			36			90			67			51			43			104			90
Repurchase of shares														(45	)		-			(45	)		-
Cash dividends		(831	)		(801	)		(1,632	)		(1,574	)		(859	)		(831	)		(1,693	)		(1,632	)

Balance at end of period	$	89,308		$	86,461		$	89,308		$	86,461		$	90,577		$	89,308		$	90,577		$	89,308

See accompanying notes to consolidated financial statements.

NorthWest Indiana Bancorp

Consolidated Statements of Cash Flows

(unaudited)

	Six Months Ended						Six Months Ended
(Dollars in thousands)	June 30,						June 30,
	2017			2016			2018			2017
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	4,827		$	4,486		$	5,072		$	4,827
Adjustments to reconcile net income to net cash provided by/(used in) operating activities:
Origination of loans for sale		(17,633	)		(18,798	)		(24,266	)		(17,633	)
Sale of loans originated for sale		17,611			19,934			22,099			17,611
Depreciation and amortization, net of accretion		1,267			1,264			1,312			1,267
Amortization of mortgage servicing rights		31			27			32			31
Stock based compensation expense		90			67			104			90
Repurchase of shares								(45	)		-
Gain on sale of securities, net		(545	)		(418	)		(1,004	)		(545	)
Gain on sale of loans held-for-sale, net		(471	)		(541	)		(570	)		(471	)
Gain on sale of foreclosed real estate, net		(93	)		(74	)		(100	)		(93	)
Provision for loan losses		557			584			638			557
Net change in:
Interest receivable		80			1			9			80
Other assets		(476	)		(3,295	)		(17	)		(476	)
Accrued expenses and other liabilities		(212	)		6,322			2,468			(212	)
Total adjustments		206			5,073			660			206
Net cash - operating activities		5,033			9,559			5,732			5,033

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of certificates of deposits in other financial institutions								150			-
Proceeds from maturities and pay downs of securities available-for-sale		12,995			23,898			10,314			12,995
Proceeds from sales of securities available-for-sale		26,428			15,613			22,545			26,428
Purchase of securities available-for-sale		(43,656	)		(45,612	)		(32,339	)		(43,656	)
Net change in loans receivable		(18,434	)		(14,412	)		(27,002	)		(18,434	)
Purchase of Federal Home Loan Bank Stock								(17	)		-
Purchase of premises and equipment, net		(1,064	)		(629	)		(398	)		(1,064	)
Proceeds from sale of foreclosed real estate, net		550			531			965			550
Change in cash value of bank owned life insurance		(230	)		(237	)		(228	)		(230	)
Net cash - investing activities		(23,411	)		(20,848	)		(26,010	)		(23,411	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposits		7,210			34,038			12,973			7,210
Proceeds from FHLB advances		-			6,000			44,000			-
Repayment of FHLB advances		(6,000	)		(15,000	)		(29,000	)		(6,000	)
Change in other borrowed funds		1,419			7,585			2,734			1,419
Dividends paid		(1,601	)		(1,542	)		(1,662	)		(1,601	)
Net cash - financing activities		1,028			31,081			29,045			1,028
Net change in cash and cash equivalents		(17,350	)		19,792			8,767			(17,350	)
Cash and cash equivalents at beginning of period		45,109			11,533			11,025			45,109
Cash and cash equivalents at end of period	$	27,759		$	31,325		$	19,792		$	27,759

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest	$	1,186		$	1,177		$	1,949		$	1,186
Income taxes		920			1,055			955			920
Noncash activities:
Transfers from loans to foreclosed real estate	$	-		$	56		$	253		$	-
Transfers to goodwill		-			231

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 subsidiaries NWIN Risk Management, Inc. (a captive insurance subsidiary) and Peoples Bank SB (the “Bank”), and the Bank’s wholly-owned subsidiaries, Peoples Service Corporation, NWIN, LLC, NWIN Funding, Incorporated, and Columbia Development Company, LLC. The Bancorp’s business activities include being a holding company for the Bank as well as a holding company for NWIN Risk Management, Inc. The Bancorp’s earnings are primarily 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, ~~2017~~2018 and December 31, ~~2016,~~2017, and the consolidated statements of income, comprehensive income, ~~and~~ changes in stockholders’ equity for the three and six months ended June 30, ~~2017~~2018 and ~~2016~~2017 and consolidated statements of cash flows for the six months ended June 30, ~~2017~~2018 and ~~2016.~~2017. The income reported for the six month period ended June 30, ~~2017~~2018 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, goodwill, and the status of contingencies are particularly susceptible to material change in the near term.

Note 3 - Acquisition Activity

On February 20, 2018, the Bancorp entered into an Agreement and Plan of Merger (the “Merger Agreement”) with First Personal Financial Corp., a Delaware corporation (“First Personal”). Pursuant to the Merger Agreement, First Personal will merge with and into the Bancorp, with the Bancorp as the surviving corporation (the “Merger”). At the time of the Merger, First Personal Bank, an Illinois state chartered commercial bank and wholly-owned subsidiary of First Personal (“First Personal Bank”), will merge with and into Peoples Bank SB, the wholly-owned Indiana state chartered savings bank subsidiary of the Bancorp (“Peoples Bank”), with Peoples Bank as the surviving bank (the “Bank Merger”).

The boards of directors of the Bancorp and First Personal, and the stockholders of First Personal, have approved the Merger and the Merger Agreement. In addition, all regulatory approvals necessary for the consummation of the Merger and Bank Merger have been received. Subject to remaining customary closing conditions, the parties anticipate completing the Merger on July 26, 2018.

Upon completion of the Merger, each First Personal stockholder will have the right to receive fixed consideration of (i) 0.1246 shares of Bancorp common stock, and (ii) $6.67 per share in cash for each share of First Personal’s common stock. Stockholders holding less than 100 shares of First Personal common stock will have the right to receive $12.12 in cash and no stock consideration for each share of First Personal common stock.

First Personal Bank has a home office and two branch offices in Cook County, Illinois. As of June 30, First Personal Bank reported total assets of $143.2 million, total loans of $98.8 million, and total deposits of $127.5 million. The combined bank is expected to have approximately $1.1 billion in assets, $745.1 million in total loans, and $933.5 million in deposits. The acquisition will expand the Bank’s banking center network into Cook County, Illinois.

Note 4 - Securities

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

(Dollars in thousands)
Gross Gross Estimated
Cost Unrealized Unrealized Fair
Basis Gains Losses Value
June 30, 2017
Money market fund $ 2,105 $ - $ - $ 2,105
U.S. government sponsored entities 13,995 - (211 ) 13,784
Collateralized mortgage obligations and
residential mortgage-backed securities 129,036 531 (931 ) 128,636
Municipal securities 90,103 3,243 (129 ) 93,217
Collateralized debt obligations 4,886 - (1,880 ) 3,006
Total securities available-for-sale $ 240,125 $ 3,774 $ (3,151 ) $ 240,748

(Dollars in thousands)
Gross Gross Estimated
Cost Unrealized Unrealized Fair
Basis Gains Losses Value
December 31, 2016
Money market fund $ 222 $ - $ - $ 222
U.S. government sponsored entities 16,643 - (369 ) 16,274
Collateralized mortgage obligations and
residential mortgage-backed securities 118,807 441 (1,273 ) 117,975
Municipal securities 95,242 2,146 (643 ) 96,745
Collateralized debt obligations 4,989 - (2,580 ) 2,409
Total securities available-for-sale $ 235,903 $ 2,587 $ (4,865 ) $ 233,625

	(Dollars in thousands)
			Gross		Gross			Estimated
	Cost		Unrealized		Unrealized			Fair
June 30, 2018	Basis		Gains		Losses			Value
Money market fund	$	1,608	$	-	$	-		$	1,608
U.S. government sponsored entities		7,997		2		(178	)		7,821
Collateralized mortgage obligations and residential mortgage-backed securities		139,149		24		(4,042	)		135,131
Municipal securities		89,963		972		(814	)		90,121
Collateralized debt obligations		4,810		-		(1,327	)		3,483
Total securities available-for-sale	$	243,527	$	998	$	(6,361	)	$	238,164

	(Dollars in thousands)
			Gross		Gross			Estimated
	Cost		Unrealized		Unrealized			Fair
December 31, 2017	Basis		Gains		Losses			Value
Money market fund	$	476	$	-	$	-		$	476
U.S. government sponsored entities		3,996		-		(106	)		3,890
Collateralized mortgage obligations and residential mortgage-backed securities		134,224		170		(1,456	)		132,938
Municipal securities		100,088		3,709		(50	)		103,747
Collateralized debt obligations		4,835		-		(1,396	)		3,439
Total securities available-for-sale	$	243,619	$	3,879	$	(3,008	)	$	244,490

The estimated fair value of available-for-sale debt securities at June 30, ~~2017,~~2018, by contractual maturity, were as follows. Securities not due at a single maturity date, primarily collateralized mortgage obligations and residential mortgage-backed securities, are shown separately.

	(Dollars in thousands)				(Dollars in thousands)
	Available-for-sale				Available-for-sale
	Estimated				Estimated
	Fair		Tax-Equivalent		Fair		Tax-Equivalent
June 30, 2017	Value		Yield (%)
June 30, 2018					Value		Yield (%)
Due in one year or less	$	2,387		7.43	$	2,279		5.48
Due from one to five years		14,192		3.00		9,996		3.50
Due from five to ten years		30,233		4.90		16,804		4.21
Due over ten years		65,300		4.44		73,954		4.03
Collateralized mortgage obligations and residential mortgage-backed securities		128,636		2.50		135,131		2.72
Total	$	240,748		3.41	$	238,164		3.29

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

(Dollars in thousands)
June 30, June 30,
2017 2016

Proceeds $ 26,428 $ 15,613
Gross gains 589 436
Gross losses (44 ) (18 )

	(Dollars in thousands)
	June 30,		June 30,
	2018		2017

Proceeds	$	22,545	$	26,428
Gross gains		1,004		589
Gross losses		-		(44	)

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

(Dollars in thousands)
Unrealized
gain/(loss)
Ending balance, December 31, 2016 $ (1,506 )
Current period change 1,915
Ending balance, June 30, 2017 $ 409

	(Dollars in thousands)
	Unrealized gain/(loss)
Ending balance, December 31, 2017	$	684
Current period change		(4,921	)
Ending balance, June 30, 2018	$	(4,237	)

Securities with carrying values of approximately ~~$25.9~~$14.4 million and ~~$32.4~~$21.2 million were pledged as of June 30, ~~2017~~2018 and December 31, ~~2016,~~2017, respectively, as collateral for repurchase agreements, public funds, and for other purposes as permitted or required by law.

Securities with gross unrealized losses at June 30, ~~2017~~2018 and December 31, ~~2016~~2017 not recognized in income are as follows:

	(Dollars in thousands)															(Dollars in thousands)
	Less than 12 months					12 months or longer					Total					Less than 12 months					12 months or longer					Total
	Estimated					Estimated					Estimated					Estimated					Estimated					Estimated
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
June 30, 2017
June 30, 2018																Value		Losses			Value		Losses			Value		Losses
U.S. government sponsored entities	$	13,784	$	(211	)	$	-	$	-		$	13,784	$	(211	)	$	1,995	$	(5	)	$	3,824	$	(173	)	$	5,819	$	(178	)
Collateralized mortgage obligations and residential mortgage-backed securities		55,259		(850	)		2,099		(81	)		57,358		(931	)		97,556		(2,303	)		33,685		(1,739	)		131,241		(4,042	)
Municipal securities		5,214		(129	)		-		-			5,214		(129	)		29,715		(675	)		1,721		(139	)		31,436		(814	)
Collateralized debt obligations		-		-			3,006		(1,880	)		3,006		(1,880	)		-		-			3,483		(1,327	)		3,483		(1,327	)
Total temporarily impaired	$	74,257	$	(1,190	)	$	5,105	$	(1,961	)	$	79,362	$	(3,151	)	$	129,266	$	(2,983	)	$	42,713	$	(3,378	)	$	171,979	$	(6,361	)
Number of securities				54					6					60					105					37					142

(Dollars in thousands)
Less than 12 months 12 months or longer Total
Estimated Estimated Estimated
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
December 30, 2016
U.S. government sponsored entities $ 16,274 $ (369 ) $ - $ - $ 16,274 $ (369 )
Collateralized mortgage obligations and residential mortgage-backed securities 75,931 (1,183 ) 2,287 (90 ) 78,218 (1,273 )
Municipal securities 20,775 (643 ) - - 20,775 (643 )
Collateralized debt obligations - - 2,409 (2,580 ) 2,409 (2,580 )
Total temporarily impaired $ 112,980 $ (2,195 ) $ 4,696 $ (2,670 ) $ 117,676 $ (4,865 )
Number of securities 97 6 103

	(Dollars in thousands)
	Less than 12 months					12 months or longer					Total
	Estimated					Estimated					Estimated
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
December 31, 2017	Value		Losses			Value		Losses			Value		Losses
U.S. government sponsored entities	$	-	$	-		$	3,890	$	(106	)	$	3,890	$	(106	)
Collateralized mortgage obligations and residential mortgage-backed securities		66,917		(511	)		37,003		(945	)		103,920		(1,456	)
Municipal securities		1,790		(3	)		1,815		(47	)		3,605		(50	)
Collateralized debt obligations		-		-			3,439		(1,396	)		3,439		(1,396	)
Total temporarily impaired	$	68,707	$	(514	)	$	46,147	$	(2,494	)	$	114,854	$	(3,008	)
Number of securities				40					37					77

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 values are expected to recover as the securities approach maturity.

Note 45 - Loans Receivable

Loans receivable are summarized below:

(Dollars in thousands)
June 30, 2017 December 31, 2016
Loans secured by real estate:
Residential real estate, including home equity $ 207,970 $ 205,979
Commercial real estate, construction & land development, and other dwellings 285,787 270,092
Commercial participations purchased 465 369
Total loans secured by real estate 494,222 476,440
Consumer 487 522
Commercial business 77,912 77,513
Government 30,592 29,529
Subtotal 603,213 584,004
Less:
Net deferred loan origination fees (159 ) (162 )
Undisbursed loan funds (2,110 ) (192 )
Loans receivable $ 600,944 $ 583,650

(Dollars in thousands)

	June 30, 2018			December 31, 2017
Loans secured by real estate:
Residential real estate	$	175,677		$	172,780
Home equity		38,247			36,718
Commercial real estate		223,598			211,090
Construction and land development		51,947			50,746
Farmland		245			-
Multifamily		44,781			43,369
Total loans secured by real estate		534,495			514,703
Consumer		485			460
Commercial business		83,941			77,122
Government		27,736			28,785
Subtotal		646,657			621,070
Less:
Net deferred loan origination fees		(180	)		(130	)
Undisbursed loan funds		(189	)		(729	)
Loans receivable	$	646,288		$	620,211

(Dollars in thousands)
Residential Real
Estate, Including
Home Equity
Consumer
Commercial
Real Estate,
Construction &
Land
Development,
and Other
Dwellings

Commercial
Participations
Purchased

Commercial
Business
Government Total

The Bancorp's activity in the allowance for loan losses, by loan segment, is summarized below for the three months ended June 30, 2017:

Allowance for loan losses:
Beginning Balance $ 1,601 $ 28 $ 4,352 $ - $ 795 $ 58 $ 6,834
Charge-offs (71 ) (24 ) - - - - (95 )
Recoveries - 2 - - 9 - 11
Provisions 107 24 (361 ) - 553 - 323
Ending Balance $ 1,637 $ 30 $ 3,991 $ - $ 1,357 $ 58 $ 7,073

The Bancorp's activity in the allowance for loan losses, by loan segment, is summarized below for the three months ended June 30, 2016:

Allowance for loan losses:
Beginning Balance $ 1,731 $ 44 $ 4,601 $ 13 $ 747 $ 72 $ 7,208
Charge-offs (164 ) (8 ) - - - - (172 )
Recoveries - 1 - - 12 - 13
Provisions 203 - 6 (4 ) 87 (4 ) 288
Ending Balance $ 1,770 $ 37 $ 4,607 $ 9 $ 846 $ 68 $ 7,337

The Bancorp's activity in the allowance for loan losses, by loan segment, is summarized below for the six months ended June 30, 2017:

Allowance for loan losses:
Beginning Balance $ 2,410 $ 34 $ 4,302 $ - $ 896 $ 56 $ 7,698
Charge-offs (928 ) (30 ) - - (245 ) - (1,203 )
Recoveries - 4 - - 17 - 21
Provisions 155 22 (311 ) - 689 2 557
Ending Balance $ 1,637 $ 30 $ 3,991 $ - $ 1,357 $ 58 $ 7,073

The Bancorp's activity in the allowance for loan losses, by loan segment, is summarized below for the six months ended June 30, 2016:

Allowance for loan losses:
Beginning Balance $ 1,711 $ 38 $ 4,422 $ 14 $ 698 $ 70 $ 6,953
Charge-offs (212 ) (12 ) - - - - (224 )
Recoveries - 4 - - 20 - 24
Provisions 271 7 185 (5 ) 128 (2 ) 584
Ending Balance $ 1,770 $ 37 $ 4,607 $ 9 $ 846 $ 68 $ 7,337

(Dollars in thousands)
Residential Real
Estate, Including
Home Equity
Consumer
Commercial
Real Estate,
Construction &
Land
Development,
and Other
Dwellings

Commercial
Participations
Purchased

Commercial
Business
Government Total

The Bancorp's allowance for loan losses impairment evaluation and loan receivables are summarized below at June 30, 2017:

Ending balance: individually
evaluated for impairment $ 15 $ - $ 127 $ - $ 649 $ - $ 791

Ending balance: collectively
evaluated for impairment $ 1,622 $ 30 $ 3,864 $ - $ 708 $ 58 $ 6,282

LOAN RECEIVABLES
Ending balance $ 207,827 $ 490 $ 285,787 $ 465 $ 75,783 $ 30,592 $ 600,944

Ending balance: individually evaluated for impairment $ 569 $ - $ 615 $ 78 $ 908 $ - $ 2,170

Ending balance: purchased credit impaired individually evaluated for impairment $ 806 $ - $ - $ - $ - $ - $ 806

Ending balance: collectively evaluated for impairment $ 206,452 $ 490 $ 285,172 $ 387 $ 74,875 $ 30,592 $ 597,968

The Bancorp's allowance for loan losses impairment evaluation and loan receivables are summarized below at December 31, 2016:

Ending balance: individually evaluated for impairment $ 879 $ - $ 3 $ - $ 354 $ - $ 1,236

Ending balance: collectively evaluated for impairment $ 1,531 $ 34 $ 4,299 $ - $ 542 $ 56 $ 6,462

LOAN RECEIVABLES
Ending balance $ 205,837 $ 524 $ 270,092 $ 369 $ 77,299 $ 29,529 $ 583,650

Ending balance: individually evaluated for impairment $ 1,419 $ - $ 374 $ 82 $ 687 $ - $ 2,562

Ending balance: purchased credit impaired individually evaluated for impairment $ 956 $ - $ - $ - $ - $ - $ 956

Ending balance: collectively evaluated for impairment $ 203,462 $ 524 $ 269,718 $ 287 $ 76,612 $ 29,529 $ 580,132

(Dollars in thousands)
	Beginning Balance		Charge-offs			Recoveries		Provisions			Ending Balance

The Bancorp's activity in the allowance for loan losses, by loan segment, is summarized below for the three months ended June 30, 2018:

Allowance for loan losses:
Residential real estate	$	1,493	$	(38	)		-	$	68		$	1,523
Home equity		159		(5	)		-		29			183
Commercial real estate		2,996		-			2		172			3,170
Construction and land development		661		-			-		(50	)		611
Multifamily		615		-			-		(8	)		607
Farmland		4		-			-		-			4
Consumer		35		(14	)		5		10			36
Commercial business		1,077		(3	)		107		83			1,264
Government		57		-			-		(7	)		50
Total	$	7,097	$	(60	)	$	114	$	297		$	7,448

The Bancorp's activity in the allowance for loan losses, by loan segment, is summarized below for the three months ended June 30, 2017:

Allowance for loan losses:
Residential real estate	$	1,295	$	(71	)	$	-	$	337		$	1,561
Home equity		306		-			-		(230	)		76
Commercial real estate		3,198		-			-		(307	)		2,891
Construction and land development		593		-			-		6			599
Multifamily		561		-			-		(60	)		501
Farmland		-		-			-		-			-
Consumer		28		(24	)		2		24			30
Commercial business		795		-			9		553			1,357
Government		58		-			-		-			58
Total	$	6,834	$	(95	)	$	11	$	323		$	7,073

The Bancorp's activity in the allowance for loan losses, by loan segment, is summarized below for the six months ended June 30, 2018:

Allowance for loan losses:
Residential real estate	$	1,568	$	(106	)	$	-	$	61		$	1,523
Home equity		166		(24	)		-		41			183
Commercial real estate		3,125		(119	)		2		162			3,170
Construction and land development		618		-			-		(7	)		611
Multifamily		622		-			-		(15	)		607
Farmland		-		-			-		4			4
Consumer		31		(22	)		9		18			36
Commercial business		1,298		(529	)		117		378			1,264
Government		54		-			-		(4	)		50
Total	$	7,482	$	(800	)	$	128	$	638		$	7,448

The Bancorp's activity in the allowance for loan losses, by loan segment, is summarized below for the six months ended June 30, 2017:

Allowance for loan losses:
Residential real estate	$	2,111	$	(928	)	$	-	$	378		$	1,561
Home equity		299		-			-		(223	)		76
Commercial real estate		3,113		-			-		(222	)		2,891
Construction and land development		617		-			-		(18	)		599
Multifamily		572		-			-		(71	)		501
Farmland		-		-			-		-			-
Consumer		34		(30	)		4		22			30
Commercial business		896		(245	)		17		689			1,357
Government		56		-			-		2			58
Total	$	7,698	$	(1,203	)	$	21	$	557		$	7,073

The Bancorp's impairment analysis is summarized below:

	Ending Balances

									Purchased
									credit
(Dollars in thousands)	*Individually*		*Collectively*						impaired
	evaluated for		*evaluated*				Individually		individually		Collectively
	impairment		for impairment		Loan		evaluated for		evaluated for		evaluated for
	reserves		reserves		receivables		impairment		impairment		impairment

The Bancorp's allowance for loan losses impairment evaluation and loan receivables are summarized below at June 30, 2018:

Residential real estate	$	30	$	1,493	$	175,492	$	548	$	693	$	174,251
Home equity		10		173		38,303		124		-		38,179
Commercial real estate		14		3,156		223,598		1,289		-		222,309
Construction and land development		-		611		51,947		-		-		51,947
Multifamily		-		607		44,781		-		-		44,781
Farmland		-		4		245		-		-		245
Commercial business		8		1,256		83,699		413		-		83,286
Consumer		-		36		487		-		-		487
Government		-		50		27,736		-		-		27,736
Total	$	62	$	7,386	$	646,288	$	2,374	$	693	$	643,221

The Bancorp's allowance for loan losses impairment evaluation and loan receivables are summarized below at December 31, 2017:

Residential real estate	$	21	$	1,547	$	172,141	$	462	$	690	$	170,989
Home equity		-		166		36,769		-		-		36,769
Commercial real estate		144		2,981		211,090		512		-		210,578
Construction and land development		-		618		50,746		134		-		50,612
Multifamily		-		622		43,368		-		-		43,368
Farmland		-		-		-		-				-
Commercial business		539		759		76,851		724		-		76,127
Consumer		-		31		461		-		-		461
Government		-		54		28,785		-		-		28,785
Total	$	704	$	6,778	$	620,211	$	1,832	$	690	$	617,689

The Bancorp's credit quality indicators are summarized below at June 30, ~~2017~~2018 and December 31, ~~2016:~~2017:

	Credit Exposure - Credit Risk Portfolio By Creditworthiness Category
	June 30, 2018
(Dollars in thousands)	2		3		4		5		6		7		8
			Above average				Marginally				Special
Loan Segment	Moderate		acceptable		Acceptable		acceptable		Pass/monitor		mention		Substandard		Total
Residential real estate	$	406	$	16,577	$	94,660	$	9,170	$	46,790	$	3,999	$	3,890	$	175,492
Home equity		105		956		36,471		-		152		228		391	$	38,303
Commercial real estate		-		2,074		78,741		93,683		43,224		4,587		1,289	$	223,598
Construction and land development		-		-		20,477		21,194		10,276		-		-	$	51,947
Multifamily		-		-		19,676		23,301		1,582		222		-	$	44,781
Farmland		-		-		-		245		-		-		-	$	245
Commercial business		7,957		20,484		15,241		25,579		12,263		1,762		413	$	83,699
Consumer		115		4		368		-		-		-		-	$	487
Government		-		2,220		19,786		5,730		-		-		-	$	27,736
Total	$	8,583	$	42,315	$	285,420	$	178,902	$	114,287	$	10,798	$	5,983	$	646,288

	December 31, 2017
	2		3		4		5		6		7		8
			Above average				Marginally				Special
Loan Segment	Moderate		acceptable		Acceptable		acceptable		Pass/monitor		mention		Substandard		Total
Residential real estate	$	887	$	12,317	$	92,241	$	8,759	$	50,075	$	4,130	$	3,732	$	172,141
Home equity		-		1,065		34,871		-		250		233		350	$	36,769
Commercial real estate		-		2,372		79,847		81,547		40,054		6,758		512	$	211,090
Construction and land development		-		-		20,719		19,583		10,310		-		134	$	50,746
Multifamily		-		-		20,159		20,965		2,076		168		-	$	43,368
Farmland		-		-		-		-		-		-		-	$	-
Commercial business		7,169		17,202		16,784		21,087		13,041		394		1,174	$	76,851
Consumer		-		131		330		-		-		-		-	$	461
Government		-		2,318		20,202		6,265		-		-		-	$	28,785
Total	$	8,056	$	35,405	$	285,153	$	158,206	$	115,806	$	11,683	$	5,902	$	620,211

(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 Government
Loan Grades 2017 2016 2017 2016 2017 2016 2017 2016
2 Moderate risk $ 637 $ 248 $ - $ - $ 7,021 $ 6,315 $ - $ -
3 Above average acceptable risk 2,624 3,147 - - 17,904 15,043 2,318 955
4 Acceptable risk 112,571 121,583 181 188 18,739 24,754 25,699 25,474
5 Marginally acceptable risk 111,429 100,615 191 83 18,205 18,787 2,575 3,100
6 Pass/monitor 41,312 38,326 15 16 12,060 10,653 - -
7 Special mention (watch) 16,599 5,799 - - 457 533 - -
8 Substandard 615 374 78 82 1,397 1,214 - -
Total $ 285,787 $ 270,092 $ 465 $ 369 $ 75,783 $ 77,299 $ 30,592 $ 29,529

(Dollars in thousands)
Consumer Credit Exposure - Credit Risk Profile Based On Payment Activity
Residential Real Estate, Including
Home Equity Consumer
2017 2016 2017 2016
Performing $ 203,983 $ 200,816 $ 490 $ 524
Non-performing 3,844 5,021 - -
Total $ 207,827 $ 205,837 $ 490 $ 524

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~~these grades by the Bancorp is uniform and conforms to regulatory definitions. The loan grading system is as follows:

1 – Minimal Risk

Borrower demonstrates exceptional credit fundamentals, including stable and predictable profit margins, strong liquidity and a conservative balance sheet with superior asset quality. Excellent cash flow coverage of existing and projected debt service. Historic and projected performance indicates borrower is able to meet obligations under almost any economic circumstances.

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 – Above average acceptable risk

Borrower generates sufficient cash flow to fund debt service and some working assets and/or capital expansion needs. Profitability and key balance sheet ratios are at or slightly above peers. Current trends are positive or stable. Earnings may be level or trending down slightly or be erratic; however, positive strengths are offsetting. Risk of default is reasonable but may warrant collateral protection.

4 – 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.

5 – Marginally acceptable risk

Borrower may exhibit excessive growth, declining earnings, strained cash flow, increasing leverage and/or weakening market position that indicate above average risk. Limited additional debt capacity, modest coverage, and average or below average asset quality, margins and market share. Interim losses and/or adverse trends may occur, but not to the level that would affect the Bank’s position. The potential for default is higher than normal but considered marginally acceptable based on prospects for improving financial performance and the strength of the collateral.

6 – 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.

7 – 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.

8 – 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.

Performing loans are loans that are paying as agreed and are approximately less than ninety days past due on payments of interest and principal.

During the first six months of ~~2017, no~~2018, three commercial business loans totaling $355 thousand, three commercial real estate loans totaling $935 thousand, two residential real estate loans totaling $114 thousand and three home equity loans totaling $124 thousand were modified as a troubled debt restructuring. 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.

910

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

As of June 30, 2017 For the six months ended
June 30, 2017
(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 $ 1,300 $ 4,137 $ - $ 1,333 $ 22
Commercial real estate, construction & land development, and other dwellings 475 475 - 435 -
Commercial participations purchased 78 78 - 80 3
Commercial business 200 200 - 206 2
With an allowance recorded:
Residential real estate, including home equity 75 75 15 380 -
Commercial real estate, construction & land development, and other dwellings 140 140 127 99 -
Commercial participations purchased - - - - -
Commercial business 708 708 649 454 4
Total:
Residential real estate, including home equity $ 1,375 $ 4,212 $ 15 $ 1,713 $ 22
Commercial real estate, construction & land development, and other dwellings $ 615 $ 615 $ 127 $ 534 $ -
Commercial participations purchased $ 78 $ 78 $ - $ 80 $ 3
Commercial business $ 908 $ 908 $ 649 $ 660 $ 6

	As of June 30, 2018						June 30, 2018
(Dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Residential real estate	$	1,110	$	2,841	$	-	$	1,108	$	16
Home equity		65		65		-		45
Commercial real estate		1,180		1,180		-		561		-
Construction and land development		-		-		-		89		-
Commercial business		405		405		-		257		-
With an allowance recorded:
Residential real estate		131		131		30		114		10
Home equity		59		59		10		20		-
Commercial real estate.		109		109		14		160		16
Construction and land development		-		-		-		-		-
Commercial business		8		8		8		186		8
Total:
Residential real estate	$	1,241	$	2,972	$	30	$	1,222	$	26
Home equity	$	124	$	124	$	10	$	65	$	-
Commercial real estate	$	1,289	$	1,289	$	14	$	721	$	16
Construction and land development	$	-	$	-	$	-	$	89	$	-
Commercial business	$	413	$	413	$	8	$	443	$	8

As of December 31, 2016 For the six months ended
June 30, 2016
(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 $ 1,309 $ 3,293 $ - $ 2,882 $ 64
Commercial real estate, construction & land development, and other dwellings 356 356 - 1,855 -
Commercial participations purchased 82 82 - - -
Commercial business 212 212 - 271 2
With an allowance recorded:
Residential real estate, including home equity 1,066 1,066 879 171 -
Commercial real estate, construction & land development, and other dwellings 18 18 3 18 -
Commercial participations purchased - - - 90 3
Commercial business 475 475 354 103 -
Total:
Residential real estate, including home equity $ 2,375 $ 4,359 $ 879 $ 3,053 $ 64
Commercial real estate, construction & land development, and other dwellings $ 374 $ 374 $ 3 $ 1,873 $ -
Commercial participations purchased $ 82 $ 82 $ - $ 90 $ 3
Commercial business $ 687 $ 687 $ 354 $ 374 $ 2

	As of December 31, 2017						June 30, 2017
(Dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Residential real estate	$	1,072	$	3,351	$	-	$	1,333	$	22
Home equity		-		-		-		-		-
Commercial real estate		253		253		-		381		3
Construction and land development		134		134		-		134		-
Commercial business		184		184		-		206		2
With an allowance recorded:
Residential real estate		80		270		21		380		-
Home equity		-		-		-		-		-
Commercial real estate		259		259		144		99		-
Construction and land development		-		-		-		-		-
Commercial business		540		540		539		454		4
Total:
Residential real estate	$	1,152	$	3,621	$	21	$	1,713	$	22
Home equity	$	-	$	-	$	-	$	-	$	-
Commercial real estate	$	512	$	512	$	144	$	480	$	3
Construction and land development	$	134	$	134	$	-	$	134	$	-
Commercial business	$	724	$	724	$	539	$	660	$	6

As ~~part~~a result of the acquisitions of First Federal Savings and Loan Association of Hammond (“First Federal”), which closed during the second quarter of 2014, and Liberty Savings Bank (‘Liberty”), which closed during the third quarter of 2015,acquisition activity, the Bancorp acquired loans for which there was evidence of credit quality deterioration since origination and it was determined that it was probable that the Bancorp would be unable to collect all contractually required principal and interest payments. At June 30, ~~2017,~~2018, total purchased credit impaired loans with unpaid principal balances totaled ~~$2.8~~$2.4 million with a recorded investment of ~~$806 thousand, compared to~~$693 thousand. At December 31, ~~2016, which unpaid principal balances totaled $2.9 million with a recorded investment of $956 thousand. First Federal~~2017, purchased credit impaired loans with unpaid principal balances totaled ~~$1.1~~$2.6 million with a recorded investment of $400 thousand, compared to December 31, 2016, which unpaid principal balances totaled $1.2 million with a recorded investment of $507 thousand. Liberty purchased credit impaired loans with unpaid principal balances totaled $1.7 million with a recorded investment of $406 thousand compared to December 31, 2016, which unpaid principal balances totaled $1.7 million with a recorded investment of $449$690 thousand.

1011

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 Past
Due and
Accruing
June 30, 2017
Residential real estate, including home equity $ 3,174 $ 1,898 $ 3,007 $ 8,079 $ 199,748 $ 207,827 $ 219
Consumer - - - - 490 490 -
Commercial real estate, construction & land development, and other dwellings 610 152 800 1,562 284,225 285,787 184
Commercial participations purchased - - 78 78 387 465 -
Commercial business 156 48 189 393 75,390 75,783 -
Government - - - - 30,592 30,592 -
Total $ 3,940 $ 2,098 $ 4,074 $ 10,112 $ 590,832 $ 600,944 $ 403

December 31, 2016
Residential real estate, including home equity $ 3,974 $ 1,775 $ 4,024 $ 9,773 $ 196,064 $ 205,837 $ 500
Consumer - - - - 524 524 -
Commercial real estate, construction & land development, and other dwellings 396 189 374 959 269,133 270,092 -
Commercial participations purchased - - 82 82 287 369 -
Commercial business 171 217 466 854 76,445 77,299 -
Government - - - - 29,529 29,529 -
Total $ 4,541 $ 2,181 $ 4,946 $ 11,668 $ 571,982 $ 583,650 $ 500

(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 Past Due and Accruing
June 30, 2018
Residential real estate	$	2,848	$	1,612	$	2,750	$	7,210	$	168,282	$	175,492	$	71
Home equity		167		200		298		665		37,638		38,303		-
Commercial real estate		8		935		85		1,028		222,570		223,598		-
Construction and land development		-		-		-		-		51,947		51,947		-
Multifamily		66		-		-		66		44,715		44,781		-
Farmland		-		-		-		-		245		245		-
Commercial business		76		198		8		282		83,417		83,699		-
Consumer		-		-		-		-		487		487		-
Government		-		-		-		-		27,736		27,736		-
Total	$	3,165	$	2,945	$	3,141	$	9,251	$	637,037	$	646,288	$	71

December 31, 2017
Residential real estate	$	4,921	$	1,751	$	3,092	$	9,764		162,377	$	172,141	$	225
Home equity		295		18		234		547		36,222		36,769		2
Commercial real estate		951		96		332		1,379		209,711		211,090		-
Construction and land development		-		-		133		133		50,613		50,746		-
Multifamily		319		-		-		319		43,049		43,368		-
Farmland		-		-		-		-		-		-
Commercial business		285		162		539		986		75,865		76,851		-
Consumer		1		-		-		1		460		461		-
Government		-		-		-		-		28,785		28,785		-
Total	$	6,772	$	2,027	$	4,330	$	13,129	$	607,082	$	620,211	$	227

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

(Dollars in thousands)
June 30,
2017 December 31,
2016
Residential real estate, including home equity $ 3,625 $ 4,521
Consumer - -
Commercial real estate, construction & land development, and other dwellings 615 374
Commercial participations purchased 78 82
Commercial business 853 628
Government - -
Total $ 5,171 $ 5,605

(Dollars in thousands)

	June 30, 2018		December 31, 2017
Residential real estate	$	3,478	$	3,509
Home equity		332		350
Commercial real estate		175		332
Construction and land development		-		133
Multifamily		-		-
Farmland		-		-
Commercial business		137		672
Consumer		-		-
Government		-		-
Total	$	4,122	$	4,996

Note 56 - Foreclosed Real Estate

Foreclosed real estate at period-end is summarized below:

	(Dollars in thousands)				*(Dollars in thousands)*
	June 30,		December 31,		June 30, 2018		December 31, 2017
	2017		2016
Residential real estate, including home equity	$	1,329	$	1,810
Commercial real estate, construction & land development and other dwellings		838		855
Residential real estate					$	399	$	914
Home equity						-		-
Commercial real estate						-		97
Construction and land development						468		468
Multifamily						-		-
Farmland						-		-
Commercial business		-		-		220		220
Consumer						-		-
Government						-		-
Total	$	2,167	$	2,665	$	1,087	$	1,699

Note 67 - Goodwill, Other Intangible Assets, and Acquisition Related Accounting

The Bancorp established a goodwill balance totaling $2.8 million with the acquisitions of First Federal Savings & Loan (First Federal) and ~~Liberty.~~Liberty Savings Bank (Liberty Savings). Goodwill of $2.0 million was established with the acquisition of First Federal and goodwill of $804 thousand was established with the acquisition of ~~Liberty.~~Liberty Savings. Goodwill is tested annually for impairment. Goodwill arising from business combinations represents the value attributable to unidentifiable intangible assets in the business acquired. The Bancorp’s goodwill relates to the value inherent in the banking industry and that value is dependent upon the ability of the Bancorp to provide quality, cost effective banking services in a competitive marketplace. If the implied fair value of goodwill is lower than its carrying amount, goodwill impairment is indicated and goodwill is written down to its implied fair value. There has not been any impairment of goodwill identified or recorded. During the second quarter of 2016, original estimates related to Liberty goodwill components were adjusted. Estimates of fair values related to a pool of purchased loans were determined to be lower than originally estimated, which led to the addition of $178 thousand to goodwill. Fixed asset valuations were also determined to be higher than originally estimated, which led to a reduction of $109 thousand to goodwill. Also, the valuation of the accrued withdrawal liability for the defined benefit plan was determined to be higher than originally estimated leading to the addition of $162 thousand to goodwill. Goodwill totaled $2.8 million at June 30, ~~2017~~2018 and December 31, ~~2016.~~2017.

In addition to goodwill, a core deposit intangible of $93 thousand for the acquisition of First Federal was established and is being amortized over 7.9 years on a straight line basis. Approximately $6 thousand of amortization was taken during the six months ended June 30, ~~2017~~2018 and June 30, ~~2016.~~2017. It is estimated that an additional $6 thousand of additional amortization will occur during ~~2017~~2018, and $12 thousand of additional amortization will occur annually from 2019 to 2021, and the remaining amount ~~of $48 thousand~~ will be amortized through to the first quarter of 2022. A core deposit intangible of $471 thousand for the acquisition of Liberty Savings was established and is being amortized over 8.2 years on a straight line basis. Approximately $29 thousand of amortization was taken during the six months ended June 30, ~~2017~~2018 and June 30, ~~2016.~~2017. It is estimated that $29 thousand of additional amortization will occur during ~~2017~~2018, and $58 thousand of additional amortization will occur annually from 2019 to 2022, and the remaining amount ~~of $327 thousand~~ will be amortized through to the third quarter of 2023.

For the First Federal acquisition, as part of the fair value of loans receivable, a net fair value discount was established for residential real estate, including home equity lines of credit, of $1.1 million that is being accreted over 55 months on a straight line basis. Approximately ~~$73~~$70 thousand of accretion was taken into income for the six months ended June 30, ~~2017,~~2018, compared to ~~$102~~$73 thousand for the six months ended June 30, ~~2016.~~2017. It is estimated that ~~$88~~$90 thousand of additional accretion will occur in ~~2017, and accretion of $147 thousand will occur during~~ 2018. Similarly, for the Liberty Savings acquisition, as part of the fair value of loans receivable, a net fair value discount was established for residential real estate, including home equity lines of credit, of $1.2 million that is being accreted over 44 months on a straight line basis. Approximately ~~$152~~$134 thousand of accretion was taken into income for the six months ended June 30, ~~2017,~~2018, compared to ~~$163~~$152 thousand for the six months ended June 30, ~~2016.~~2017. It is estimated that ~~$139~~$131 thousand of additional accretion will occur in ~~2017, accretion of $278 thousand will occur in~~ 2018, and accretion of ~~$46~~$44 thousand will occur during 2019.

For the Liberty acquisition, as part of the fair value of certificates of deposit, a fair value premium was established of $124 thousand that was amortized over 17 months on a straight line basis. No amortization expense was taken during the six months ended June 30, 2017, compared to $44 thousand of amortization taken as expense during the six months ended June 30, 2016. No additional amortization expense will occur during 2017.

Note 78 - 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 89 - 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, ~~2017~~2018 and ~~2016~~2017 are as follows:

	Three Months Ended				Six Months Ended
	June 30,				June 30,				Three Months Ended				Six Months Ended
(Dollars in thousands, except per share data)	2017		2016		2017		2016		June 30,				June 30,
									2018		2017		2018		2017
Basic earnings per common share:
Net income as reported	$	2,529	$	2,242	$	4,827	$	4,486	$	2,511	$	2,529	$	5,072	$	4,827
Weighted average common shares outstanding		2,864,246		2,859,003		2,863,704		2,856,938		2,868,250		2,864,246		2,867,834		2,863,704
Basic earnings per common share	$	0.89	$	0.78	$	1.69	$	1.57	$	0.88	$	0.89	$	1.77	$	1.69
Diluted earnings per common share:						-								-
Net income as reported	$	2,529	$	2,242	$	4,827	$	4,486	$	2,511	$	2,529	$	5,072	$	4,827
Weighted average common shares outstanding		2,864,246		2,859,003		2,863,704		2,856,938		2,868,250		2,864,246		2,867,834		2,863,704
Add: Dilutive effect of assumed stock option exercises		146		750		143		750		-		146		-		143
Weighted average common and dilutive potential common shares outstanding		2,864,392		2,859,753		2,863,847		2,857,688		2,868,250		2,864,392		2,867,834		2,863,847
Diluted earnings per common share	$	0.89	$	0.78	$	1.69	$	1.57	$	0.88	$	0.89	$	1.77	$	1.69

Note 910 - Stock Based Compensation

The Bancorp’s 2015 Stock Option and Incentive Plan (the Plan), which was adopted by the Bancorp’s Board of Directors on February 27, 2015 and approved by the Bancorp’s shareholders on April 24, 2015, permits the grant of equity awards for up to 250,000 shares of common stock. Awards granted under the Plan may be in the form of incentive stock options, non-qualified stock options, restricted stock, unrestricted stock, performance shares, or performance units.

1213

As required by the 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, ~~2017,~~2018, stock based compensation expense of ~~$90~~$104 thousand was recorded, compared to ~~$67~~$90 thousand for the six months ended June 30, ~~2016.~~2017. It is anticipated that current outstanding unvested ~~options and~~ awards will result in additional compensation expense of approximately ~~$102~~$489 thousand through 2021 with $100 thousand in ~~2017 and $147~~2018, $184 thousand in ~~2018.~~2019, $150 thousand in 2020 and $55 thousand in 2021.

There were no incentive stock options granted during the first six months of ~~2017~~2018 or ~~2016.~~2017. 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.

~~A summary of incentive option activity under the Bancorp’s stock option and incentive plans described above for the six months ended~~ At June 30, ~~2017 follows:~~2018, there were no outstanding incentive stock options.

Weighted-
Weighted- Average
Average Remaining Aggregate
Exercise Contractual Intrinsic
Incentive options Shares Price Term Value
Outstanding at January 1, 2017 500 $ 28.50
Granted - -
Exercised - -
Forfeited - -
Expired - $ -
Outstanding at June 30, 2017 500 $ 28.50 0.7 6,000
Exercisable at June 30, 2017 500 $ 28.50 0.7 6,000

There were ~~4,575~~4,433 shares of restricted stock granted during the first six months of ~~2017~~2018 compared to ~~8,740~~4,575 shares granted during the first six months of ~~2016.~~2017. Restricted stock awards are issued with an award price equal to the market price of the Bancorp’s common stock on the award date and vest between three and five years after the grant date. Forfeiture provisions exist for personnel that separate employment before the vesting period expires. A summary of restricted stock activity under the Bancorp’s incentive stock option and incentive plans described above for the year ended December 31, 2017 and six months ended June 30, ~~2017~~2018 follows:

Weighted-
Average
Grant Date
Restricted stock Shares Fair Value
Nonvested at January 1, 2017 28,465 $ 26.67
Granted 4,575 39.00
Vested 1,625 25.81
Forfeited 725 28.62
Nonvested at June 30, 2017 30,690 $ 28.51

Non-vested Shares	Shares			Weighted Average Grant Date Fair Value
Non-vested at January 1, 2017		28,465		$	26.67
Granted		4,575			39.00
Vested		(1,625	)		25.81
Forefited		(725	)		28.62
Non-vested at December 31, 2017		30,690		$	28.51

Non-vested at January 1, 2018		30,690		$	28.51
Granted		4,433			43.50
Vested		(6,200	)		22.43
Forefited		-
Non-vested at June 30, 2018		28,923		$	32.11

Note 1011 - ~~Adoption of New~~Change in Accounting ~~Standards~~ Principles

In May 2014, ~~the Financial Accounting Standards Board (FASB)~~FASB issued Accounting Standards Update (ASU) No. 2014-09 and ASU 2015-14,Revenue from Contracts with Customers (Topic 606), ~~which will supersede~~superseding the current revenue recognition requirements in Topic 605, Revenue Recognition. The ASU is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. The new guidance ~~will be~~is effective for the Bancorp's year ending December 31, 2018 and has been adopted as of January 1, 2018. The ~~ASU permits application~~use of the ~~new revenue recognition guidance to be applied using one of two~~modified retrospective ~~application methods. The Bancorp~~approach has ~~not yet determined which application method it will use.~~been used for implementing this standard. Interest income is outside of the scope of the new standard and ~~will~~was not be impacted by the adoption of the standard. ~~The Bancorp~~Management mapped noninterest income accounts to their associated income streams and applied the five step model to identify the contract, identify the performance obligations in the contract, determine the total transaction price, allocate the transaction price to each performance obligation, and ensure revenue is ~~still evaluating~~recognized when the ~~impact~~performance obligation is satisfied. A review of the ~~new standard on its~~Bancorp’s noninterest ~~income.~~income has not resulted in a change in revenue recognition since adoption.

In January 2016, ~~the Financial Accounting Standards Board (FASB)~~FASB issued Accounting Standards Update (ASU) No. 2016-01,Recognition and Measurement of Financial Assets and Financial Liabilities. The ASU covers various changes to the accounting, measurement, and disclosures related to certain financial instruments, including requiring equity investments to be accounted for at fair value with changes recorded through earnings, the use of the exit price when measuring fair value, and disaggregation of financial assets and liabilities by category for disclosure purposes. The new guidance ~~will be~~is effective for the Bancorp's year ending December 31, 2018 and was adopted on January 1, 2018. ~~Early~~The adoption ~~is permitted as early as periods ending after December 31, 2017 with some additional options for early application. The Bancorp does~~of this ASU has not ~~believe adopting the provisions of ASU No. 2016-01 in the future will have~~had a material impact on the consolidated financial ~~statements.~~statements, as the Bancorp does not hold any equity securities with unrealized gains or losses. The ~~Bancorp has not yet quantified~~new reporting requirements have been incorporated into the ~~impact~~fair value of ~~the change.~~financial instruments table and disclosures.

1314

In March 2016, FASB issued ASU No. 2016-09:Compensation—Stock Compensation (Topic 718)—Improvements to Employee Share-Based Payment Accounting. This ASU seeks to reduce complexity in accounting standards. The areas for simplification in ASU No. 2016-09, identified through outreach for the Simplification Initiative, pre-agenda research for the Private Company Council, and the August 2014 Post-Implementation Review Report on FASB Statement No. 123(R), Share-Based Payment, involve several aspects of the accounting for share-based payment transactions, including (1) accounting for income taxes, (2) classification of excess tax benefits on the statement of cash flow, (3) forfeitures; (4) minimum statutory tax withholding requirements, (5) classification of employee taxes paid on the statement of cash flows when an employer withholds shares for tax withholding purposes, (6) the practical expedient for estimating the expected term, and (7) intrinsic value. The Bancorp adopted this ASU during 2017, the adoption of this ASU has not had a material impact on the consolidated financial statements.

Note 12 - Upcoming Accounting Standards

In February 2016, ~~the Financial Accounting Standards Board (FASB)~~FASB issued ASU No. 2016-02,Leases, which will supersede the current lease requirements in ASC 840. The ASU requires lessees to recognize a right-of-use asset and related lease liability for all leases, with a limited exception for short-term leases. Leases will be classified as either finance or operating, with the classification affecting the pattern of expense recognition in the statement of operations. Currently, leases are classified as either capital or operating, with only capital leases recognized on the balance sheet. The reporting of lease-related expenses in the statements of operations and cash flows will be generally consistent with the current guidance. The new lease guidance will be effective for the Bancorp's year ending December 31, 2019 and will be applied using a modified retrospective transition method to the beginning of the earliest period presented. Management does not believe the adoption of this update will have a material effect on the Bancorp’s consolidated financial ~~statements.~~statements, as the Bancorp does not engage in the leasing of property or in leasing of any significant furniture, fixtures, equipment, or software.

In June 2016, ~~the Financial Accounting Standards Board (FASB)~~FASB issued ~~Accounting Standards Update (ASU)~~ASU No. 2016-13,Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments. The ASU includes increased disclosures and various changes to the accounting and measurement of financial assets including the Bancorp’s loans and available-for-sale and held-to-maturity debt securities. Each financial asset presented on the balance sheet would have a unique allowance for credit losses valuation account that is deducted from the amortized cost basis to present the net carrying value at the amount expected to be collected on the financial asset. The amendments in this ASU also eliminate the probable initial recognition threshold in current GAAP and instead, reflect an entity’s current estimate of all expected credit losses using reasonable and supportable forecasts. The new credit loss guidance will be effective for the Bancorp's year ending December 31, 2020. Upon adoption, the ASU will be applied using a modified retrospective transition method to the beginning of the first reporting period in which the guidance is effective. A prospective transition approach is required for debt securities for which an other-than-temporary impairment had been recognized before the effective date. Early adoption for all institutions is permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Management is in the process of evaluating the impact adoption of this update will have on the Bancorp’s consolidated financial statements. This process of evaluation has engaged multiple areas of the Bancorp’s management in discussing loss estimation methods and the application of these methods to specific segments of the loans receivable portfolio. Given the amount of time left to adoption, the appropriateness of the loss estimation methods chosen, and the continuing development of understanding of application, additional time is needed to fully understand how this ASU will impact the Bancorp’s financial statements.

In January 2017, the FASB issued ASU 2017-04,Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This Standard simplifies the manner in which an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. In computing the implied fair value of goodwill under Step 2, an entity, prior to the amendments in ASU No. 2017-04, had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities, including unrecognized assets and liabilities, in accordance with the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. However, under the amendments in this ASU, an entity should (1) perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount, and (2) recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, with the understanding that the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, ASU No. 2017-04 removes the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails such qualitative test, to perform Step 2 of the goodwill impairment test. Finally, this ASU amends the Overview and Background sections of the Accounting Standards Codification as part of the FASB’s initiative to unify and improve such sections across Topics and Subtopics. The new guidance will be effective for the Company’s year ending December 31, 2020.

In March 2017, the FASB issued ASU 2017-08,Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. This Standard amends the amortization period for certain purchased callable debt securities held at a premium. In particular, the amendments in this ASU require the premium to be amortized to the earliest call date. The amendments do not, however, require an accounting change for securities held at a discount; instead, the discount continues to be amortized to maturity. The amendments in this ASU more closely align the amortization period of premiums and discounts to expectations incorporated in market pricing on the underlying securities. In fact, in most cases, market participants price securities to the call date that produces the worst yield when the coupon is above current market rates (i.e., the security is trading at a premium), and price securities to maturity when the coupon is below market rates (i.e., the security is trading at a discount), in anticipation that the borrower will act in its economic best interest. The new guidance will be effective for the Company’s year ending December 31, 2020. Management will recognize amortization expense as dictated by the amount of premiums and the differences between maturity and call dates at the time of adoption.

Note 1113 - 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 theInvestments – Debt and Equity SecuritiesTopic. 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.

The Bancorp’s management utilizes a specialist to perform an other-than-temporary impairment analysis for each of its four pooled trust preferred securities. The analysis is performed ~~semiannually~~annually on ~~June 30 and~~ December 31 and 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 theInvestments – OtherTopic and theInvestments – Debt and Equity SecuritiesTopic. 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 ~~semi-annual~~annual 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, and bank call reports filed with the FDIC and 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. Based on current market conditions and a review of the trustee reports, management performed an analysis of the four pooled trust preferred securities and no additional impairment was taken at ~~June 30,~~December 31, 2017. During the second quarter of 2018, upon management review, the Bancorp decided to review for trust preferred security impairment annually, a change from semi-annual review previously disclosed. A specialist will be used to review all four pooled trust preferred securities again at December 31, ~~2017.~~2018.

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)
Collateralized debt obligations
other-than-temporary impairment
Ending balance, December 31, 2016 $ 271
Additions not previously recognized -
Ending balance, June 30, 2017 $ 271

~~The following table contains information regarding the Bancorp’s pooled trust preferred securities impairment evaluation as of June 30, 2017:~~

Cusip 74043CAC1 74042TAJ0 01449TAB9 01450NAC6
Deal name PreTSL XXIV PreTSL XXVII Alesco IX Alesco XVII
Class B-1 C-1 A-2A B
Lowest credit rating assigned CCC CC BB CCC
Number of performing banks 62 33 62 51
Number of performing insurance companies 13 7 10 n/a
Number of issuers in default 16 7 2 4
Number of issuers in deferral 2 2 2 1
Defaults & deferrals as a % of performing collateral 26.56 % 20.06 % 4.22 % 8.11 %
Subordination:
As a % of performing collateral 23.55 % 8.35 % 52.53 % 35.58 %
As a % of performing collateral - adjusted for projected future defaults 18.93 % 1.24 % 49.17 % 31.69 %
Other-than-temporary impairment model assumptions:
Defaults:
Year 1 - issuer average 1.90 % 2.40 % 2.20 % 1.90 %
Year 2 - issuer average 1.90 % 2.40 % 2.20 % 1.90 %
Year 3 - issuer average 1.90 % 2.40 % 2.20 % 1.90 %
> 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 preceding table, 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, 2017, 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.

	Collateralized debt obligations
(Dollars in thousands)	other-than-temporary impairment
Ending balance, December 31, 2017	$	271
Additions not previously recognized		-
Ending balance, June 30, 2018	$	271

At June 30, ~~2017,~~2018, three of the trust preferred securities with a cost basis of ~~$3.6~~$3.5 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 theInvestments – 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.~~resume on a consistent basis.

1617

Assets and Liabilities Measured at Fair Value on a Recurring Basis

There were no transfers to or from Levels 1 and 2 during the six months ended June 30, ~~2017.~~2018. Assets measured at fair value on a recurring basis are summarized below:

(Dollars in thousands)
Fair Value Measurements at June 30, 2017 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:
Money market fund $ 2,105 $ 2,105 $ - $ -
U.S. government sponsored entities 13,784 - 13,784 -
Collateralized mortgage obligations and residential mortgage-backed securities 128,636 - 128,636 -
Municipal securities 93,217 - 93,217 -
Collateralized debt obligations 3,006 - - 3,006
Total securities available-for-sale $ 240,748 $ 2,105 $ 235,637 $ 3,006

											(Dollars in thousands)
											Fair Value Measurements at June 30, 2018 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:
Money market fund									$	1,608	$	1,608	$	-	$	-
U.S. government sponsored entities										7,821		-		7,821		-
Collateralized mortgage obligations and
residential mortgage-backed securities										135,131		-		135,131		-
Municipal securities										90,121		-		90,121		-
Collateralized debt obligations										3,483		-		-		3,483
Total securities available-for-sale									$	238,164	$	1,608	$	233,073	$	3,483
			(Dollars in thousands)
			Fair Value Measurements at December 31, 2016 Using								Fair Value Measurements at December 31, 2017 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)		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:
Money market fund	$	222	$	222	$	-	$	-	$	476	$	476	$	-	$	-
U.S. government sponsored entities		16,274		-		16,274		-		3,890		-		3,890		-
Collateralized mortgage obligations and residential mortgage-backed securities		117,975		-		117,975		-		132,938		-		132,938		-
Municipal securities		96,745		-		96,745		-		103,747		-		103,747		-
Collateralized debt obligations		2,409		-		-		2,409		3,439		-		-		3,439
Total securities available-for-sale	$	233,625	$	222	$	230,994	$	2,409	$	244,490	$	476	$	240,575	$	3,439

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)
	Estimated Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Available-for- sale securities
Beginning balance, January 1, 2016	$	2,734
Principal payments		(107	)
Total unrealized losses, included in other comprehensive income		(218	)
Transfers in and/or (out) of Level 3		-
Ending balance, December 31, 2016	$	2,409
(Dollars in thousands)				Estimated Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
				Available-for- sale securities
Beginning balance, January 1, 2017	$	2,409		$	2,409
Principal payments		(103	)		(154	)
Total unrealized gains, included in other comprehensive income		700			1,184
Transfers in and/or (out) of Level 3		-			-
Ending balance, June 30, 2017	$	3,006
Ending balance, December 31, 2017				$	3,439

Beginning balance, January 1, 2018				$	3,439
Principal payments					(25	)
Total unrealized gains, included in other comprehensive income					69
Transfers in and/or (out) of Level 3					-
Ending balance, June 30, 2018				$	3,483

1718

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

			(Dollars in thousands)								(Dollars in thousands)
			Fair Value Measurements at June 30, 2017 Using								Fair Value Measurements at June 30, 2018 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)		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	$	2,185	$	-	$	-	$	2,185	$	3,005	$	-	$	-	$	3,005
Foreclosed real estate		2,167		-		-		2,167		1,087		-		-		1,087


			(Dollars in thousands)								(Dollars in thousands)
			Fair Value Measurements at December 31, 2016 Using								Fair Value Measurements at December 31, 2017 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)		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	$	2,282	$	-	$	-	$	2,282	$	1,818	$	-	$	-	$	1,818
Foreclosed real estate		2,665		-		-		2,665		1,699		-		-		1,699

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 recorded investment in impaired loans was approximately ~~$3.0~~$3.1 million and the related specific reserves totaled approximately ~~$791~~$62 thousand, resulting in a fair value of impaired loans totaling approximately ~~$2.2~~$3.0 million, at June 30, ~~2017.~~2018. The recorded investment of impaired loans was approximately ~~$3.5~~$2.5 million and the related specific reserves totaled approximately ~~$1.2 million,~~$704 thousand, resulting in a fair value of impaired loans totaling approximately ~~$2.3~~$1.8 million, at December 31, ~~2016.~~2017. 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 to this presentation.

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, 2017				Estimated Fair Value Measurements at June 30, 2017 Using						June 30, 2018				Estimated Fair Value Measurements at June 30, 2018 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)		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	$	27,759	$	27,759	$	27,759	$	-	$	-	$	19,792	$	19,792	$	19,792	$	-	$	-
Certificates of deposit in other financial institutions												1,526		1,493		-		1,493		-
Securities available-for-sale		240,748		240,748		2,105		235,637		3,006		238,164		238,164		1,608		233,073		3,483
Loans held-for-sale		2,677		2,736		2,736		-		-		4,329		4,411		4,411		-		-
Loans receivable, net		593,871		590,338		-		-		590,338		638,840		627,250		-		-		627,250
Federal Home Loan Bank stock		3,000		3,000		-		3,000		-		3,017		3,017		-		3,017		-
Accrued interest receivable		3,006		3,006		-		3,006		-		3,253		3,253		-		3,253		-

Financial liabilities:
Non-interest bearing deposits		119,874		119,874		119,874		-		-		120,418		120,418		120,418		-		-
Interest bearing deposits		667,107		666,138		489,582		176,556		-		685,559		683,809		478,974		204,835		-
Repurchase agreements		15,635		15,628		13,879		1,749		-		14,236		14,231		12,482		1,749		-
Borrowed funds		19,610		19,633		510		19,123		-		35,679		35,519		579		34,940		-
Interest rate swap agreements												111		111		-		111		-
Accrued interest payable		32		32		-		32		-		110		110		-		110		-

1819

	December 31, 2016				Estimated Fair Value Measurements at December 31, 2016 Using						December 31, 2017				Estimated Fair Value Measurements at December 31, 2017 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)		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	$	45,109	$	45,109	$	45,109	$	-	$	-	$	11,025	$	11,025	$	11,025	$	-	$	-
Certificates of deposit in other financial institutions												1,676		1,640		-		1,640		-
Securities available-for-sale		233,625		233,625		222		230,994		2,409		244,490		244,490		476		240,575		3,439
Loans held-for-sale		2,193		2,242		2,242		-		-		1,592		1,625		1,625		-		-
Loans receivable, net		575,952		568,855		-		-		568,855		612,729		608,506		-		-		608,506
Federal Home Loan Bank stock		3,000		3,000		-		3,000		-		3,000		3,000		-		3,000		-
Accrued interest receivable		3,086		3,086		-		3,086		-		3,262		3,262		-		3,262		-

Financial liabilities:
Non-interest bearing deposits		111,800		111,800		111,800		-		-		120,556		120,556		120,556		-		-
Interest bearing deposits		667,971		667,227		482,307		184,920		-		672,448		670,967		488,528		182,439		-
Repurchase agreements		13,998		13,995		11,439		2,556		-		11,300		11,292		9,545		1,747		-
Borrowed funds		25,828		25,840		700		25,140		-		20,881		20,818		600		20,218		-
Accrued interest payable		41		41		-		41		-		42		42		-		42		-

The following methods were used to estimate the fair value of financial instruments presented in the preceding table for the periods ended June 30, ~~2017 and December 31, 2016:~~2018:

Cash and cash equivalents 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 (Level 1). The estimated fair value for net loans receivable is based on an exit price basis incorporating discounts for credit, liquidity, and marketability factors (Level 3). This is not comparable with the fair values disclosed for December 31, 2017, which were 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 of 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 quarter 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 for similar advances with similar maturities (Level 2). The estimated fair value of other financial instruments, and off-balance sheet loan commitments, approximate cost and are not considered significant to this presentation.

The following methods were used to estimate the fair value of financial instruments presented in the preceding table for the periods ended December 31, 2017:

Cash and cash equivalent carrying amounts approximate fair value. Certificates of deposits in other financial institutions carrying amounts approximate fair value (Level 2). 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 (Level 1). 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 (Level 3). Federal Home Loan Bank stock is estimated at book value due to restrictions that limit the sale or transfer of the security. Fair ~~value~~values of accrued interest receivable and payable ~~approximates~~approximate 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 for similar advances with similar maturities (Level 2). 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 financial holding company registered with the Board of Governors of the Federal Reserve System. Peoples Bank SB (“the Bank”), an Indiana savings bank, and NWIN Risk Management, Inc., a captive insurance company, are wholly-owned subsidiaries of the Bancorp. The Bancorp has no other business activity other than being a holding company for the Bank and NWIN Risk Management, Inc. The following management’s discussion and analysis presents information concerning our financial condition as of June 30, 2018, as compared to December 31, 2017, and the results of operations for the quarter and six months ending June 30, 2018, and June 30, 2017. This discussion should be read in conjunction with the consolidated financial statements and other financial data presented elsewhere herein and with the financial statements and other financial data, as well as the Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

At June 30, ~~2017,~~2018, the Bancorp had total assets of ~~$921.2~~$959.0 million, total loans receivable of ~~$593.9~~$646.3 million and total deposits of ~~$787.0~~$806.0 million. Stockholders' equity totaled ~~$89.3~~$90.6 million or ~~9.69%~~9.45% of total assets, with a book value per share of ~~$31.18.~~$31.58. Net income for the quarter ended June 30, ~~2017,~~2018, was $2.5 million, or ~~$0.89~~$0.88 earnings per common share for both basic and diluted calculations. For the quarter ended June 30, ~~2017,~~2018, the return on average assets (ROA) was ~~1.11%~~1.07%, while the return on average stockholders’ equity (ROE) was ~~11.30%~~11.04%. Net income for the six months ended June 30, ~~2017,~~2018, was ~~$4.8~~$5.1 million, or ~~$1.69~~$1.77 earnings per common share for both basic and diluted calculations. For the six months ended June 30, ~~2017,~~2018, the ~~return on average assets (ROA)~~ROA was ~~1.07%~~1.08%, while the ~~return~~ROE was 11.12%.

Recent Developments

On February 21, 2018, the Bancorp announced the execution of an Agreement and Plan of Merger (the “Merger Agreement”) on ~~average stockholders’ equity (ROE) was 10.97%.~~February 20, 2018 with First Personal Financial Corp., a Delaware corporation (“First Personal”), pursuant to which the Bancorp will acquire First Personal and its wholly-owned subsidiary, First Personal Bank, through a stock and cash merger. Under the terms of the Merger Agreement, each First Personal stockholder will have the right to receive fixed consideration of (i) 0.1246 shares of Bancorp common stock, and (ii) $6.67 per share in cash for each share of First Personal’s common stock. First Personal stockholders holding less than 100 shares of First Personal common stock will have the right to receive $12.12 in cash and no stock consideration for each share of First Personal common stock. The merger is expected to close on July 26, 2018.

Financial Condition

During the six months ended June 30, ~~2017,~~2018, total assets increased by ~~$7.6~~$31.7 million ~~(0.8%~~(3.4%), with interest-earning assets increasing by ~~$9.0~~$25.2 million ~~(1.1%~~(2.9%). At June 30, ~~2017,~~2018, interest-earning assets totaled ~~$861.3~~$896.7 million compared to ~~$852.2~~$871.5 million at December 31, ~~2016.~~2017. Earning assets represented 93.5% of total assets at June 30, ~~2017~~2018 and ~~93.3%~~94.0% of total assets at December 31, ~~2016.~~2017. The increase in total assets and interest earning assets for the six months was the result of internally generated growth.

Net loans receivable totaled ~~$593.9~~$638.8 million at June 30, ~~2017,~~2018, compared to ~~$576.0~~$612.7 million at December 31, ~~2016.~~2017. 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 emphasizes quality loan growth, product diversification, and competitive and profitable pricing.

The Bancorp’s end-of-period loan balances were as follows:

	June 30,
	2017					December 31,					June 30,
	(unaudited)					2016					2018					December 31,
(Dollars in thousands)	Balance		% Loans			Balance		% Loans			(unaudited)					2017
											Balance		% Loans			Balance		% Loans
Construction & land development	$	44,550		7.4	%	$	38,937		6.7	%
1-4 first liens		171,686		28.6	%		170,018		29.1	%

Residential real estate											$	175,492		27.2	%		172,141		27.8	%
Home equity												38,303		5.9	%		36,769		5.9	%
Commercial real estate												223,598		34.6	%		211,090		34.0	%
Construction and land development												51,947		8.0	%		50,746		8.2	%
Multifamily		37,170		6.2	%		36,086		6.2	%		44,781		6.9	%		43,368		7.0	%
Commercial real estate		204,532		34.0	%		195,438		33.5	%
Farmland												245		0.1	%		-		0.0	%
Consumer												487		0.1	%		461		0.1	%
Commercial business		75,783		12.6	%		77,299		13.2	%		83,699		13.0	%		76,851		12.4	%
1-4 Junior Liens		733		0.1	%		838		0.1	%
HELOC		32,745		5.4	%		31,737		5.4	%
Lot loans		2,663		0.4	%		3,244		0.6	%
Consumer		490		0.1	%		524		0.1	%
Government		30,592		5.2	%		29,529		5.1	%		27,736		4.2	%		28,785		4.6	%
Loans receivable	$	600,944		100.0	%	$	583,650		100.0	%	$	646,288		100.0	%	$	620,211		100.0	%

Adjustable rate loans / loans receivable	$	343,720		57.2	%	$	332,650		57.0	%	$	379,815		58.8	%	$	348,559		56.2	%

June 30,
2017 December 31,
(unaudited) 2016

Loans receivable to total assets 65.2 % 63.9 %
Loans receivable to earning assets 69.8 % 68.5 %
Loans receivable to total deposits 76.4 % 74.8 %

	June 30,
	2018			December 31,
	(unaudited)			2017

Loans receivable to total assets		67.4	%		66.9	%
Loans receivable to earning assets		72.1	%		71.2	%
Loans receivable to total deposits		80.2	%		78.2	%

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. The Bancorp will also retain fixed rate mortgage loans with a contractual maturity greater than 15 years on a limited basis. During the six months ended June 30, ~~2017,~~2018, the Bancorp originated ~~$17.6~~$24.3 million in new fixed rate mortgage loans for sale, compared to ~~$18.8~~$17.6 million during the six months ended June 30, ~~2016.~~2017. Net gains realized from the mortgage loan sales totaled $570 thousand for the six months ended June 30, 2018, compared to $471 thousand for the six months ended June 30, ~~2017, compared to $541 thousand for the six months ended June 30, 2016.~~2017. At June 30, ~~2017,~~2018, the Bancorp had ~~$2.7~~$4.3 million in loans that were classified as held for sale, compared to ~~$2.2~~$1.6 million at December 31, ~~2016.~~

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.2017.

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 $5.6 million at June 30, 2017, compared to $6.1 million at December 31, 2016, a decrease of $530 thousand or 8.7%. The decrease in non-performing loans for the first six months of 2017 is primarily due to a partial charge-off totaling $829 thousand for twenty-six Investor Owned Residential Real Estate loans. The ratio of non-performing loans to total loans was 0.93% at June 30, 2017, compared to 1.05% at December 31, 2016. The ratio of non-performing loans to total assets was 0.61% at June 30, 2017, compared to 0.67% at December 31, 2016. At June 30, ~~2017,~~2018, all non-performing loans are also accounted for on a non-accrual basis, except for ~~three loans~~one residential real estate loan totaling ~~$403~~$71 thousand that remained accruing and more than 90 days past due.

~~Loans internally classified as substandard totaled $5.8 million at June 30, 2017, compared to $6.1 million at December 31, 2016 a decrease of $304 thousand or 5.0%.~~ The ~~decrease in substandard~~Bancorp's nonperforming loans ~~is primarily~~are loans that are more than 90 days past due ~~to a partial charge-off totaling $829 thousand for twenty-six Investor Owned Residential Real Estate~~and those loans ~~a charge-off totaling $290 thousand for three commercial business loans,~~that have been placed on non-accrual status and one residential real estate loan totaling $272 thousand that was upgraded to watch. The decrease is largely offset by $526 thousand in two commercial business loans, $241 thousand in four commercial real estate loans, and $185 thousand in one home equity loan that was added to the substandard classification. are summarized below:

	June 30,			December 31,
(Dollars in thousands)	2018			2017
Residential real estate	$	3,549		$	3,734
Home equity		332			352
Commercial real estate		175			332
Construction and land development		-			133
Multifamily		-			-
Farmland		-			-
Commercial business		137			672
Consumer		-			-
Government		-			-
Total	$	4,193		$	5,223
Nonperforming loans to total loans		0.65	%		0.84	%
Nonperforming loans to total assets		0.44	%		0.56	%

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, ~~2017~~2018 or December 31, ~~2016.~~ 2017.

The Bancorp's substandard loans are summarized below:

(Dollars in thousands)

	June 30,		December 31,
Loan Segment	2018		2017
Residential real estate	$	3,890	$	3,732
Home equity		391		350
Commercial real estate		1,289		512
Construction and land development		-		134
Multifamily		-		-
Farmland		-		-
Commercial business		413		1,174
Consumer		-		-
Government		-		-
Total	$	5,983	$	5,902

In addition to identifying and monitoring non-performing and other classified loans, management maintains a list of ~~watch~~special mention loans. ~~Watch~~Special mention loans represent loans management is closely monitoring due to one or more factors that may cause the loan to become classified as substandard. ~~Watch~~

The Bancorp's special mention loans ~~totaled $21.3 million at June 30, 2017, compared to $10.6 million at December 31, 2016, an increase of 101.2%. The increase~~are summarized below:

(Dollars in ~~watch loans is primarily due to the addition of three related commercial real estate loans totaling $10.4 million.~~thousands)

	June 30,		December 31,
Loan Segment	2018		2017
Residential real estate	$	3,999	$	4,130
Home equity		228		233
Commercial real estate		4,587		6,758
Construction and land development		-		-
Multifamily		222		168
Farmland		-		-
Commercial business		1,762		394
Consumer		-		-
Government		-		-
Total	$	10,798	$	11,683

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, 2017, impaired loans totaled $3.0 million, compared to $3.5 million at December 31, 2016, a decrease of $542 thousand or 15.4%. The decrease in impaired loans for the first six months of 2017 is primarily due to a partial charge-off totaling $829 thousand for twenty-six Investor Owned Residential Real Estate loans which was offset by the addition of two commercial business loans totaling $526 thousand. The June 30, 2017 impaired loan balances consist of seven commercial real estate loans, ten commercial business loans, and one in-market participation loan, all of which total $1.6 million that are secured by business assets and real estate, and are personally guaranteed by the owners of the businesses. In addition, 78 residential real estate and home equity line of credit loans totaling $1.4 million, which are troubled debt restructurings, purchased credit impaired, or Investor Owned Residential Real Estate have also been classified as impaired. At June 30, 2017 the ALL contained $791 thousand in specific reserves for impaired loans, compared to $1.2 million at December 31, 2016. There were no other loans considered to be impaired loans as of June 30, 2017. 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.

Purchased loans acquired in a business combination are recorded at estimated fair value on their purchase date. Purchased loans with evidence of credit quality deterioration since origination are considered purchased credit impaired loans. Expected future cash flows at the purchase date in excess of the fair value of loans are recorded as interest income over the life of the loans if the timing and amount of the future cash flows is reasonably estimable (“accretable yield”). The difference between contractually required payments and the cash flows expected to be collected at acquisition is referred to as the non-accretable difference and represents probable losses in the portfolio. In determining the acquisition date fair value of purchased credit impaired loans, and in subsequent accounting, the Bancorp aggregates these purchased loans into pools of loans by common risk characteristics, such as credit risk rating and loan type. Subsequent to the purchase date, increases in cash flows over those expected at the purchase date are recognized as interest income prospectively. Subsequent decreases to the expected cash flows will generally result in a provision for loan losses. ~~During the second quarter of 2016, initial estimates of fair values related to a pool of Liberty~~

The Bancorp's impaired loans, ~~were found to be lower than expected. This change led to the addition of $178 thousand to non-accretable discount. At June 30, 2017,~~including purchased credit impaired loans, ~~with unpaid principal balances totaled $2.8 million with a recorded investment of $806 thousand.~~are summarized below:

(Dollars in thousands)

	June 30,		December 31,
Loan Segment	2018		2017
Residential real estate	$	1,241	$	1,152
Home equity		124		-
Commercial real estate		1,289		512
Construction and land development		-		134
Multifamily		-		-
Farmland		-		-
Commercial business		413		724
Consumer		-		-
Government		-		-
Total	$	3,067	$	2,522

At ~~June 30, 2017,~~times, the Bancorp ~~classified three loans totaling $327 thousand as troubled debt restructurings, which involves modifying~~will modify the terms of a loan to forego a portion of interest or principal or ~~reducing~~reduce the interest rate on the loan to a rate materially less than market rates, or materially ~~extending~~extend the maturity date of a ~~loan. The Bancorp’s~~loan as part of a troubled debt restructurings include one accruing residential real estate loan in the amount of $272 thousand for which an extension of amortization and reduction in rate was granted and two accruing commercial business loans totaling $55 thousand for which a reduction in principal payments was granted.restructuring. The valuation basis for the Bancorp’s troubled debt restructurings is based on the present value of expected future cash flows; unless consistent cash flows are not present, then the fair value of the collateral securing the loan is the basis for valuation.

The Bancorp's troubled debt restructred loans are summarized below:

(Dollars in thousands)

	June 30,		December 31,
Loan Segment	2018		2017
Residential real estate	$	415	$	303
Home equity		124		-
Commercial real estate		1,114		181
Construction and land development		-		-
Multifamily		-		-
Farmland		-		-
Commercial business		405		51
Consumer		-		-
Government		-		-
Total	$	2,058	$	535

For the six months ended June 30, 2018, a $1.1 million commercial relationship was modified as part of a troubled debt restructure. This event is the primary reason for the increase in impaired loans as well as the decrease in special mention loans. The relationship was classified as substandard, but did not result in an overall increase to substandard loans due to improvements to substandard loan classifications and workouts that resulted in chargeoffs. This commercial relationship remains in accrual status.

At June 30, ~~2017,~~2018, management is of the opinion that there are no loans, except certain of 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 affect future operations, liquidity or capital resources.

~~For~~The allowance for loan losses (ALL) is a valuation allowance for probable incurred credit losses, increased by the ~~six months ended June 30, 2017, $557 thousand in provisions to~~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 ~~were~~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 ~~compared to $584 thousand~~allowance for loan losses given the current risk estimates.

The Bancorp's provision for loan losses for the six months ended ~~June 30, 2016, a decrease of $27 thousand or 4.6%.~~ is summarized below:

(Dollars in thousands)

Loan Segment	June 30, 2018			June 30, 2017
Residential real estate	$	61		$	378
Home equity		41			(223	)
Commercial real estate		162			(222	)
Construction and land development		(7	)		(18	)
Multifamily		(15	)		(71	)
Farmland		4			-
Commercial business		378			689
Consumer		18			22
Government		(4	)		2
Total	$	638		$	557

The ~~ALL provision for the current six month period~~Bancorp's charge-off and recovery information is primarily a result of overall loan portfolio growth. For the six months ended June 30, 2017, charge-offs, net of recoveries, totaled $1.2 million, compared to charge-offs, net of recoveries of $200 thousand for the six months ended June 30, 2016. The increasesummarized below:

(Dollars in net charge-offs the first six months of 2017 is primarily due to a partial charge-off totaling $829 thousand for twenty-six Investor Owned Residential Real Estate loans related to previous acquisitions. The net loan charge-offs for the first six months of 2017 were comprised of $903 thousand in residential real estate loans, $26 thousand in consumer loans, $228 thousand in commercial business loans, and $25 thousand in home equity loans. thousands)

	As of June 30, 2018
Loan Segment	Charge-off			Recoveries		Net Charge-offs
Residential real estate	$	(106	)	$	-	$	(106	)
Home equity		(24	)		-		(24	)
Commercial real estate		(119	)		2		(117	)
Construction and land development		-			-		-
Multifamily		-			-		-
Farmland		-			-		-
Commercial business		(529	)		117		(13	)
Consumer		(22	)		9		(412	)
Government		-			-		-
Total	$	(800	)	$	128	$	(672	)

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 considered risks associated with the local economy, changes in loan balances and mix, and asset quality.

The ~~ALL-to-total~~Bancorp's allowance-to-total loans ~~was 1.18% at June 30, 2017, compared to 1.32% at December 31, 2016. The ALL-to-non-performing~~and non-performing loans ~~(coverage ratio) was 126.9% at June 30, 2017, compared to 126.1% at December 31, 2016.~~ is summarized below:

(Dollars in thousands)

	June 30,			December 31,
	2018			2017

Allowance for loan losses	$	7,448		$	7,482
Total loans	$	646,288		$	620,211
Non-performing loans	$	4,193		$	5,223
ALL-to-total loans		1.15	%		1.21	%
ALL-to-non-performing loans (coverage ratio)		177.7	%		143.3	%

The June 30, ~~2017~~2018 balance in the ALL account ~~of $7.1 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, ~~2017,~~2018, foreclosed real estate totaled ~~$2.2~~$1.1 million, which was comprised of ~~nineteen~~nine properties, compared to ~~$2.7~~$1.7 million and ~~twenty-six~~sixteen properties at December 31, ~~2016.~~2017. The decrease in foreclosed real estate is the result of the sale of properties. Net gains from the sale of foreclosed real estate totaled ~~$93~~$100 thousand for the six months ended June 30, ~~2017, and were the result of proceeds received from the sale of foreclosed properties.~~2018. At the end of June ~~2017~~2018 all of the Bancorp’s foreclosed real estate is located within its primary market area.

2225

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 other 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 ~~$240.7~~$238.2 million at June 30, ~~2017,~~2018, compared to ~~$233.6~~$244.5 million at December 31, ~~2016, an increase~~2017, a decrease of ~~$7.1~~$6.3 million ~~(3.0%~~(2.6%). The ~~increase~~decrease in the securities portfolio is a result of ~~continued investment~~market value adjustments for unrealized losses and funding of ~~excess liquidity in securities.~~loan growth. At June 30, ~~2017,~~2018, the securities portfolio represented 26.6% of interest-earning assets and 24.8% of total assets compared to 28.1% of interest-earning assets and ~~26.1% of total assets compared to 27.4% of interest-earning assets and 25.6%~~26.4% of total assets at December 31, ~~2016.~~2017.

The Bancorp’s end-of-period investment portfolio and other short-term investments and stock balances were as follows:

	June 30,
	2017					December 31,					June 30,
	(unaudited)					2016					2018					December 31,
(Dollars in thousands)	Balance		% Securities			Balance		% Securities			(unaudited)					2017
											Balance		% Securities			Balance		% Securities

Money market fund	$	2,105		0.9	%	$	222		0.1	%	$	1,608		0.7	%	$	476		0.2	%
U.S. government sponsored entities		13,784		5.7	%		16,274		7.0	%		7,821		3.3	%		3,890		1.6	%
Collateralized mortgage obligations and residential mortgage-backed securities		128,636		53.4	%		117,975		50.5	%		135,131		56.7	%		132,938		54.4	%
Municipal securities		93,217		38.7	%		96,745		41.4	%		90,121		37.8	%		103,747		42.4	%
Collateralized debt obligations		3,006		1.3	%		2,409		1.0	%		3,483		1.5	%		3,439		1.4	%
Total securities available-for-sale	$	240,748		100.0	%	$	233,625		100.0	%	$	238,164		100.0	%	$	244,490		100.0	%

	June 30,
	2017		December 31,		YTD						June 30,
	(unaudited)		2016		Change						2018		December 31,		YTD
(Dollars in thousands)	Balance		Balance		$			%			(unaudited)		2017		Change
											Balance		Balance		$			%

Interest bearing deposits in other financial institutions	$	10,588	$	29,556	$	(18,968	)		-64.2	%	$	2,524	$	139	$	2,385			1715.8	%
Fed funds sold		3,293		215		3,078			1431.6	%		839		357		482			135.0	%
Certificates of deposit in other financial institutions												1,526		1,676	$	(150	)		-8.9	%
Federal Home Loan Bank stock		3,000		3,000		-			0.0	%		3,017		3,000		17			0.6	%

The net ~~decrease~~increase in interest bearing ~~balances~~deposits in other financial institutions is primarily the result of the seasonality of municipality deposit ~~accounts and a decrease in certificates of deposit.~~accounts. The net increase in fed funds sold is primarily the result of timing of liquidity needs. Federal Home Loan Bank stock corresponds to stock ownership requirements based on borrowing needs.

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,
	2017		December 31,		YTD						June 30,
	(unaudited)		2016		Change						2018		December 31,		YTD
(Dollars in thousands)	Balance		Balance		$			%			(unaudited)		2017		Change
											Balance		Balance		$			%

Checking	$	308,741	$	288,149	$	20,592			7.1	%	$	321,588	$	309,023	$	12,565			4.1	%
Savings		133,261		127,626		5,635			4.4	%		131,003		129,702		1,301			1.0	%
Money market		167,454		178,332		(10,878	)		-6.1	%		146,613		170,359		(23,746	)		-13.9	%
Certificates of deposit		177,525		185,664		(8,139	)		-4.4	%		206,773		183,920		22,853			12.4	%
Total deposits	$	786,981	$	779,771	$	7,210			0.9	%	$	805,977	$	793,004	$	12,973			1.6	%

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

2326

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, 2017		December 31,		YTD						June 30,
	(unaudited)		2016		Change						2018		December 31,		YTD
(Dollars in thousands)	Balance		Balance		$			%			(unaudited)		2017		Change
											Balance		Balance		$		%

Repurchase agreements	$	15,635	$	13,998	$	1,637			11.7	%	$	14,236	$	11,300	$	2,936		26.0	%
Borrowed funds		19,610		25,828		(6,218	)		-24.1	%		35,679		20,881		14,798		70.9	%
Total borrowed funds	$	35,245	$	39,826	$	(4,581	)		-11.5	%	$	49,915	$	32,181	$	17,734		55.1	%

Repurchase agreements increased as part of normal account fluctuations within that product line. Borrowed funds ~~decreased~~increased as FHLB ~~fixed~~ advances ~~matured and~~ were ~~not replaced.~~utilized for funding purposes.

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 profit and liquidity are often conflicting objectives, management attempts to maximize the Bank’s net interest margin by making adequate, but not excessive, liquidity provisions. Furthermore, funds are managed so that future profits will not be significantly impacted as funding costs increase.

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 other 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., repurchase agreements, FHLB advances and federal funds purchased) as a source of funds.

During the six months ended June 30, ~~2017,~~2018, cash and cash equivalents ~~decreased~~increased by ~~$17.4~~$8.8 million compared to a ~~$19.8~~$17.4 million ~~increase~~decrease for the six months ended June 30, ~~2016.~~2017. The primary sources of cash and cash equivalents were ~~increased deposits,~~ sales of loans originated for sale, ~~and~~ proceeds from maturities, pay downs, calls, and sales of available-for-sale ~~securities.~~securities, and borrowed funds. The primary uses of cash and cash equivalents were ~~loan originations,~~ the purchase of securities, loan originations, and the repayment of FHLB advances. Cash provided by operating activities totaled ~~$5.0~~$5.7 million for the six months ended June 30, ~~2017,~~2018, compared to cash provided of ~~$9.6~~$5.0 million for the six month period ended June 30, ~~2016.~~2017. The ~~decrease~~increase in cash from operating activities was primarily a result of ~~a decrease~~an increase in ~~clearing accounts that facilitate customer transactions.~~the sale of loans originated for sale and accrued expenses and other liabilities, offset by origination of loans for sale and gain on sale of securities. Cash outflows from investing activities totaled ~~$23.4~~$26.0 million for the current period, compared to cash outflows of ~~$20.8~~$23.4 million for the six months ended June 30, ~~2016.~~2017. Cash outflows from investing activities for the current six months were primarily related to the origination of loans receivable and purchases of securities, offset by the sale and maturities ~~and pay downs of securities.~~for securities available-for-sale. Net cash inflows from financing activities totaled ~~$1.0~~$29.0 million during the current period compared to net cash inflows of ~~$31.1~~$1 million for the six months ended June 30, ~~2016.~~2017. The net cash inflows from financing activities was primarily a result of proceeds from FHLB advances, an increase in deposits and other borrowed ~~funds.~~fund. On a cash basis, the Bancorp paid dividends on common stock of ~~$1.60~~$1.7 million for the six months ended June 30, ~~2017~~2018 and ~~$1.54~~$1.6 million for the six months ended June 30, ~~2016.~~2017.

At June 30, ~~2017,~~2018, outstanding commitments to fund loans totaled ~~$141.3~~$151.5 million. Approximately ~~54.3%~~49.1% 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 ~~$8.6~~$8.7 million at June 30, ~~2017.~~2018. 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, ~~2017,~~2018, stockholders' equity ~~increased~~decreased by ~~$5.2~~$1.5 million ~~(6.2%~~(1.6%). During the six months ended June 30, ~~2017,~~2018, stockholders’ equity was primarily increased by net income of ~~$4.8 million and an increase to net unrealized gains on security sales of $1.9~~$5.1 million. Decreasing stockholders’ equity was the declaration of ~~$1.63~~$1.7 million in cash ~~dividends.~~dividends and a decrease to net unrealized gains (losses) on securities available-for-sale of $4.9 million. On April 24, 2014 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. The stock repurchase program does not expire and is only limited by the number of shares that can be purchased. The stock repurchase program will be reviewed annually by the Board of Directors. No shares were repurchased under the program during the first six months of ~~2017~~2018 or ~~2016.~~2017. On May 1, 2018 3,000 restricted stock shares vested under the program outlined in Note 10 of the financial statements, of which the Bancorp authorized the repurchase of 1,029 of these shares in the form of a net surrender by the vesting employees. The repurchase of these surrendered shares is considered outside of the scope of the formal stock repurchase program.

2427

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 multiple tiers. The first tier (Common Equity Tier 1 Capital) includes common shareholders’ equity, after deductions for various items including goodwill and certain other intangible assets, and after certain other adjustments. Common Equity Tier 1 Capital also includes accumulated other comprehensive income (for organizations that do not make opt-out elections). The next tier (Tier 1 Capital) is comprised of Common Equity Tier 1 Capital plus other qualifying capital instruments such as perpetual noncumulative preferred stock and junior subordinated debt issued to trusts, and other adjustments. The third tier (Tier 2 Capital) includes instruments such as subordinated debt that have a minimum original maturity of at least five years and are subordinated to the claims of depositors and general creditors, total capital minority interest not included in Tier 1 Capital, and limited amounts of the allowance for loan losses, less applicable regulatory adjustments and deductions. The Bancorp and the Bank are required to maintain a Common Equity Tier 1 Capital ratio of 4.5%, a Tier 1 Capital ratio of 6%, and a Total Capital ratio (comprised of Tier 1 Capital plus Tier 2 Capital) of 8%. In addition, the capital regulations provide for a minimum leverage ratio (Tier 1 capital to adjusted average assets) of 4%.

The Dodd-Frank Act required the FRB to set minimum capital levels for bank holding companies that are as stringent as those required for insured depository subsidiaries. However, under the FRB’s “Small Bank Holding Company” exemption from consolidated bank holding company capital requirements, bank holding companies and savings and loan holding companies with less than $1 billion in consolidated assets, such as the Bancorp, are exempt from consolidated regulatory capital requirements, unless the FRB determines otherwise in particular cases. The Bancorp would have approximately $1.1 billion of total assets when factoring in the acquisition of First Personal based on estimated total assets at closing.

During the six months ended June 30, ~~2017,~~2018, the Bancorp’s and Bank’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 ~~$4.9~~$4.8 million. Three of these investments currently have ratings that are below investment grade. As a result, approximately ~~$18.9~~$19.1 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 following table shows that, at June 30, ~~2017,~~2018, and December 31, ~~2016,~~2017, the Bancorp’s capital exceeded all applicable regulatory capital requirements. The dollar amounts are in millions.

(Dollars in millions)											Minimum Required To Be															Minimum Required To Be
						Minimum Required For					Well Capitalized Under Prompt										Minimum Required For					Well Capitalized Under Prompt
	Actual					Capital Adequacy Purposes					Corrective Action Regulations					Actual					Capital Adequacy Purposes					Corrective Action Regulations
At June 30, 2017	Amount		Ratio			Amount		Ratio			Amount		Ratio
At June 30, 2018																Amount		Ratio			Amount		Ratio			Amount		Ratio
Common equity tier 1 capital to risk-weighted assets	$	85.9		13.0	%	$	29.7		4.5	%	$	42.8		6.5	%	$	91.6		13.0	%	$	31.7		4.5	%		N/A		N/A
Tier 1 capital to risk-weighted assets	$	85.9		13.0	%	$	39.5		6.0	%	$	52.7		8.0	%	$	91.6		13.0	%	$	42.3		6.0	%		N/A		N/A
Total capital to risk-weighted assets	$	92.9		14.1	%	$	52.7		8.0	%	$	65.9		10.0	%	$	99.0		14.1	%	$	56.3		8.0	%		N/A		N/A
Tier 1 capital to adjusted average assets	$	85.9		9.5	%	$	36.2		4.0	%	$	45.2		5.0	%	$	91.6		9.8	%	$	40.5		4.0	%		N/A		N/A

(Dollars in millions)											Minimum Required To Be															Minimum Required To Be
						Minimum Required For					Well Capitalized Under Prompt										Minimum Required For					Well Capitalized Under Prompt
		Actual				Capital Adequacy Purposes					Corrective Action Regulations					Actual					Capital Adequacy Purposes					Corrective Action Regulations
At December 31, 2016	Amount		Ratio			Amount		Ratio			Amount		Ratio
At December 31, 2017																Amount		Ratio			Amount		Ratio			Amount		Ratio
Common equity tier 1 capital to risk-weighted assets	$	82.4		13.1	%	$	28.3		4.5	%	$	40.9		6.5	%	$	88.4		12.9	%	$	30.9		4.5	%		N/A		N/A
Tier 1 capital to risk-weighted assets	$	82.4		13.1	%	$	37.8		6.0	%	$	50.4		8.0	%	$	88.4		12.9	%	$	41.2		6.0	%		N/A		N/A
Total capital to risk-weighted assets	$	90.1		14.3	%	$	50.4		8.0	%	$	63.0		10.0	%	$	96.0		14.0	%	$	55.0		8.0	%		N/A		N/A
Tier 1 capital to adjusted average assets	$	82.4		9.2	%	$	36.0		4.0	%	$	45.0		5.0	%	$	88.4		9.6	%	$	36.8		4.0	%		N/A		N/A

In addition, the following table shows that, at June 30, ~~2017,~~2018, and December 31, ~~2016,~~2017, the Bank’s capital exceeded all applicable regulatory capital requirements. The dollar amounts are in millions.

(Dollars in millions) Minimum Required To Be
Minimum Required For Well Capitalized Under Prompt
Actual Capital Adequacy Purposes Corrective Action Regulations
At June 30, 2017 Amount Ratio Amount Ratio Amount Ratio
Common equity tier 1 capital to risk-weighted assets $ 84.2 12.8 % $ 29.7 4.5 % $ 42.9 6.5 %
Tier 1 capital to risk-weighted assets $ 84.2 12.8 % $ 39.6 6.0 % $ 52.8 8.0 %
Total capital to risk-weighted assets $ 91.3 13.8 % $ 52.8 8.0 % $ 66.0 10.0 %
Tier 1 capital to adjusted average assets $ 84.2 9.3 % $ 36.1 4.0 % $ 45.1 5.0 %

(Dollars in millions) Minimum Required To Be
Minimum Required For Well Capitalized Under Prompt
Actual Capital Adequacy Purposes Corrective Action Regulations
At December 31, 2016 Amount Ratio Amount Ratio Amount Ratio
Common equity tier 1 capital to risk-weighted assets $ 81.2 12.9 % $ 28.4 4.5 % $ 41.0 6.5 %
Tier 1 capital to risk-weighted assets $ 81.2 12.9 % $ 37.9 6.0 % $ 50.5 8.0 %
Total capital to risk-weighted assets $ 88.9 14.1 % $ 50.5 8.0 % $ 63.1 10.0 %
Tier 1 capital to adjusted average assets $ 81.2 9.0 % $ 35.9 4.0 % $ 44.9 5.0 %

(Dollars in millions)											Minimum Required To Be
						Minimum Required For					Well Capitalized Under Prompt
	Actual					Capital Adequacy Purposes					Corrective Action Regulations
At June 30, 2018	Amount		Ratio			Amount		Ratio			Amount		Ratio
Common equity tier 1 capital to risk-weighted assets	$	89.2		12.7	%	$	31.7		4.5	%	$	45.8		6.5	%
Tier 1 capital to risk-weighted assets	$	89.2		12.7	%	$	42.3		6.0	%	$	56.4		8.0	%
Total capital to risk-weighted assets	$	96.6		13.7	%	$	56.4		8.0	%	$	70.5		10.0	%
Tier 1 capital to adjusted average assets	$	89.2		9.5	%	$	40.6		4.0	%	$	50.7		5.0	%

(Dollars in millions)											Minimum Required To Be
						Minimum Required For					Well Capitalized Under Prompt
	Actual					Capital Adequacy Purposes					Corrective Action Regulations
At December 31, 2017	Amount		Ratio			Amount		Ratio			Amount		Ratio
Common equity tier 1 capital to risk-weighted assets	$	86.3		12.6	%	$	30.9		4.5	%	$	44.6		6.5	%
Tier 1 capital to risk-weighted assets	$	86.3		12.6	%	$	41.2		6.0	%	$	54.9		8.0	%
Total capital to risk-weighted assets	$	93.8		13.7	%	$	54.9		8.0	%	$	68.7		10.0	%
Tier 1 capital to adjusted average assets	$	86.3		9.4	%	$	36.7		4.0	%	$	45.8		5.0	%

The Bancorp’s ability to pay dividends to its shareholders is primarily 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, the Bank must obtain the approval of the Indiana Department of Financial Institutions (DFI) 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. 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 ~~2017,~~2018, without the need for qualifying for an exemption or prior DFI approval, is $10.2 million plus ~~2017~~2018 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 May ~~19, 2017~~18, 2018 the Board of Directors of the Bancorp declared a second quarter dividend of ~~$0.29~~$0.30 per share. The Bancorp’s ~~first~~second quarter dividend was paid to shareholders on July ~~7, 2017.~~11, 2018.

Results of Operations - Comparison of the Quarter Ended June 30, ~~2017~~2018 to the Quarter Ended June 30, ~~2016~~

2017

For the ~~quarter~~three months ended June 30, ~~2017,~~2018, the Bancorp reported net income of ~~$2.5~~$2.511 million, compared to net income of ~~$2.2~~$2.529 million for the quarter ended June 30, ~~2016, an increase~~2017, a decrease of ~~$287~~$18 thousand ~~(12.8%~~(0.7%). For the ~~current~~ quarter, the ROA was ~~1.11%~~1.07%, compared to ~~1.02%~~1.11% for the quarter ended June 30, ~~2016.~~2017. The ROE was 11.04% for the quarter ended June 30, 2018, compared to 11.30% for the quarter ended June 30, ~~2017, compared to 10.49%~~2017.

Net interest income for the quarter ended June 30, ~~2016.~~

~~Net interest income for the three months ended June 30, 2017~~2018 was ~~$7.7~~$7.9 million, an increase of ~~$298~~$218 thousand ~~(4.0%~~(2.8%), compared to ~~$7.4~~$7.7 million for the quarter ended June 30, ~~2016.~~2017. The weighted-average yield on interest-earning assets was 4.07% for the quarter ended June 30, 2018, compared to 3.89% for the ~~three months~~quarter ended June 30, ~~2017, compared to 3.87% for the three months ended June 30, 2016.~~2017. The weighted-average cost of funds for the quarter ended June 30, ~~2017 and~~2018 was 0.53% compared to 0.30% for the quarter ended June 30, ~~2016, was 0.30%.~~2017. The impact of the ~~3.89%~~4.07% return on interest earning assets and the ~~0.30%~~0.53% cost of funds resulted in an interest rate spread of ~~3.59%~~3.54% for the current quarter, ~~compared to 3.57%~~a decrease from the 3.59% spread for the quarter ended June 30, ~~2016. Compared to~~2017. The net interest margin on earning assets was 3.56% for the three months ended June 30, ~~2016, total interest income increased by $320 thousand (4.0%) while total interest expense increased by $22 thousand (3.7%). The net interest margin was~~2018 and 3.60% for the three months ended June 30, ~~2017, compared to 3.58% for the quarter ended June 30, 2016.~~2017. On a tax equivalent basis, the Bancorp’s net interest margin was 3.78% for the three months ended June 30, 2018, compared to 3.84% for the three months ended June 30, ~~2017, compared to 3.82% for the quarter ended June 30, 2016.~~2017. 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~~Information relating to the average consolidated balance sheet and the yield on average earning assets and cost of average liabilities for the periods indicated are in the following table. Dividing the related interest, on an annualized basis, by the average balance of assets or liabilities drives the disclosed rates. Average balances are derived from daily balances.

(Dollars in thousands)	Average Balances, Interest, and Rates (unaudited)
	June 30, 2018							June 30, 2017
	Average Balance			Interest		Rate (%)		Average Balance			Interest		Rate (%)
ASSETS
Interest bearing deposits in other financial institutions	$	6,865		$	32		1.86	$	2,610		$	4		0.61
Federal funds sold		1,585			4		1.01		1,281			1		0.31
Certificates of deposit in other financial institutions		1,526			7		1.83		1,033			4		1.55
Securities available-for-sale		238,669			1,665		2.79		238,889			1,568		2.63
Loans receivable		636,333			7,257		4.56		603,481			6,664		4.42
Federal Home Loan Bank stock		3,010			31		4.12		3,000			31		4.13
Total interest bearing assets		887,988		$	8,996		4.05		850,294		$	8,272		3.89
Cash and non-interest bearing deposits in other financial institutions		9,839							10,845
Allowance for loan losses		(7,234	)						(7,118	)
Other noninterest bearing assets		53,755							53,684
Total assets	$	944,348						$	907,705

LIABILITIES AND STOCKHOLDERS' EQUITY
Total deposits	$	786,207		$	838		0.43	$	771,281		$	498		0.26
Repurchase agreements		13,330			45		1.35		14,341			28		0.78
Borrowed funds		44,510			237		2.13		24,178			88		1.46
Total interest bearing liabilities		844,047		$	1,120		0.53		809,800		$	614		0.30
Other noninterest bearing liabilities		9,335							8,473
Total liabilities		853,382							818,273
Total stockholders' equity		90,966							89,432
Total liabilities and stockholders' equity	$	944,348						$	907,705

The increase in yields for interest bearing deposits in other financial institutions and certificates of deposits in other financial institutions was primarily the result of higher average rates received from increases in short term rates for the three months ended June 30, ~~2017, interest income from loans increased by $237 thousand (3.7%),~~2018, compared to the three months ended June 30, ~~2016.~~2017. The ~~change was due to an~~ increase in yields for securities available-for-sale and loans receivable was the result of higher average ~~balances. The weighted-average yield on loans outstanding was 4.42% for the current quarter, compared to 4.43%~~balances and higher weighted average rates for the three months ended June 30, 2016. Loan balances averaged $603.5 million for the current quarter, an increase of $22.8 million (3.9%) from $580.7 million for the three months ended June 30, 2016. During the three months ended June 30, 2017, interest income on securities and other interest bearing balances increased by $83 thousand (5.4%), compared to the quarter ended June 30, 2016. The change was due to an increase in average balances. The weighted-average yield on securities and other interest bearing balances was 2.64%, for the current quarter, compared to 2.54% for the three months ended June 30, 2016. Securities balances averaged $241.9 million for the current quarter, up $1.9 million (0.8%) from $240.0 million for the three months ended June 30, 2016. Other interest bearing balances averaged $4.9 million for the current period, up $2.9 million (148.7%) from $2.0 million for the three months ended June 30, 2016. The increase in other interest bearing balance averages is a result of the seasonality of municipal deposits.

~~Interest expense on deposits increased by $57 thousand (12.9%) during the current quarter~~2018, compared to the three months ended June 30, ~~2016.~~2017. The ~~change was due to an increase in average balances outstanding and an~~ increase in the ~~weighted-average rate paid. The weighted-average rate paid on~~cost of total deposits ~~for~~and borrowed funds was the ~~three month period ended June 30, 2017 was 0.26% compared to 0.24%~~result of higher average balances and higher weighted average rates for the three months ended June 30, 2016. Total deposit balances averaged $771.3 million for the current quarter, an increase of $49.4 million (6.8%) from $721.9 million for the quarter ended June 30, 2016. Interest expense on borrowed funds decreased by $35 thousand (23.2%) during the current quarter due to a decrease in average balances2018 compared to the three months ended June 30, ~~2016.~~2017. The ~~weighted-average~~increase in the cost of ~~borrowed funds~~repurchase agreements was ~~1.21% for~~ the ~~current quarter, compared to 1.01%~~result of higher weighted average rates for the three months ended June 30, ~~2016. Borrowed funds averaged $38.5 million during~~2018 compared to the ~~quarter~~three months ended June 30, ~~2017, a decrease of $21.5 million (35.8%) from $60.0 million for the quarter ended June 30, 2016. The decrease in borrowed funds is the result of seasonality of inflows of deposits.~~2017.

~~Noninterest~~The following table shows the change in noninterest income for the quarter ~~ended~~ending June 30, ~~2017 was $2.0 million, an increase of $190 thousand (10.7%) from $1.8 million for the quarter ended~~2018, and June 30, ~~2016. During the current quarter, fees and service charges totaled $821 thousand, an increase of $105 thousand (14.7%) from $716 thousand for the quarter ended June 30, 2016.~~ 2017.

	Three Months Ended
	June 30,
(Dollars in thousands)	(unaudited)				Three Months Ended
	2018		2017		$ Change			% Change
Noninterest income:
Fees and service charges	$	947	$	821	$	126			15.3	%
Gain on sale of securities, net		246		252		(6	)		-2.4	%
Wealth management operations		424		398		26			6.5	%
Gain on sale of loans held-for-sale, net		359		271		88			32.5	%
Increase in cash value of bank owned life insurance		120		115		5			4.3	%
Gain on sale of foreclosed real estate, net		68		93		(25	)		-26.9	%
Other		39		10		29			290.0	%

Total noninterest income	$	2,203	$	1,960	$	243			12.4	%

The increase in fees and service charges is the result of the Bancorp’s ~~growing depository base. Fees~~continued focus on maintaining competitive fees within its market place. Current market conditions provided opportunities to maintain securities cash flows, while recognizing gains from ~~Wealth Management operations totaled $398 thousand for~~ the ~~quarter ended June 30, 2017, a decrease~~sales of ~~$36 thousand (8.3%)~~securities. The increase in gain on sale of foreclosed real estate is the result of normal course of business sales from ~~$434 thousand for the quarter ended June 30, 2016.~~other real estate owned. The decrease in Wealth Management income is related to decreased book value of assets under management and the timing of one-time fees between the two time periods. Gains from loan sales totaled $271 thousand for the current quarter, a decrease of $20 thousand (6.9%), compared to $291 thousand for the quarter ended June 30, 2016. The decreaseincrease in gains from the sale of loans is a result of timing differences in customer demand. Gains from the sale of securities totaled $252 thousand for the current quarter, an increase of $87 thousand (52.7%) from $165 thousand for the quarter ended June 30, 2016. Current market conditions continued to provide opportunities to maintain securities cash flows, while recognizing gains from the sales of securities. Income from andemand and overall increase in ~~the cash value of bank owned life insurance totaled $116 thousand for the current quarter, a decrease of $5 thousand (4.1%)~~loan generation. The increase in other noninterest income is primarily driven by rental income from ~~$121 thousand for the quarter ended June 30, 2016. Gains on foreclosed~~other real estate totaled $93 thousand for the quarter ended June 30, 2017, compared to $42 thousand for the quarter ended June 30, 2016. Other noninterest income totaled $9 thousand for the quarter, an increase of $8 thousand (800.0%) compared to $1 thousand for the quarter ended June 30, 2016.owned properties.

~~Noninterest~~The following table shows the change in noninterest expense for the quarter ~~ended~~ending June 30, ~~2017 was $6.0 million, an increase of $86 thousand (1.4%) from $5.9 million for the three months ended~~2018, and June 30, ~~2016. During the current quarter, compensation and benefits totaled $3.14 million, an increase of $69 thousand (2.2%) from $3.07 million for the quarter ended June 30, 2016.~~ 2017.

	Three Months Ended
(Dollars in thousands)	June 30, (unaudited)				Three Months Ended
	2018		2017		$ Change			% Change
Noninterest expense:
Compensation and benefits	$	3,516	$	3,140	$	376			12.0	%
Occupancy and equipment		842		815		27			3.3	%
Data processing		703		360		343			95.3	%
Marketing		166		199		(33	)		-16.6	%
Federal deposit insurance premiums		75		81		(6	)		-7.4	%
Other		1,604		1,433		171			11.9	%

Total noninterest expense	$	6,906	$	6,028	$	878			14.6	%

The increase in compensation and benefits is the result of a continued focus on talent management and retention. ~~Occupancy~~The increase in data processing expense is the result of data conversion expenses related to the potential acquisition of First Personal as discussed in Note 3 of the financial statements and ~~equipment~~increased system utilization. The increase in other operating expenses is related to generally higher costs related to foreclosure and collection expense, ~~totaled $815 thousand~~legal expenses related to the First Personal acquisition, seminars and education, and higher third party costs. The Bancorp’s efficiency ratio was 68.5% for the ~~current~~ quarter ~~a decrease of $149 thousand (15.5%),~~ended June 30, 2018, compared to ~~$964~~62.7% for the quarter ended June 30, 2017. The increased ratio is related primarily to the increase in noninterest expense. The efficiency ratio is determined by dividing total noninterest expense by the sum of net interest income and total noninterest income for the period.

Income tax expenses for the quarter ended June 30, 2018 totaled $365 thousand, compared to income tax expense of $738 thousand for the quarter ended June 30, ~~2016.~~2017, a decrease of $373 thousand (50.5%). The combined effective federal and state tax rates for the Bancorp was 12.7% for the quarter ended June 30, 2018, compared to 22.6% for the quarter ended June 30, 2017. The Bancorp’s lower current quarter effective tax rate is primarily a result of the Tax Cuts and Jobs Act that, among other changes, reduces the corporate federal income tax rate from 34% to 21% and was effective January 1, 2018.

Results of Operations - Comparison of the Six Months Ended June 30, 2018 to the Six Months Ended June 30, 2017

For the six months ended June 30, 2018, the Bancorp reported net income of $5.1 million, compared to net income of $4.8 million for the six months ended June 30, 2017, an increase of $245 thousand (5.1%). For the six months ended, the ROA was 1.08%, compared to 1.07% for the six months ended June 30, 2017. The ROE was 11.12% for the six months ended June 30, 2018, compared to 10.97% for the six months ended June 30, 2017.

Net interest income for the six months ended June 30, 2018 was $15.7 million, an increase of $538 thousand (3.5%), compared to $15.2 million for the six months ended June 30, 2017. The weighted-average yield on interest-earning assets was 4.03% for the six months ended June 30, 2018, compared to 3.87% for the six months ended June 30, 2017. The weighted-average cost of funds for the six months ended June 30, 2018 was 0.48% compared to 0.29% for the six months ended June 30, 2017. The impact of the 4.03% return on interest earning assets and the 0.48% cost of funds resulted in an interest rate spread of 3.55% for the current six months, which is a decrease from the spread of 3.58% as of June 30, 2017. The net interest margin on earning assets was 3.35% for the six months ended June 30, 2018 and 3.59% for the six months ended June 30, 2017. On a tax equivalent basis, the Bancorp’s net interest margin was 3.79% for the six months ended June 30, 2018, compared to 3.83% for the six months ended June 30, 2017. 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.

Information relating to the average consolidated balance sheet and the yield on average earning assets and cost of average liabilities for the periods indicated are in the following table. Dividing the related interest, on an annualized basis, by the average balance of assets or liabilities drives the disclosed rates. Average balances are derived from daily balances.

(Dollars in thousands)	Average Balances, Interest, and Rates (unaudited)
	June 30, 2018							June 30, 2017
	Average Balance			Interest		Rate (%)		Average Balance			Interest		Rate (%)
ASSETS
Interest bearing deposits in other financial institutions	$	4,915		$	42		1.71	$	6,276		$	25		0.80
Federal funds sold		1,029			5		0.97		908			1		0.22
Certificates of deposit in other financial institutions		1,581			13		1.64		959			5		1.04
Securities available-for-sale		239,868			3,336		2.78		236,787			3,153		2.66
Loans receivable		631,640			14,251		4.51		597,571			13,103		4.39
Federal Home Loan Bank stock		3,005			82		5.46		3,000			63		4.20
Total interest bearing assets		882,038		$	17,729		4.02		845,501		$	16,350		3.87
Cash and non-interest bearing deposits in other financial institutions		10,351							11,389
Allowance for loan losses		(7,350	)						(7,380	)
Other noninterest bearing assets		53,699							53,818
Total assets	$	938,738						$	903,328

LIABILITIES AND STOCKHOLDERS' EQUITY
Total deposits	$	783,066		$	1,513		0.39	$	769,659		$	957		0.25
Repurchase agreements		12,252			77		1.26		13,389			49		0.73
Borrowed funds		42,919			428		1.99		24,217			171		1.41
Total interest bearing liabilities		838,237		$	2,018		0.48		807,265		$	1,177		0.29
Other noninterest bearing liabilities		9,267							8,064
Total liabilities		847,504							815,329
Total stockholders' equity		91,234							87,999
Total liabilities and stockholders' equity	$	938,738						$	903,328

The following table shows the change in noninterest income for the six months ending June 30, 2018, and June 30, 2017.

	Six Months Ended
	June 30,
(Dollars in thousands)	(unaudited)				Six Months Ended
	2018		2017		$ Change			% Change
Noninterest income:
Fees and service charges	$	1,839	$	1,561	$	278			17.8	%
Gain on sale of securities, net		1,004		545		459			84.2	%
Wealth management operations		839		808		31			3.8	%
Gain on sale of loans held-for-sale, net		570		471		99			21.0	%
Increase in cash value of bank owned life insurance		228		230		(2	)		-0.9	%
Other		72		37		35			94.6	%

Total noninterest income	$	4,652	$	3,745	$	907			24.2	%

The increase in fees and service charges is the result of the Bancorp’s continued focus on maintaining competitive fees within its market place. Current market conditions provided opportunities to maintain securities cash flows, while recognizing gains from the sales of securities. The increase in wealth management income is related to book value changes in assets under management and the timing of one time fees. The increase in gain on sale of loans held for sale is the result of continued efforts on loan growth and normal course of business sales. The increase in other noninterest income is primarily driven by rental income from other real estate owned properties.

The following table shows the change in noninterest expense for the six ending June 30, 2018, and June 30, 2017.

	Six Months Ended
	June 30,
(Dollars in thousands)	(unaudited)				Six Months Ended
	2018		2017		$ Change			% Change
Noninterest expense:
Compensation and benefits	$	7,376	$	6,753	$	623			9.2	%
Occupancy and equipment		1,695		1,697		(2	)		-0.1	%
Data processing		1,064		728		336			46.2	%
Marketing		300		334		(34	)		-10.2	%
Federal deposit insurance premiums		159		158		1			0.6	%
Other		3,279		2,658		621			23.4	%

Total noninterest expense	$	13,873	$	12,328	$	1,545			12.5	%

The increase in compensation and benefits is the result of a continued focus on talent management and retention. The increase in data processing expense is the result of data conversion expenses related to the potential acquisition of First Personal as discussed in Note 3 of the financial statements and increased system utilization. The decrease in marketing expense is a result of timing based on projected benefits and needs. The decrease in occupancy and equipment expense is the result of lower building operating expenses. Data processing expense totaled $360 thousand for the three months ended June 30, 2017, an increase of $22 thousand (6.5%) from $338 thousand for the three months ended June 30, 2016. Data processing expense has increased as a result of increased system utilization. Federal deposit insurance premiums expense totaled $81 thousand for the current quarter, a decrease of $50 thousand (38.2%), compared to $131 thousand for the quarter ended June 30, 2016. Marketing expense totaled $199 thousand for the current quarter, an increase of $69 thousand (53.1%), compared to $130 thousand for the quarter ended June 30, 2016. The Bancorp proactively markets its products, but varies its timing based on projected benefits and needs. Other expense totaled $1.4 million for the current quarter, an increase of $125 thousand (9.6%), compared to $1.3 million for the quarter ended June 30, 2016. The marginal increase in other operating expenses is related to generally higher ~~cost for procuring goods~~costs related to foreclosure and ~~services.~~collection expense, legal expenses related to the First Personal acquisition, seminars and education, higher third party costs, and a shared loss of $125 thousand from the operation of its wholly-owned subsidiaries NWIN Risk Management, Inc. (a captive insurance subsidiary). The Bancorp’s efficiency ratio was ~~62.7%~~68.1% for the ~~quarter ended June 30, 2017, compared to 65.1% for the three~~six months ended June 30, ~~2016.~~2018, compared to 65.2% for the six months ended June 30, 2017. The ~~improved efficiency~~increased ratio is related primarily to the ~~result of higher interest income and~~increase in noninterest ~~income.~~expense. The efficiency ratio is determined by dividing total noninterest expense by the sum of net interest income and total noninterest income for the period.

Income tax expenses for the ~~three~~six months ended June 30, ~~2017~~2018 totaled ~~$738~~$780 thousand, compared to income tax expense of ~~$658~~$1,206 thousand for the ~~three~~six months ended June 30, ~~2016, an increase~~2017, a decrease of ~~$80~~$426 thousand ~~(12.2%~~(35.3%). The combined effective federal and state tax rates for the Bancorp was ~~22.6%~~13.3% for the ~~three months~~six ended June 30, ~~2017,~~2018, compared to ~~22.7%~~20.0% for the ~~three months~~quarter ended June 30, ~~2016.~~2017. The Bancorp’s lower current quarter effective tax rate is primarily a result of ~~increasing investment in low income housing projects, increasing investment in~~ the ~~Bancorp’s real estate investment trust, as well as a new self-insurance program through a wholly owned captive insurance company.~~

~~Results of Operations - Comparison of~~Tax Cuts and Jobs Act that, among other changes, reduces the ~~Six Months Ended June 30, 2017 to the Six Months Ended June 30, 2016~~

For the six months ended June 30, 2017, the Bancorp reported net income of $4.8 million, compared to net income of $4.5 million for the six months ended June 30, 2016, an increase of $341 thousand (7.6%). For the current six months the ROA was 1.07%, compared to 1.03% for the six months ended June 30, 2016. The ROE was 10.97% for the six months ended June 30, 2017, compared to 10.64% for the six months ended June 30, 2016.

Net interest income for the six months ended June 30, 2017 was $15.2 million, an increase of $278 thousand (1.9%), compared to $14.9 million for the six months ended June 30, 2016. The weighted-average yield on interest-earning assets was 3.87% for the six months ended June 30, 2017, compared to 3.92% for the six months ended June 30, 2016. The decrease of the weighted-average yield for interest earning assets was affected by approximately $200 thousand dollars of outstanding interest income received from the payoff of one non-accruing commercial real estate loan with a balance of $522 thousand during the first six months of 2016. The weighted-average cost of funds for the six months ended June 30, 2017, was 0.29%, compared to 0.30% for the six months ended June 30, 2016. The impact of the 3.87% return on interest earning assets and the 0.29% cost of funds resulted in an interest rate spread of 3.58% for the current six months, compared to 3.62% for the six months ended June 30, 2016. Compared to the six months ended June 30, 2016, total interest income increased by $283 thousand (1.8%) while total interest expense increased by $5 thousand (0.4%). The net interest margin was 3.59% for the six months ended June 30, 2017, compared to 3.64% for the six months ended June 30, 2016. On a tax equivalent basis, the Bancorp’s net interest margin was 3.83% for the six months ended June 30, 2017, compared to 3.88% for the six months ended June 30, 2016. 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, 2017, interest income from loans increased by $112 thousand (0.9%), compared to the six months ended June 30, 2016. The change was primarily due to an increase in average balances. The weighted-average yield on loans outstanding was 4.39% for the current six months, compared to 4.51% for the six months ended June 30, 2016. Loan balances averaged $597.6 million for the current six months, an increase of $20.9 million (3.6%) from $576.7 million for the six months ended June 30, 2016. During the six months ended June 30, 2017, interest income on securities and other interest bearing balances increased by $171 thousand (5.6%), compared to the six months ended June 30, 2016. The increase was due to an increase in weighted-average yield. The weighted-average yield on securities and other interest bearing balances was 2.62%, for the current six months, compared to 2.54% for the six months ended June 30, 2016. Securities balances averaged $239.79 million for the current six months, up $398 thousand (0.2%) from $239.39 million for the six months ended June 30, 2016. Other interest bearing balances averaged $8.1 million for the current period, up $4.9 million (149.3%) from $3.3 million for the six months ended June 30, 2016.

Interest expense on deposits increased by $87 thousand (10.0%) during the current six months compared to the six months ended June 30, 2016. The change was due to an increase in average balances and the weighted-average rate paid on deposits. The weighted-average rate paid on deposits for the six months ended June 30, 2017 was 0.25%, compared to 0.24%, for the six months ended June 30, 2016. Total deposit balances averaged $769.7 million for the current six months, up $51.1 million (7.1%) from $718.6 million for the six months ended June 30, 2016. Interest expense on borrowed funds decreased by $82 thousand (27.2%) during the current six months due to lower average balances, as compared to the six months ended June 30, 2016. The weighted-average cost of borrowed funds was 1.17% for the current six months, compared to 1.00% for the six months ended June 30, 2016. Borrowed funds averaged $37.6 million during the six months ended June 30, 2017, a decrease of $23.0 million (38.0%) from $60.6 million for the six months ended June 30, 2016.

Noninterest income for the six months ended June 30, 2017 was $3.7 million, an increase of $237 thousand (6.8%) from $3.5 million for the six months ended June 30, 2016. During the current six months, fees and service charges totaled $1.56 million, an increase of $182 thousand (13.2%) from $1.38 million for the six months ended June 30, 2016. The increase in fees and service charges is the result of the Bancorp’s growing depository base. Fees from Wealth Management operations totaled $808 thousand for the six months ended June 30, 2017, a decrease of $49 thousand (5.7%) from $857 thousand for the six months ended June 30, 2016. The decrease in Wealth Management income is related to book value changes in assets under management and the timing of one time fees. Gains from loan sales totaled $471 thousand for the current six months, a decrease of $70 thousand (12.9%), compared to $541 thousand for the six months ended June 30, 2016. The decrease in gains from the sale of loans is a result of timing differences in customer demand. Gains from the sale of securities totaled $545 thousand for the current six months, an increase of $127 thousand (30.4%) from $418 thousand for the six months ended June 30, 2016. Current market conditions provided opportunities to manage securities cash flows, while recognizing gains from the sales of securities. Income from an increase in the cash value of bank owned life insurance totaled $230 thousand for the six months ended June 30, 2017, a decrease of $6 thousand (2.5%), compared to $237 thousand for the six months ended June 30, 2016. Gains on foreclosed real estate totaled $93 thousand for the six months ended June 30, 2017, an increase of $19 thousand (25.7%) from $74 thousand in gains for the six months ended June 30, 2016. Other noninterest income totaled $37 thousand for the six months ended June 30, 2017, an increase of $34 thousand (1700.0%) from $2 thousand for the six months ended June 30, 2016.

Noninterest expense for the six months ended June 30, 2017 was $12.3 million, an increase of $281 thousand (2.3%) from $12.0 million for the six months ended June 30, 2016. During the current six months, compensation and benefits totaled $6.75 million, an increase of $120 thousand (1.8%) from $6.63 million for the six months ended June 30, 2016. The increase in compensation and benefits is the result of a continued focus on talent management. Occupancy and equipment totaled $1.70 million for the current six months, a decrease of $171 thousand (9.2%), compared to $1.87 million for the six months ended June 30, 2016. The decrease in occupancy and equipment expense is the result of lower building operating expenses. Data processing expense totaled $728 thousand for the six months ended June 30, 2017, an increase of $65 thousand (9.8%) from $663 thousand for the six months ended June 30, 2016. Data processing expense has increased as a result of increased system utilization. Federal deposit insurance premium expense totaled $158 thousand for the six months ended June 30, 2017, a decrease of $110 thousand (41.0%) from $268 thousand for the six months ended June 30, 2016. The decrease was the result of lower FDIC premiums. Marketing expense related to banking products totaled $334 thousand for the current six months, an increase of $90 thousand (36.9%) from $244 thousand for the six months ended June 30, 2016. The Bancorp continues to proactively market its products, but varies its timing based on projected benefits and needs. Other expenses related to banking operations totaled $2.7 million for the six months ended June 30, 2017, an increase of $287 thousand (12.1%) from $2.4 million for the six months ended June 30, 2016. The increase in other operating expense is related to increased loan collection efforts and the timing of community support. The Bancorp’s efficiency ratio was 65.2% for the six months ended June 30, 2017, compared to 65.5% for the six months ended June 30, 2016. 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 improved efficiency ratio is primarily the result of higher interest income and noninterest income.

~~Income tax expenses for the six months ended June 30, 2017 totaled $1.2 million, compared to~~corporate federal income tax ~~expense of $1.3 million for the six months ended June 30, 2016, a decrease of $80 thousand (6.2%). The combined~~rate from 34% to 21% and was effective federal and state tax rates for the Bancorp was 20.0% for the six months ended June 30, 2017, compared to 22.3% for the six months ended June 30, 2016. The Bancorp’s lower current six month effective tax rate is a result of increasing investment in low income housing projects, increasing investment in the Bancorp’s real estate investment trust, as well as a new self-insurance program through a wholly owned captive insurance company.January 1, 2018.

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, ~~2016~~2017 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, merger and acquisition activities, 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 ~~2016~~2017 Form 10-K.

Item 3. Quantitative and Qualitative Disclosures ~~About~~about Market Risk

As part of its normal operations, the Bancorp is subject to interest-rate risk on the assets it invests in (primarily loans and securities) and the liabilities it funds (primarily customer deposits and borrowed funds), as well as its ability to manage such risk. Fluctuations in interest rates may result in changes in the fair market values of the Bancorp’s financial instruments, cash flows, and net interest income. Like most financial institutions, the Bancorp has an exposure to changes in both short-term and long-term interest rates.

The Bancorp manages various market risks in its normal course of operations, including credit risk, liquidity risk, and interest-rate risk. Other types of market risk, such as foreign currency exchange risk and commodity price risk, do not arise in the normal course of the Bancorp’s business activities and operations. In addition, since the Bancorp does not hold a trading portfolio, it is not exposed to significant market risk from trading activities. The Bancorp’s interest rate risk exposures estimated at June 30, 2018, and December 31, 2017, are outlined in the table below for a period of 12 months based on projected results from the asset/liability model and does not consider other forecast assumptions.

(Dollars in thousands)
	Immediate Changes in Rates								Immediate Changes in Rates
March 31, 2018	Down 2.00%			Down 1.00%			Base		Up 1.00%			Up 2.00%			Up 3.00%
Projected interest income:
Loans	$	27,389		$	28,399		$	29,923	$	31,596		$	33,381		$	35,128
Securities		6,527			6,819			7,124		7,365			7,580			7,761
Other interest earning assets		-			-			3		11			19			27
Total interest income		33,916			35,218			37,050		38,972			40,980			42,916
Projected interest expense:
Deposits		2,521			3,109			4,452		6,576			8,703			10,831
Borrowings		926			1,101			1,290		1,487			1,683			1,882
Total interest expense		3,447			4,210			5,742		8,063			10,386			12,713
Net interest income	$	30,469		$	31,008		$	31,308	$	30,909		$	30,594		$	30,203

Dollar change from base	$	(839	)	$	(300	)			$	(399	)	$	(714	)	$	(1,105	)
Percent change from base		-2.68	%		-0.96	%				-1.27	%		-2.28	%		-3.53	%

(Dollars in thousands)
	Immediate Changes in Rates								Immediate Changes in Rates
December 31, 2017	Down 2.00%			Down 1.00%			Base		Up 1.00%			Up 2.00%			Up 3.00%
Projected interest income:
Loans	$	26,190		$	27,136		$	28,751	$	30,454		$	32,155		$	33,874
Securities		6,528			6,844			7,272		7,483			7,672			7,824
Other interest earning assets					-			-		4			7			11
Total interest income		32,718			33,980			36,023		37,941			39,834			41,709
Projected interest expense:
Deposits		1,777			1,981			2,921		5,056			7,204			9,358
Borrowings		461			577			826		1,079			1,327			1,569
Total interest expense		2,238			2,558			3,747		6,135			8,531			10,927
Net interest income	$	30,480		$	31,422		$	32,276	$	31,806		$	31,303		$	30,782

Dollar change from base	$	(1,796	)	$	(854	)			$	(470	)	$	(973	)	$	(1,494	)
Percent change from base		-5.56	%		-2.65	%				-1.46	%		-3.01	%		-4.63	%

The Bancorp's net income can be significantly influenced by a variety of external factors, including: overall economic conditions, policies and actions of regulatory authorities, the amounts of and rates at which assets and liabilities reprice, variances in prepayment of loans and securities other than those that are assumed, early withdrawal of deposits, exercise of call options on borrowings or securities, competition, a general rise or decline in interest rates, changes in the slope of the yield-curve, changes in historical relationships between indices (such as LIBOR and prime), and balance sheet growth or contraction. The Bancorp's ALCO seeks to manage interest rate risk under a variety of rate environments by structuring the Bancorp's balance sheet and off-balance sheet positions. The Bancorp enters into derivative instruments that are not designated as hedging instruments to help its commercial customers manage their exposure to interest rate fluctuations. To mitigate the interest rate risk associated with customer contracts, the Bancorp enters into an offsetting derivative contract. The notional amount of these derivative instruments was $18.0 million with an estimated fair value loss of $111 thousand at June 30, 2018. The Bancorp manages its credit risk, or potential risk of default by its commercial customers through credit limit approval and monitoring procedures. Interest rate risk is monitored and managed within approved policy limits.

~~Not Applicable.~~The Bancorp utilizes simulation analysis to quantify the impact of various rate scenarios on net interest income. Specific cash flows, repricing characteristics, and embedded options of the assets and liabilities held by the Bancorp are incorporated into the simulation model. Earnings at risk is calculated by comparing the net interest income of a stable interest rate environment to the net interest income of different interest rate environments in order to determine the percentage change. The analysis does not calculate scenarios for a decline of 3% or more due to current market interest rates. The simulation analysis is not indicative of expected actual results.

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~~Chief Executive Officer and ~~chief financial officer~~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, ~~2017,~~2018, the Bancorp’s ~~chief executive officer~~Chief Executive Officer and ~~chief financial officer~~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, ~~2017~~2018 that has materially affected, or is reasonably likely to materially affect, the Bancorp's internal control over financial reporting.

3135

PART II - Other Information

Item 1.

Legal Proceedings

~~There~~The Bancorp and its subsidiaries, from time to time, are ~~no matters reportable under this item.~~involved in legal proceedings in the ordinary course of business against its debtors and are defendants in legal actions arising from normal business activities. Management, after consultation with legal counsel believes that the ultimate liabilities, if any, resulting from these actions will not have a material adverse effect on the financial position of the Bank or on the consolidated financial position of the Bancorp.

Item 1A.

Risk Factors

~~Not Applicable.~~

Risk factors that affect the Bancorp’s business and financial results are discussed in “Risk Factors” in Item 1A of Part II of the Bancorp’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2018. There has been no material changes to the identified risk factors for the quarter ended June 30, 2018

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

On April 24, 2014 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. The stock repurchase program does not expire and is only limited by the number of shares that can be purchased. The stock repurchase program will be reviewed annually by the Board of Directors. No shares were repurchased during the six months ended June 30, ~~2017~~2018 under the stock repurchase program.

Period	Total Number of Shares Purchased		Average Price Paid per Share		~~Total Number of Shares~~ ~~Purchased as Part of~~ ~~Publicly Announced~~ ~~Plans or Programs~~		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, ~~2017~~2018 – January 31, ~~2017~~2018		-		N/A		-		48,828
February 1, ~~2017~~2018 – February 28, ~~2017~~2018		-		N/A		-		48,828
March 1, ~~2017~~2018 – March 31, ~~2017~~2018		-		N/A		-		48,828
April 1, ~~2017~~2018 – April 30, ~~2017~~2018		-		N/A		-		48,828
May 1, ~~2017~~2018 – May 31, ~~2017~~2018		-		N/A		-		48,828
June 1, ~~2017~~2018 – June 30, ~~2017~~2018		-		N/A		-		48,828
		-		N/A		-		48,828

(1)

The stock repurchase program was announced on April 24, 2014, whereby the Bancorp is authorized to repurchase up to 50,000 shares of the Bancorp’s common stock outstanding. There is no express expiration date for this program.

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.~~

None.

Item 6.

Exhibits

	Exhibit
Number	~~Number~~	Description
3.1		Amended and Restated By-Laws of NorthWest Indiana Bancorp (Amended and Restated as of May 18, 2018) (incorporated by reference to Exhibit 3.1 to the registrant’s Current Report on Form 8-K filed on May 21, 2018).
10.1	Form of Non-Solicitation and Confidentiality Agreement between Peoples Bank SB and each of its Executive Officers (incorporated by reference to Exhibit 10.2 to the registrant’s Quaterly Report on Form 10-Q filed on May 9, 2018)
31.1	Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.
31.2	~~31.2~~	Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.
32.1	~~32.1~~	Section 1350 Certifications.
	101	The following materials from the Bancorp’s Form 10-Q for the quarterly period ended June 30, ~~2017,~~2018, 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 Statement of Comprehensive Income; (v) Consolidated Statements of Cash Flows; and (vi) Notes to Consolidated Financial Statements, with detailed tagging of notes and financial statement schedules.

3236

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 24, ~~2017~~2018	/s/ Benjamin J. Bochnowski
	Benjamin J. Bochnowski
	President and Chief Executive Officer

Date: July 24, ~~2017~~2018	/s/ Robert T. Lowry
	Robert T. Lowry
	Executive Vice President, Chief Financial
	Officer and Treasurer

3337

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

The Bancorp's activity in the allowance for loan losses, by loan segment, is summarized below for the three months ended June 30, 2017:

Allowance for loan losses:
Beginning Balance	$	1,601		$	28		$	4,352		$	-		$	795		$	58		$	6,834
Charge-offs		(71	)		(24	)		-			-			-			-			(95	)
Recoveries		-			2			-			-			9			-			11
Provisions		107			24			(361	)		-			553			-			323
Ending Balance	$	1,637		$	30		$	3,991		$	-		$	1,357		$	58		$	7,073

The Bancorp's activity in the allowance for loan losses, by loan segment, is summarized below for the three months ended June 30, 2016:

Allowance for loan losses:
Beginning Balance	$	1,731		$	44		$	4,601		$	13		$	747		$	72		$	7,208
Charge-offs		(164	)		(8	)		-			-			-			-			(172	)
Recoveries		-			1			-			-			12			-			13
Provisions		203			-			6			(4	)		87			(4	)		288
Ending Balance	$	1,770		$	37		$	4,607		$	9		$	846		$	68		$	7,337

The Bancorp's activity in the allowance for loan losses, by loan segment, is summarized below for the six months ended June 30, 2017:

Allowance for loan losses:
Beginning Balance	$	2,410		$	34		$	4,302		$	-		$	896		$	56		$	7,698
Charge-offs		(928	)		(30	)		-			-			(245	)		-			(1,203	)
Recoveries		-			4			-			-			17			-			21
Provisions		155			22			(311	)		-			689			2			557
Ending Balance	$	1,637		$	30		$	3,991		$	-		$	1,357		$	58		$	7,073

The Bancorp's activity in the allowance for loan losses, by loan segment, is summarized below for the six months ended June 30, 2016:

Allowance for loan losses:
Beginning Balance	$	1,711		$	38		$	4,422		$	14		$	698		$	70		$	6,953
Charge-offs		(212	)		(12	)		-			-			-			-			(224	)
Recoveries		-			4			-			-			20			-			24
Provisions		271			7			185			(5	)		128			(2	)		584
Ending Balance	$	1,770		$	37		$	4,607		$	9		$	846		$	68		$	7,337

	(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				Government
Loan Grades		2017		2016		2017		2016		2017		2016		2017		2016
2 Moderate risk	$	637	$	248	$	-	$	-	$	7,021	$	6,315	$	-	$	-
3 Above average acceptable risk		2,624		3,147		-		-		17,904		15,043		2,318		955
4 Acceptable risk		112,571		121,583		181		188		18,739		24,754		25,699		25,474
5 Marginally acceptable risk		111,429		100,615		191		83		18,205		18,787		2,575		3,100
6 Pass/monitor		41,312		38,326		15		16		12,060		10,653		-		-
7 Special mention (watch)		16,599		5,799		-		-		457		533		-		-
8 Substandard		615		374		78		82		1,397		1,214		-		-
Total	$	285,787	$	270,092	$	465	$	369	$	75,783	$	77,299	$	30,592	$	29,529

	(Dollars in thousands)
	Consumer Credit Exposure - Credit Risk Profile Based On Payment Activity
	Residential Real Estate, Including Home Equity				Consumer
	2017		2016		2017		2016
Performing	$	203,983	$	200,816	$	490	$	524
Non-performing		3,844		5,021		-		-
Total	$	207,827	$	205,837	$	490	$	524

	As of June 30, 2017						For the six months ended June 30, 2017
(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	$	1,300	$	4,137	$	-	$	1,333	$	22
Commercial real estate, construction & land development, and other dwellings		475		475		-		435		-
Commercial participations purchased		78		78		-		80		3
Commercial business		200		200		-		206		2
With an allowance recorded:
Residential real estate, including home equity		75		75		15		380		-
Commercial real estate, construction & land development, and other dwellings		140		140		127		99		-
Commercial participations purchased		-		-		-		-		-
Commercial business		708		708		649		454		4
Total:
Residential real estate, including home equity	$	1,375	$	4,212	$	15	$	1,713	$	22
Commercial real estate, construction & land development, and other dwellings	$	615	$	615	$	127	$	534	$	-
Commercial participations purchased	$	78	$	78	$	-	$	80	$	3
Commercial business	$	908	$	908	$	649	$	660	$	6

	As of December 31, 2016						For the six months ended June 30, 2016
(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	$	1,309	$	3,293	$	-	$	2,882	$	64
Commercial real estate, construction & land development, and other dwellings		356		356		-		1,855		-
Commercial participations purchased		82		82		-		-		-
Commercial business		212		212		-		271		2
With an allowance recorded:
Residential real estate, including home equity		1,066		1,066		879		171		-
Commercial real estate, construction & land development, and other dwellings		18		18		3		18		-
Commercial participations purchased		-		-		-		90		3
Commercial business		475		475		354		103		-
Total:
Residential real estate, including home equity	$	2,375	$	4,359	$	879	$	3,053	$	64
Commercial real estate, construction & land development, and other dwellings	$	374	$	374	$	3	$	1,873	$	-
Commercial participations purchased	$	82	$	82	$	-	$	90	$	3
Commercial business	$	687	$	687	$	354	$	374	$	2

(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 Past Due and Accruing
June 30, 2017
Residential real estate, including home equity	$	3,174	$	1,898	$	3,007	$	8,079	$	199,748	$	207,827	$	219
Consumer		-		-		-		-		490		490		-
Commercial real estate, construction & land development, and other dwellings		610		152		800		1,562		284,225		285,787		184
Commercial participations purchased		-		-		78		78		387		465		-
Commercial business		156		48		189		393		75,390		75,783		-
Government		-		-		-		-		30,592		30,592		-
Total	$	3,940	$	2,098	$	4,074	$	10,112	$	590,832	$	600,944	$	403


December 31, 2016
Residential real estate, including home equity	$	3,974	$	1,775	$	4,024	$	9,773	$	196,064	$	205,837	$	500
Consumer		-		-		-		-		524		524		-
Commercial real estate, construction & land development, and other dwellings		396		189		374		959		269,133		270,092		-
Commercial participations purchased		-		-		82		82		287		369		-
Commercial business		171		217		466		854		76,445		77,299		-
Government		-		-		-		-		29,529		29,529		-
Total	$	4,541	$	2,181	$	4,946	$	11,668	$	571,982	$	583,650	$	500

	(Dollars in thousands)
	June 30, 2017		December 31, 2016
Residential real estate, including home equity	$	3,625	$	4,521
Consumer		-		-
Commercial real estate, construction & land development, and other dwellings		615		374
Commercial participations purchased		78		82
Commercial business		853		628
Government		-		-
Total	$	5,171	$	5,605

					Weighted-
			Weighted-		Average
			Average		Remaining		Aggregate
			Exercise		Contractual		Intrinsic
Incentive options	Shares		Price		Term		Value
Outstanding at January 1, 2017		500	$	28.50
Granted		-		-
Exercised		-		-
Forfeited		-		-
Expired		-	$	-
Outstanding at June 30, 2017		500	$	28.50		0.7		6,000
Exercisable at June 30, 2017		500	$	28.50		0.7		6,000

			Weighted-
			Average
			Grant Date
Restricted stock	Shares		Fair Value
Nonvested at January 1, 2017		28,465	$	26.67
Granted		4,575		39.00
Vested		1,625		25.81
Forfeited		725		28.62
Nonvested at June 30, 2017		30,690	$	28.51

	(Dollars in thousands)
	Collateralized debt obligations
	other-than-temporary impairment
Ending balance, December 31, 2016	$	271
Additions not previously recognized		-
Ending balance, June 30, 2017	$	271

Cusip		74043CAC1			74042TAJ0			01449TAB9			01450NAC6
Deal name		PreTSL XXIV			PreTSL XXVII			Alesco IX			Alesco XVII
Class		B-1			C-1			A-2A			B
Lowest credit rating assigned		CCC			CC			BB			CCC
Number of performing banks		62			33			62			51
Number of performing insurance companies		13			7			10			n/a
Number of issuers in default		16			7			2			4
Number of issuers in deferral		2			2			2			1
Defaults & deferrals as a % of performing collateral		26.56	%		20.06	%		4.22	%		8.11	%
Subordination:
As a % of performing collateral		23.55	%		8.35	%		52.53	%		35.58	%
As a % of performing collateral - adjusted for projected future defaults		18.93	%		1.24	%		49.17	%		31.69	%
Other-than-temporary impairment model assumptions:
Defaults:
Year 1 - issuer average		1.90	%		2.40	%		2.20	%		1.90	%
Year 2 - issuer average		1.90	%		2.40	%		2.20	%		1.90	%
Year 3 - issuer average		1.90	%		2.40	%		2.20	%		1.90	%
> 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