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 September 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 ~~______~~

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 ~~or organization)~~		(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

N/A

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by ~~section~~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):~~

Act:

Large accelerated filer¨Accelerated filer¨xNon-accelerated filer¨~~(Do not check if a smaller reporting company)~~

Smaller Reporting CompanyxEmerging 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~~3,029,157 shares of the registrant’s Common Stock, without par value, outstanding at ~~October 20, 2017.~~November 2, 2018.

NorthWest Indiana Bancorp

Index

			Page
			Number
PART I. Financial Information

	Item 1.	Unaudited Financial Statements

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

		~~Consolidated Statements of Income, Three and Nine Months Ended September 30, 2017 and 2016~~	2

		~~Consolidated Statements of Comprehensive Income, Three and Nine Months Ended September 30, 2017 and 2016~~	3

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

		~~Consolidated Statements of Cash Flows, Nine Months Ended September 30, 2017 and 2016~~	4

		~~Notes to Consolidated Financial Statements~~	~~5-20~~

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	~~21-30~~22

	Item 3.	Quantitative and Qualitative Disclosures ~~About~~about Market Risk	3135

	Item 4.	Controls and Procedures	3135

PART II. Other Information		3236

SIGNATURES		3337

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

NorthWest Indiana Bancorp

Consolidated Balance Sheets

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

Cash and non-interest bearing deposits in other financial institutions	$	11,354		$	15,338		$	9,990		$	10,529
Interest bearing deposits in other financial institutions		2,306			29,556			2,576			139
Federal funds sold		468			215			1,398			357

Total cash and cash equivalents		14,128			45,109			13,964			11,025

Certificates of deposit in other financial institutions								3,754			1,676

Securities available-for-sale		243,552			233,625			238,071			244,490
Loans held-for-sale		2,007			2,193			4,483			1,592
Loans receivable		607,964			583,650			742,232			620,211
Less: allowance for loan losses		(7,059	)		(7,698	)		(7,749	)		(7,482	)
Net loans receivable		600,905			575,952			734,483			612,729
Federal Home Loan Bank stock		3,000			3,000			3,236			3,000
Accrued interest receivable		3,021			3,086			3,560			3,262
Premises and equipment		19,573			19,287			24,868			19,559
Foreclosed real estate		1,805			2,665			2,125			1,699
Cash value of bank owned life insurance		19,244			18,895			23,007			19,355
Goodwill		2,792			2,792			8,170			2,792
Other assets		6,320			7,022			13,353			6,080

Total assets	$	916,347		$	913,626		$	1,073,074		$	927,259

LIABILITIES AND STOCKHOLDERS' EQUITY

Deposits:
Non-interest bearing	$	118,797		$	111,800		$	134,449		$	120,556
Interest bearing		638,763			667,971			768,307			672,448
Total		757,560			779,771			902,756			793,004
Repurchase agreements		15,946			13,998			12,585			11,300
Borrowed funds		41,421			25,828			48,314			20,881
Accrued expenses and other liabilities		10,293			9,921			12,932			10,014

Total liabilities		825,220			829,518			976,587			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: September 30, 2017 - 2,920,045 December 31, 2016 - 2,916,195 shares outstanding: September 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 and outstanding: September 30, 2018 - 3,029,157								-			-
December 31, 2017 - 2,864,507
Additional paid-in capital		4,442			4,300			11,877			4,867
Accumulated other comprehensive gain/(loss)		760			(1,506	)
Accumulated other comprehensive income/(loss)								(5,992	)		684
Retained earnings		85,564			80,953			90,602			86,509

Total stockholders' equity		91,127			84,108			96,487			92,060

Total liabilities and stockholders' equity	$	916,347		$	913,626		$	1,073,074		$	927,259

See accompanying notes to consolidated financial statements.

NorthWest Indiana Bancorp

Consolidated Statements of Income

(unaudited)

	Three Months Ended				Nine Months Ended				Three Months Ended				Nine Months Ended
(Dollars in thousands, except per share data)	September 30,				September 30,
(Dollars in thousands)									September 30,				September 30,
	2017		2016		2017		2016		2018		2017		2018		2017
Interest income:
Loans receivable
Real estate loans	$	5,773	$	5,676	$	16,800	$	16,866	$	7,189	$	5,773	$	19,240	$	16,800
Commercial loans		1,050		982		3,116		2,771		1,266		1,050		3,457		3,116
Consumer loans		5		6		15		17		97		5		106		15
Total loan interest		6,828		6,664		19,931		19,654		8,552		6,828		22,803		19,931
Securities		1,585		1,498		4,801		4,566		1,709		1,585		5,127		4,801
Other interest earning assets		18		7		49		15		74		18		134		49

Total interest income		8,431		8,169		24,781		24,235		10,335		8,431		28,064		24,781

Interest expense:
Deposits		518		445		1,475		1,315		1,018		518		2,531		1,475
Repurchase agreements		31		25		80		74		47		31		124		80
Borrowed funds		110		117		281		370		254		110		682		281

Total interest expense		659		587		1,836		1,759		1,319		659		3,337		1,836

Net interest income		7,772		7,582		22,945		22,476		9,016		7,772		24,727		22,945
Provision for loan losses		165		262		722		846		312		165		950		722

Net interest income after provision for loan losses		7,607		7,320		22,223		21,630		8,704		7,607		23,777		22,223

Noninterest income:
Fees and service charges		843		763		2,404		2,143	$	991	$	843	$	2,830	$	2,404
Wealth management operations		459		423		1,267		1,280		414		459		1,253		1,267
Gain on sale of securities, net										151		213		1,155		758
Gain on sale of loans held-for-sale, net		412		579		883		1,120		451		412		1,021		883
Gain on sale of securities, net		213		283		758		700
Increase in cash value of bank owned life insurance		119		118		349		354		130		119		358		349
Gain on sale of foreclosed real estate, net		2		6		95		80		54		2		154		95
Other		27		15		64		18		32		27		104		64

Total noninterest income		2,075		2,187		5,820		5,695	$	2,223	$	2,075	$	6,875	$	5,820

Noninterest expense:
Compensation and benefits		4,094		3,901		10,847		10,534	$	4,669	$	4,094	$	12,045	$	10,847
Occupancy and equipment		845		900		2,542		2,768		829		845		2,524		2,542
Data processing		364		343		1,092		1,005		1,012		364		2,076		1,092
Marketing										223		135		523		469
Federal deposit insurance premiums		84		135		242		403		91		84		250		242
Marketing		135		108		469		352
Other		1,403		1,161		4,061		3,533		2,233		1,403		5,512		4,061

Total noninterest expense		6,925		6,548		19,253		18,595	$	9,057	$	6,925	$	22,930	$	19,253

Income before income tax expenses		2,757		2,959		8,790		8,730		1,870		2,757		7,722		8,790
Income tax expenses		509		631		1,715		1,917		245		509		1,025		1,715

Net income	$	2,248	$	2,328	$	7,075	$	6,813	$	1,625	$	2,248	$	6,697	$	7,075

Earnings per common share:
Basic	$	0.78	$	0.81	$	2.47	$	2.38	$	0.54	$	0.78	$	2.29	$	2.47
Diluted	$	0.78	$	0.81	$	2.47	$	2.38	$	0.54	$	0.78	$	2.29	$	2.47

Dividends declared per common share	$	0.29	$	0.28	$	0.87	$	0.83	$	0.30	$	0.29	$	0.89	$	0.87

See accompanying notes to consolidated financial statements.

NorthWest Indiana Bancorp

Consolidated Statements of Comprehensive Income

(unaudited)

	Three Months Ended						Nine Months Ended						Three Months Ended						Nine Months Ended
(Dollars in thousands)	September 30,						September 30,						September 30,						September 30,
	2017			2016			2017			2016			2018			2017		��	2018			2017

Net income	$	2,248		$	2,328		$	7,075		$	6,813		$	1,625		$	2,248		$	6,697		$	7,075

Net change in net unrealized gains and losses on securities available-for-sale:
Unrealized gains arising during the period		747			(947	)		4,193			3,367
Unrealized gains/(losses) arising during the period														(2,071	)		747			(7,301	)		4,193
Less: reclassification adjustment for gains included in net income		(213	)		(283	)		(758	)		(700	)		(151	)		(213	)		(1,155	)		(758	)
Net securities gain (loss) during the period		534			(1,230	)		3,435			2,667
Net securities gain/(loss) during the period														(2,222	)		534			(8,456	)		3,435
Tax effect		(183	)		416			(1,169	)		(907	)		467			(183	)		1,780			(1,169	)
Net of tax amount		351			(814	)		2,266			1,760			(1,755	)		351			(6,676	)		2,266

Net change in unrealized gain on postretirement benefit:
Amortization of net actuarial gain		-			(1	)		-			(2	)
Net loss during the period		-			(1	)		-			(2	)
Net of tax amount		-			(1	)		-			(2	)
Other comprehensive income, net of tax		351			(815	)		2,266			1,758

Comprehensive income, net of tax	$	2,599		$	1,513		$	9,341		$	8,571
Comprehensive income/(loss), net of tax													$	(130	)	$	2,599		$	21		$	9,341

See accompanying notes to consolidated financial statements.

NorthWest Indiana Bancorp

Consolidated Statements of Changes in Stockholders' Equity

(unaudited)

	Three Months Ended						Nine Months Ended						Three Months Ended						Nine Months Ended
(Dollars in thousands)	September 30,						September 30,						September 30,						September 30,
	2017			2016			2017			2016			2018			2017			2018			2017

Balance at beginning of period	$	89,308		$	86,461		$	84,108		$	80,909		$	90,577		$	89,308		$	92,060		$	84,108

Comprehensive income:
Net income		2,248			2,328			7,075			6,813			1,625			2,248			6,697			7,075
Net unrealized gains (losses) on securities available-for-sale, net of reclassifications and tax effects		351			(814	)		2,266			1,760
Amortization of unrecognized gain on postretirement benefit		-			(1	)		-			(2	)
Net unrealized gains/(losses) on securities available-for-sale, net of reclassifications and tax effects														(1,755	)		351			(6,676	)		2,266
Comprehensive income, net of tax		2,599			1,513			9,341			8,571			(130	)		2,599			21			9,341

Stock based compensation expense		51			38			142			104			50			51			154			142
Net surrender value of restricted stock awards														(27	)		-			(72	)		-
Issuance of 161,875 shares at $42.80 per share, for acquisition of First Personal Financial Corporation														6,928			-			6,928			-
Cash dividends		(831	)		(800	)		(2,464	)		(2,372	)		(911	)		(831	)		(2,604	)		(2,464	)

Balance at end of period	$	91,127		$	87,212		$	91,127		$	87,212		$	96,487		$	91,127		$	96,487		$	91,127

See accompanying notes to consolidated financial statements.

NorthWest Indiana Bancorp

Consolidated Statements of Cash Flows

(unaudited)

	Nine Months Ended						Nine Months Ended
(Dollars in thousands)	September 30,						September 30,
	2017			2016			2018			2017
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	7,075		$	6,813		$	6,697		$	7,075
Adjustments to reconcile net income to net cash provided by/(used in) operating activities:
Origination of loans for sale		(31,599	)		(42,077	)		(41,823	)		(31,599	)
Sale of loans originated for sale		32,659			41,986			39,953			32,659
Depreciation and amortization, net of accretion		1,906			1,920			1,902			1,906
Amortization of mortgage servicing rights		48			36			48			48
Stock based compensation expense		142			104			154			142
Net surrender value of restricted stock awards								(72	)		-
Gain on sale of securities, net		(758	)		(700	)		(1,155	)		(758	)
Gain on sale of loans held-for-sale, net		(883	)		(1,120	)		(1,021	)		(883	)
Gain on sale of foreclosed real estate, net		(95	)		(80	)		(154	)		(95	)
Provision for loan losses		722			846			950			722
Net change in:
Interest receivable		65			97			(298	)		65
Other assets		(538	)		(2,242	)		(345	)		(538	)
Accrued expenses and other liabilities		372			(86	)		(2,544	)		372
Total adjustments		2,041			(1,316	)		(4,405	)		2,041
Net cash - operating activities		9,116			5,497			2,292			9,116

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of certificates of deposits in other financial institutions								1,150			-
Proceeds from maturities and pay downs of securities available-for-sale		18,887			34,822			17,747			18,887
Proceeds from sales of securities available-for-sale		48,063			26,977			29,049			48,063
Purchase of securities available-for-sale		(73,503	)		(65,971	)		(48,464	)		(73,503	)
Loan participations purchased		(362	)		-			-			(362	)
Net change in loans receivable		(25,260	)		(23,122	)		(28,385	)		(25,260	)
Purchase of Federal Home Loan Bank Stock								(17	)		-
Purchase of premises and equipment, net		(1,373	)		(898	)		(624	)		(1,373	)
Proceeds from sale of foreclosed real estate, net		902			641			1,273			902
Cash and cash equivalents from acquisition activity								26,950			-
Cash paid for acquisition								(8,689	)		-
Change in cash value of bank owned life insurance		(349	)		(354	)		(358	)		(349	)
Net cash - investing activities		(32,995	)		(27,905	)		(10,368	)		(32,995	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposits		(22,211	)		33,485			(15,180	)		(22,211	)
Proceeds from FHLB advances		7,000			6,000			62,000			7,000
Repayment of FHLB advances		(8,000	)		(15,000	)		(44,000	)		(8,000	)
Change in other borrowed funds		18,541			5,294			10,718			18,541
Dividends paid		(2,432	)		(2,343	)		(2,523	)		(2,432	)
Net cash - financing activities		(7,102	)		27,436			11,015			(7,102	)
Net change in cash and cash equivalents		(30,981	)		5,028			2,939			(30,981	)
Cash and cash equivalents at beginning of period		45,109			11,533			11,025			45,109
Cash and cash equivalents at end of period	$	14,128		$	16,561		$	13,964		$	14,128

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest	$	1,832		$	1,763		$	3,258		$	1,832
Income taxes		1,355			1,308			1,080			1,355
Acquisition activity:
Fair value of assets acquired, including cash and cash equivalents							$	137,449		$	-
Value of goodwill and other intangible assets								8,481			-
Fair value of liabilities assumed								130,313			-
Cash paid for acquisition								8,689			-
Issuance of common stock for acquisition								6,928			-
Noncash activities:
Transfers from loans to foreclosed real estate	$	51		$	93		$	253		$	51
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” or “NWIN”), 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 September 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 nine months ended September 30, ~~2017~~2018 and ~~2016~~2017 and consolidated statements of cash flows for the nine months ended September 30, ~~2017~~2018 and ~~2016.~~2017. The income reported for the nine month period ended September 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 July 26, 2018, the Bancorp completed its previously announced acquisition of First Personal Financial Corp., a Delaware corporation (“First Personal”) pursuant to an Agreement and Plan of Merger dated February 20, 2018 (the “First Personal Merger Agreement”) between NWIN and First Personal. Pursuant to the terms of the First Personal Merger Agreement, First Personal merged with and into NWIN, with NWIN as the surviving corporation (the “First Personal Merger”). Simultaneous with the First Personal Merger, First Personal Bank, an Illinois state chartered commercial bank and wholly-owned subsidiary of First Personal, merged with and into Peoples Bank SB (“Peoples Bank”), with Peoples Bank as the surviving bank.

In connection with the First Personal Merger, each First Personal stockholder holding 100 or more shares of First Personal common stock received fixed consideration of (i) 0.1246 shares of NWIN common stock, and (ii) $6.67 per share in cash for each outstanding share of First Personal’s common stock. Stockholders holding less than 100 shares of First Personal common stock received $12.12 in cash and no stock consideration for each outstanding share of First Personal common stock. Any fractional shares of NWIN common stock that a First Personal stockholder would have otherwise received in the First Personal Merger were cashed out in the amount of such fraction multiplied by $42.95.

NWIN issued a total of 161,875 shares of NWIN common stock to the former First Personal stockholders, and paid cash consideration of approximately $8.7 million. Based upon the closing price of NWIN common stock on July 25, 2018, the transaction had an implied valuation of approximately $15.6 million.

As of the closing date of the First Personal Merger, First Personal reported total assets of $138.9 million, total loans of $98.0 million, and total deposits of $125.1 million. Additionally, upon the closing of the merger the three former First Personal Bank branches in Cook County, Illinois became branches of Peoples Bank, thereby expanding the Peoples Bank branch network into Illinois.

Consideration paid for the First Personal acquisition included $8.7 million of cash and the issuance of $6.9 million of NWIN stock in exchange for First Personal common stock. Based on preliminary valuations of the fair value of tangible and intangible assets acquired and liabilities assumed, which are based on assumptions that are subject to change, the First Personal acquisition added assets with fair values of approximately $140.5 million, including loans with a fair market value of approximately 94.6 million, and liabilities with a fair market value of approximately $130.3 million, including deposits with a fair market value of approximately $124.9 million. The amount of consideration paid, less the net fair value of assets and liabilities, resulted in goodwill of $5.4 million.

Final estimates of fair value on the date of acquisition have not been finalized yet. Prior to the end of the one year measurement period for finalizing the purchase price allocation, if information becomes available which would indicate adjustments are required to the purchase price allocation, such adjustments will be included in the purchase price allocation prospectively. If any adjustments are made to the preliminary assumptions (provisional amounts), disclosures will be made in the notes to the financial statements of the amounts recorded in the current period earnings by line item that have been recorded in previous reporting periods if the adjustments to the provisional amounts had been recognized as of the acquisition date.

On July 30, 2018, NorthWest Indiana Bancorp entered into an Agreement and Plan of Merger (the “AJSB Merger Agreement”) with AJS Bancorp, Inc., a Maryland corporation (“AJSB”). Pursuant to the AJSB Merger Agreement, AJSB will merge with and into NWIN, with NWIN as the surviving corporation (the “AJSB Merger”). Simultaneously with the AJSB Merger, A.J. Smith Federal Savings Bank, a federally chartered savings bank and wholly-owned subsidiary of AJSB (“ AJS Bank”), will merge with and into Peoples Bank SB, with Peoples Bank as the surviving bank.

The boards of directors of each of NWIN and AJSB have approved the AJSB Merger and the AJSB Merger Agreement. Subject to the approval of the AJSB Merger by AJSB’s stockholders, regulatory approvals, and other customary closing conditions, the parties anticipate completing the AJSB Merger early in the first quarter of 2019.

AJSB has a home office and two branch offices in Cook County, Illinois. As of September 30, 2018, AJS Bank reported total assets of $182.9 million, total loans of $96.8 million, and total deposits of $153.5 million. The combined bank is expected to have approximately $1.3 billion in total assets, $839.0 million in total loans, and $1.1 billion in deposits. The acquisition will further expand the Bank’s banking center network in 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
September 30, 2017
Money market fund $ 1,711 $ - $ - $ 1,711
U.S. government sponsored entities 3,996 - (82 ) 3,914
Collateralized mortgage obligations and residential mortgage-backed securities 141,870 552 (847 ) 141,575
Municipal securities 89,965 3,207 (84 ) 93,088
Collateralized debt obligations 4,853 - (1,589 ) 3,264
Total securities available-for-sale $ 242,395 $ 3,759 $ (2,602 ) $ 243,552

	(Dollars in thousands)									(Dollars in thousands)
			Gross		Gross			Estimated				Gross		Gross			Estimated
	Cost		Unrealized		Unrealized			Fair		Cost		Unrealized		Unrealized			Fair
	Basis		Gains		Losses			Value
December 31, 2016
September 30, 2018										Basis		Gains		Losses			Value
Money market fund	$	222	$	-	$	-		$	222	$	2,018	$	-	$	-		$	2,018
U.S. government sponsored entities		16,643		-		(369	)		16,274		9,997		-		(229	)		9,768
Collateralized mortgage obligations and residential mortgage-backed securities		118,807		441		(1,273	)		117,975		137,628		7		(4,965	)		132,670
Municipal securities		95,242		2,146		(643	)		96,745		92,519		446		(1,549	)		91,416
Collateralized debt obligations		4,989		-		(2,580	)		2,409		3,494		-		(1,295	)		2,199
Total securities available-for-sale	$	235,903	$	2,587	$	(4,865	)	$	233,625	$	245,656	$	453	$	(8,038	)	$	238,071

	(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 September 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
September 30, 2017	Value		Yield (%)
September 30, 2018					Value		Yield (%)
Due in one year or less	$	1,994		7.46	$	2,689		5.48
Due from one to five years		5,414		4.82		8,580		3.18
Due from five to ten years		29,754		5.25		16,972		4.03
Due over ten years		64,815		4.75		77,160		4.09

Collateralized mortgage obligations and residential mortgage-backed securities		141,575		2.53		132,670		2.76
Total	$	243,552		3.54	$	238,071		3.32

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

	(Dollars in thousands)						(Dollars in thousands)
	September 30,			September 30,			September 30,			September 30,
	2017			2016			2018			2017

Proceeds	$	48,063		$	26,977		$	29,049		$	48,063
Gross gains		848			718			1,159			848
Gross losses		(90	)		(18	)		(4	)		(90	)

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 2,266
Ending balance, September 30, 2017 $ 760

	(Dollars in thousands)
	Unrealized gain/(loss)
Ending balance, December 31, 2017	$	684
Current period change		(6,676	)
Ending balance, September 30, 2018	$	(5,992	)

Securities with carrying values of approximately ~~$22.9~~$13.4 million and ~~$32.4~~$21.2 million were pledged as of September 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 September 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
September 30, 2017
September 30, 2018																Value		Losses			Value		Losses			Value		Losses
U.S. government sponsored entities	$	1,952	$	(44	)	$	1,962	$	(38	)	$	3,914	$	(82	)	$	3,812	$	(185	)	$	5,956	$	(44	)	$	9,768	$	(229	)
Collateralized mortgage obligations and residential mortgage-backed securities		70,176		(763	)		3,841		(84	)		74,017		(847	)		61,506		(3,133	)		70,448		(1,832	)		131,954		(4,965	)
Municipal securities		4,849		(43	)		1,217		(41	)		6,066		(84	)		1,683		(177	)		51,144		(1,372	)		52,827		(1,549	)
Collateralized debt obligations		-		-			3,264		(1,589	)		3,264		(1,589	)		-		-			2,199		(1,295	)		2,199		(1,295	)
Total temporarily impaired	$	76,977	$	(850	)	$	10,284	$	(1,752	)	$	87,261	$	(2,602	)	$	67,001	$	(3,495	)	$	129,747	$	(4,543	)	$	196,748	$	(8,038	)
Number of securities				50					11					61					52					128					180

	(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
December 31, 2016
December 31, 2017																Value		Losses			Value		Losses			Value		Losses
U.S. government sponsored entities	$	16,274	$	(369	)	$	-	$	-		$	16,274	$	(369	)	$	-	$	-		$	3,890	$	(106	)	$	3,890	$	(106	)
Collateralized mortgage obligations and residential mortgage-backed securities		75,931		(1,183	)		2,287		(90	)		78,218		(1,273	)		66,917		(511	)		37,003		(945	)		103,920		(1,456	)
Municipal securities		20,775		(643	)		-		-			20,775		(643	)		1,790		(3	)		1,815		(47	)		3,605		(50	)
Collateralized debt obligations		-		-			2,409		(2,580	)		2,409		(2,580	)		-		-			3,439		(1,396	)		3,439		(1,396	)
Total temporarily impaired	$	112,980	$	(2,195	)	$	4,696	$	(2,670	)	$	117,676	$	(4,865	)	$	68,707	$	(514	)	$	46,147	$	(2,494	)	$	114,854	$	(3,008	)
Number of securities				97					6					103					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)
September 30, 2017 December 31, 2016
Loans secured by real estate:
Residential real estate $ 171,846 $ 173,365
Home equity 35,308 32,614
Commercial real estate 203,388 195,438
Construction and land development 53,983 38,937
Multifamily 37,402 36,086
Total loans secured by real estate 501,926 476,440
Consumer 382 522
Commercial business 77,532 77,513
Government 29,830 29,529
Subtotal 609,671 584,004
Less:
Net deferred loan origination fees (158 ) (162 )
Undisbursed loan funds (1,549 ) (192 )
Loans receivable $ 607,964 $ 583,650

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

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

Allowance for loan losses:
Residential real estate $ 1,561 $ (10 ) $ 3 $ 17 $ 1,571
Home equity 76 (35 ) - 41 82
Commercial real estate 2,890 - - 28 2,918
Construction and land development 600 - - (30 ) 570
Multifamily 501 - - 40 541
Consumer 30 (29 ) 7 22 30
Commercial business 1,357 (120 ) 5 49 1,291
Government 58 - - (2 ) 56
Total $ 7,073 $ (194 ) $ 15 $ 165 $ 7,059

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

Allowance for loan losses:
Residential real estate $ 1,485 $ (93 ) $ 1 $ 93 $ 1,486
Home equity 285 - - 4 289
Commercial real estate 3,099 - - 126 3,225
Construction and land development 761 - - (40 ) 721
Multifamily 756 - - 24 780
Consumer 37 (12 ) 1 25 51
Commercial business 846 - 8 43 897
Government 68 - - (13 ) 55
Total $ 7,337 $ (105 ) $ 10 $ 262 $ 7,504

The Bancorp's activity in the allowance for loan losses is summarized below for the nine months ended September 30, 2017:

Allowance for loan losses:
Residential real estate $ 2,111 $ (913 ) $ 3 $ 370 $ 1,571
Home equity 299 (60 ) - (157 ) 82
Commercial real estate 3,113 - - (195 ) 2,918
Construction and land development 617 - - (47 ) 570
Multifamily 572 - - (31 ) 541
Consumer 34 (59 ) 11 44 30
Commercial business 896 (365 ) 22 737 1,291
Government 56 - - - 56
Total $ 7,698 $ (1,397 ) $ 36 $ 722 $ 7,059

The Bancorp's activity in the allowance for loan losses is summarized below for the nine months ended September 30, 2016:

Allowance for loan losses:
Residential real estate $ 1,448 $ (305 ) $ 1 $ 342 $ 1,486
Home equity 263 - - 26 289
Commercial real estate 2,986 - - 239 3,225
Construction and land development 692 - - 29 721
Multifamily 758 - - 22 780
Consumer 38 (24 ) 5 32 51
Commercial business 698 - 28 171 897
Government 70 - - (15 ) 55
Total $ 6,953 $ (329 ) $ 34 $ 846 $ 7,504

(Dollars in thousands)

~~The Bancorp’s individually impaired loans are summarized below:~~

	Ending Balances												September 30, 2018			December 31, 2017
(Dollars in thousands)	Individually evaluated impairment reserves		Collectively evaluated impairment reserves		Loan receivables		Loans individually evaluated for impairment		Purchased credit impaired loans individually evaluated for impairment		Loans collectively evaluated for impairment

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

Loans secured by real estate:
Residential real estate	$	27	$	1,544	$	171,667	$	495	$	773	$	170,399		221,054			172,780
Home equity		-		82		35,357		-		-		35,357		43,175			36,718
Commercial real estate		136		2,782		203,388		557		-		202,831		243,304			211,090
Construction and land development		-		570		53,983		134		-		53,849		54,755			50,746
Farmland														242			-
Multifamily		-		541		37,402		-		-		37,402		45,752			43,369
Total loans secured by real estate														608,282			514,703
Consumer		-		30		383		-		-		383		5,633			460
Commercial business		562		729		75,954		749		-		75,205		102,820			77,122
Government		-		56		29,830		-		-		29,830		25,763			28,785
Total	$	725	$	6,334	$	607,964	$	1,935	$	773	$	605,256

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

Residential real estate	$	879	$	1,232	$	173,262	$	1,419	$	956	$	170,887
Home equity		-		299		32,575		-		-		32,575
Commercial real estate		3		3,110		195,438		322		-		195,116
Construction and land development		-		617		38,937		134		-		38,803
Multifamily		-		572		36,086		-		-		36,086
Consumer		-		34		524		-		-		524
Commercial business		354		542		77,299		687		-		76,612
Government		-		56		29,529		-		-		29,529
Total	$	1,236	$	6,462	$	583,650	$	2,561	$	956	$	580,132
Subtotal														742,498			621,070
Less:
Net deferred loan origination fees														(188	)		(130	)
Undisbursed loan funds														(78	)		(729	)
Loans receivable													$	742,232		$	620,211

(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 September 30, 2018:

Allowance for loan losses:
Residential real estate	$	1,523	$	(30	)		-	$	82		$	1,575
Home equity		183		-			-		10			193
Commercial real estate		3,170		-			22		48			3,240
Construction and land development		611		-			-		(32	)		579
Multifamily		607		-			-		(150	)		457
Farmland		4		-			-		(1	)		3
Consumer		36		(19	)		8		298			323
Commercial business		1,264		-			8		61			1,333
Government		50		-			-		(4	)		46
Total	$	7,448	$	(49	)	$	38	$	312		$	7,749

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

Allowance for loan losses:
Residential real estate	$	1,561	$	(10	)	$	3	$	17		$	1,571
Home equity		76		(35	)		-		41			82
Commercial real estate		2,890		-			-		28			2,918
Construction and land development		600		-			-		(30	)		570
Multifamily		501		-			-		40			541
Farmland		-		-			-		-			-
Consumer		30		(29	)		7		22			30
Commercial business		1,357		(120	)		5		49			1,291
Government		58		-			-		(2	)		56
Total	$	7,073	$	(194	)	$	15	$	165		$	7,059

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

Allowance for loan losses:
Residential real estate	$	1,568	$	(136	)	$	-	$	143		$	1,575
Home equity		166		(24	)		-		51			193
Commercial real estate		3,125		(119	)		24		210			3,240
Construction and land development		618		-			-		(39	)		579
Multifamily		622		-			-		(165	)		457
Farmland		-		-			-		3			3
Consumer		31		(41	)		17		316			323
Commercial business		1,298		(529	)		125		439			1,333
Government		54		-			-		(8	)		46
Total	$	7,482	$	(849	)	$	166	$	950		$	7,749

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

Allowance for loan losses:
Residential real estate	$	2,111	$	(913	)	$	3	$	370		$	1,571
Home equity		299		(60	)		-		(157	)		82
Commercial real estate		3,113		-			-		(195	)		2,918
Construction and land development		617		-			-		(47	)		570
Multifamily		572		-			-		(31	)		541
Consumer		34		(59	)		11		44			30
Commercial business		896		(365	)		22		738			1,291
Government		56		-			-		-			56
Total	$	7,698	$	(1,397	)	$	36	$	722		$	7,059

The Bancorp's impairment analysis is summarized below:

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

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

Residential real estate	$	20	$	1,555	$	220,862	$	536	$	1,095	$	219,231
Home equity		9		184		43,234		147		123		42,964
Commercial real estate		278		2,962		243,304		1,804		1,605		239,895
Construction and land development		-		579		54,755		-		-		54,755
Multifamily		-		457		45,752		-		-		45,752
Farmland		-		3		242		-		-		242
Consumer		-		323		5,633		-		-		5,633
Commercial business		69		1,264		102,687		473		1,436		100,778
Government		-		46		25,763		-		-		25,763
Total	$	376	$	7,373	$	742,232	$	2,960	$	4,259	$	735,013

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		-		-		-		-		-		-
Consumer		-		31		461		-		-		461
Commercial business		539		759		76,851		724		-		76,127
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 September 30, ~~2017~~2018 and December 31, ~~2016:~~2017:

	Credit Exposure - Credit Risk Portfolio By Creditworthiness Category														Credit Exposure - Credit Risk Portfolio By Creditworthiness Category
	September 30, 2017														September 30, 2018
(Dollars in thousands)	2		3		4		5		6		7		8		2		3		4		5		6		7		8
Loan Segment	Moderate		Above average acceptable		Acceptable		Marginally acceptable		Pass/monitor		Special mention		Substandard		Moderate		Above average acceptable		Acceptable		Marginally acceptable		Pass/monitor		Special mention		Substandard		Total
Residential real estate	$	444	$	10,789	$	93,622	$	8,020	$	51,256	$	4,135	$	3,401	$	143	$	55,619	$	99,366	$	8,920	$	47,779	$	4,685	$	4,350	$	220,862
Home equity		50		1,016		33,266		-		276		233		516		108		4,552		37,472		-		126		544		432		43,234
Commercial real estate		-		2,433		80,119		74,764		38,816		6,699		557		-		6,133		80,598		102,712		46,018		5,972		1,871		243,304
Construction and land development		399		525		18,106		25,287		9,532		-		134		-		330		22,127		22,895		9,403		-		-		54,755
Multifamily		-		-		20,584		14,803		1,844		171		-		-		574		19,575		23,686		1,763		154		-		45,752
Farmland																-		-		-		-		242		-		-		242
Commercial business																9,872		22,398		22,229		31,540		12,724		3,144		780		102,687
Consumer		58		7		318		-		-		-		-		794		3,007		678		221		913		20		-		5,633
Commercial business		5,556		17,985		18,915		20,196		11,613		470		1,219
Government		-		2,318		24,937		2,575		-		-		-		-		2,111		18,707		4,945		-		-		-		25,763
Total	$	6,507	$	35,073	$	289,867	$	145,645	$	113,337	$	11,708	$	5,827	$	10,917	$	94,724	$	300,752	$	194,919	$	118,968	$	14,519	$	7,433	$	742,232

	December 31, 2016														December 31, 2017
	2		3		4		5		6		7		8		2		3		4		5		6		7		8
Loan Segment	Moderate		Above average acceptable		Acceptable		Marginally acceptable		Pass/monitor		Special mention		Substandard		Moderate		Above average acceptable		Acceptable		Marginally acceptable		Pass/monitor		Special mention		Substandard		Total
Residential real estate	$	-	$	6,068	$	94,394	$	7,085	$	57,644	$	4,015	$	4,056	$	887	$	12,317	$	92,241	$	8,759	$	50,075	$	4,130	$	3,732	$	172,141
Home equity		82		1,172		30,459		-		250		236		376		-		1,065		34,871		-		250		233		350		36,769
Commercial real estate		248		2,708		93,293		64,950		28,306		5,611		322		-		2,372		79,847		81,547		40,054		6,758		512		211,090
Construction and land development		-		439		11,355		18,912		8,097		-		134		-		-		20,719		19,583		10,310		-		134		50,746
Multifamily		-		-		17,123		16,836		1,939		188		-		-		-		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		90		4		430		-		-		-		-		-		131		330		-		-		-		-		461
Commercial business		6,315		15,043		24,754		18,787		10,653		533		1,214
Government		-		955		25,474		3,100		-		-		-		-		2,318		20,202		6,265		-		-		-		28,785
Total	$	6,735	$	26,389	$	297,282	$	129,670	$	106,889	$	10,583	$	6,102	$	8,056	$	35,405	$	285,153	$	158,206	$	115,806	$	11,683	$	5,902	$	620,211

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 nine 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 five home equity loans totaling $149 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.

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

																	For the nine months ended
	As of September 30, 2017						For the nine months ended September 30, 2017				As of September 30, 2018						September 30, 2018
(Dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized		Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Residential real estate	$	1,208	$	3,824	$	-	$	1,302	$	48	$	1,518	$	3,922	$	-	$	1,208	$	61
Home equity		-		-		-		-		-		212		219		-		87		1
Commercial real estate		298		298		-		361		4		2,772		3,471		-		1,114		46
Construction and land development		134		134		-		134		-		-		-		-		67		-
Multifamily		-		-		-		-		-		-		-		-		-		-
Farmland												-		-		-		-		-
Commercial business		187		187		-		201		3		1,831		2,091		-		651		20
Consumer												-		-		-		-		-
Government												-		-		-		-		-

With an allowance recorded:
Residential real estate		60		60		27		300		1		113		113		20		114		4
Home equity		-		-		-		-		-		58		58		9		29		-
Commercial real estate		259		259		136		139		-		637		637		278		280		3
Construction and land development		-		-		-		-		-		-		-		-		-		-
Multifamily		-		-		-		-		-		-		-		-		-		-
Farmland												-		-		-		-		-
Commercial business		562		562		562		481		4		78		78		69		159		1
Consumer												-		-		-		-		-
Government												-		-		-		-		-

Total:
Residential real estate	$	1,268	$	3,884	$	27	$	1,602	$	49	$	1,631	$	4,035	$	20	$	1,322	$	65
Home equity	$	-	$	-	$	-	$	-	$	-	$	270	$	277	$	9	$	116	$	1
Commercial real estate	$	557	$	557	$	136	$	500	$	4	$	3,409	$	4,108	$	278	$	1,394	$	49
Construction & land development	$	134	$	134	$	-	$	134	$	-	$	-	$	-	$	-	$	67	$	-
Multifamily	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Farmland											$	-	$	-	$	-	$	-	$	-
Commercial business	$	749	$	749	$	562	$	682	$	7	$	1,909	$	2,169	$	69	$	810	$	21
Consumer											$	-	$	-	$	-	$	-	$	-
Government											$	-	$	-	$	-	$	-	$	-

As of December 31, 2016 For the nine months ended
September 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 $ 1,309 $ 3,293 $ - $ 2,900 $ 113
Home equity - - - - -
Commercial real estate 304 304 - 1,346 -
Construction and land development 134 134 - 134 -
Multifamily - - - - -
Commercial business 212 212 - 260 3
With an allowance recorded:
Residential real estate 1,066 1,066 879 168 4
Home equity - - - - -
Commercial real estate 18 18 3 107 5
Construction & land development - - - - -
Multifamily - - - - -
Commercial business 475 475 354 184 1
Total:
Residential real estate $ 2,375 $ 4,359 $ 879 $ 3,068 $ 117
Home equity $ - $ - $ - $ - $ -
Commercial real estate $ 322 $ 322 $ 3 $ 1,453 $ 5
Construction & land development $ 134 $ 134 $ - $ 134 $ -
Multifamily $ - $ - $ - $ - $ -
Commercial business $ 687 $ 687 $ 354 $ 444 $ 4

							For the nine months ended
	As of December 31, 2017						September 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	$	-	$	1,302	$	48
Home equity		-		-		-		-		-
Commercial real estate		253		253		-		361		4
Construction and land development		134		134		-		134		-
Multifamily		-		-		-		-		-
Commercial business		184		184		-		201		3

With an allowance recorded:
Residential real estate		80		270		21		300		1
Home equity		-		-		-		-		-
Commercial real estate		259		259		144		139		-
Construction & land development		-		-		-		-		-
Multifamily		-		-		-		-		-
Commercial business		540		540		539		481		4

Total:
Residential real estate	$	1,152	$	3,621	$	21	$	1,602	$	49
Home equity	$	-	$	-	$	-	$	-	$	-
Commercial real estate	$	512	$	512	$	144	$	500	$	4
Construction & land development	$	134	$	134	$	-	$	134	$	-
Commercial business	$	724	$	724	$	539	$	682	$	7

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 September 30, ~~2017,~~2018, total purchased credit impaired loans with unpaid principal balances totaled ~~$2.7~~$7.6 million with a recorded investment of ~~$773 thousand, compared to~~$4.3 million. At December 31, ~~2016, at 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 ~~$388 thousand at September 30,2017, compared to December 31, 2016, at which unpaid principal balances totaled $1.2 million with a recorded investment of $507~~$690 thousand. Liberty purchased credit impaired loans with unpaid principal balances totaled $1.6 million with a recorded investment of $385 thousand at September 30, 2017, compared to December 31, 2016, at which unpaid principal balances totaled $1.7 million with a recorded investment of $449 thousand.

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		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
September 30, 2017
September 30, 2018
Residential real estate	$	3,957	$	1,635	$	3,046	$	8,638	$	163,029	$	171,667	$	380	$	2,329	$	1,518	$	3,942	$	7,789	$	213,073	$	220,862	$	885
Home equity		96		46		260		402		34,955		35,357		-		225		183		164		572		42,662		43,234		50
Commercial real estate		98		732		557		1,387		202,001		203,388		-		-		352		680		1,032		242,272		243,304		-
Construction and land development		-		-		134		134		53,849		53,983		-		-		-		-		-		54,755		54,755		-
Multifamily		163		-		-		163		37,239		37,402		-		-		154		-		154		45,598		45,752		-
Farmland																-		-		-		-		242		242		-
Commercial business																1,397		184		207		1,788		100,899		102,687		-
Consumer		-		-		-		-		383		383		-		52		20		-		72		5,561		5,633		-
Commercial business		306		53		562		921		75,033		75,954		-
Government		-		-		-		-		29,830		29,830		-		-		-		-		-		25,763		25,763		-
Total	$	4,620	$	2,466	$	4,559	$	11,645	$	596,319	$	607,964	$	380	$	4,003	$	2,411	$	4,993	$	11,407	$	730,825	$	742,232	$	935

December 31, 2016
December 31, 2017
Residential real estate	$	3,640	$	1,702	$	3,804	$	9,146	$	164,116	$	173,262	$	436	$	4,921	$	1,751	$	3,092	$	9,764	$	162,377	$	172,141	$	225
Home equity		334		73		220		627		31,948		32,575		64		295		18		234		547		36,222		36,769		2
Commercial real estate		208		189		322		719		194,719		195,438		-		951		96		332		1,379		209,711		211,090		-
Construction and land development		-		-		134		134		38,803		38,937		-		-		-		133		133		50,613		50,746		-
Multifamily		188		-		-		188		35,898		36,086		-		319		-		-		319		43,049		43,368		-
Farmland																-		-		-		-		-		-		-
Commercial business																285		162		539		986		75,865		76,851		-
Consumer		-		-		-		-		524		524		-		1		-		-		1		460		461		-
Commercial business		171		217		466		854		76,445		77,299		-
Government		-		-		-		-		29,529		29,529		-		-		-		-		-		28,785		28,785		-
Total	$	4,541	$	2,181	$	4,946	$	11,668	$	571,982	$	583,650	$	500	$	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)
September
30, 2017 December
31, 2016
Residential real estate $ 3,307 $ 4,342
Home equity 516 179
Commercial real estate 557 322
Construction and land development 134 134
Multifamily - -
Consumer - -
Commercial business 695 628
Government - -
Total $ 5,209 $ 5,605

(Dollars in thousands)

	September 30, 2018		December 31, 2017
Residential real estate	$	3,861	$	3,509
Home equity		328		350
Commercial real estate		768		332
Construction and land development		-		133
Multifamily		-		-
Farmland		-		-
Commercial business		514		672
Consumer		-		-
Government		-		-
Total	$	5,471	$	4,996

For the acquisitions of First Federal Savings & Loan (“First Federal”), Liberty Savings Bank (“Liberty Savings”), and First Personal Bank (“First Personal”), as part of the fair value of loans receivable, a net fair value discount was established for loans as summarized below:

(dollars in thousands)	First Federal				Liberty Savings				First Personal
	Net fair value discount		Accretable period in months		Net fair value discount		Accretable period in months		Net fair value discount		Accretable period in months
Residential real estate	$	1,100		55	$	1,200		44	$	948		56
Home equity		-		-		-		-		51		50
Commercial real estate		-		-		-		-		208		56
Construction and land development		-		-		-		-		1		30
Multifamily		-		-		-		-		11		48
Consumer		-		-		-		-		146		50
Commercial business		-		-		-		-		348		24
Purchased credit impaired loans		-		-		-		-		424		32
Total	$	1,100			$	1,200			$	2,137

Accretable yield, or income collected for the nine months ended September 30, is as follows:

(dollars in thousands)	First Federal		Liberty Savings		First Personal		Total
2017	$	112	$	239	$	-	$	351
2018		105		200		114		419

Accretable yield, or income expected to be collected is as follows:

(dollars in thousands)	First Federal		Liberty Savings		First Personal		Total
Remainder 2018	$	33	$	65	$	157	$	255
2019		22		43		627		692
2020		-		-		554		554
2021		-		-		335		335
2022		-		-		283		283
2023		-		-		67		67
Total	$	55	$	108	$	2,023	$	2,186

Note 56 - Foreclosed Real Estate

Foreclosed real estate at period-end is summarized below:

	(Dollars in thousands)
	September 30,		December 31,		(Dollars in thousands)
	2017		2016		September 30, 2018		December 31, 2017
Residential real estate	$	1,032	$	1,810	$	1,311	$	914
Home equity		-		-
Commercial real estate		97		161		126		97
Construction and land development		676		694		468		468
Multifamily		-		-
Consumer		-		-
Commercial business		-		-		220		220
Government		-		-
Total	$	1,805	$	2,665	$	2,125	$	1,699

Note ~~6 - Goodwill, Other Intangible Assets,~~7 – Intangibles and Acquisition Related Accounting

The Bancorp established a goodwill balance totaling ~~$2.8~~$8.2 million with the acquisitions of First Personal, First Federal and ~~Liberty.~~Liberty Savings. Goodwill of $5.4 million, $2.0 million, ~~was~~and $804 thousand were established with the acquisition of First Personal, First Federal, and ~~goodwill of $804 thousand was established with the acquisition of Liberty.~~Liberty Savings, respectively. 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 $8.2 million and $2.8 million atas of September 30, ~~2017~~2018 and December 31, ~~2016.~~2017, respectively.

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 $9 thousand of amortization was taken during the nine months ended September 30, 2017 and September 30, 2016. It is estimated that an additional $3 thousand of additional amortization will occur during 2017 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 $43 thousand~~A core deposit intangible of ~~amortization was taken during~~$3.0 million for the ~~nine months ended September 30, 2017 and September 30, 2016. It is estimated that $14 thousand~~acquisition of ~~additional amortization will occur during 2017 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~~Personal was established ~~for residential real estate, including home equity lines of credit, of $1.1 million that~~and is being ~~accreted~~amortized over ~~55 months~~6.4 years on a straight line basis. ~~Approximately $112 thousand of accretion was taken into income for~~The table below summarizes the nine months ended September 30, 2017, compared to $146 thousand for the nine months ended September 30, 2016. It is estimated that $46 thousand of additional accretion will occur in 2017, and accretion of $151 thousand will occur during 2018. Similarly, for the Liberty 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 $239 thousand of accretion was taken into income for the nine months ended September 30, 2017, compared to $274 thousand for the nine months ended September 30, 2016. It is estimated that $67 thousand of additional accretion will occur in 2017, accretion of $266 thousand will occur in 2018, and accretion of $44 thousand will occur during 2019.annual amortization:

(dollars in thousands)	First Federal		Liberty Savings		First Personal		Total
Current period	$	8	$	38	$	79	$	125
Remainder 2018		4		20		119		143
2019		12		58		475		545
2020		12		58		475		545
2021		12		58		475		545
2022		1		58		475		534
2023		-		38		475		513
2024		-		-		470		470
Total	$	49	$	328	$	3,043	$	3,420

For the ~~Liberty~~First Personal acquisition, as part of the fair value of certificates of deposit, a fair value premium was established of ~~$124~~$133 thousand that ~~was~~is being amortized over 178 months on a straight line basis. ~~No amortization expense was taken during the nine months ended September 30, 2017, compared to $66~~Approximately $32 thousand of amortization was taken as expense during the nine months ended September 30, ~~2016. No~~2018. It is estimated that an additional $48 thousand of amortization ~~expense~~ will occur during ~~2017.~~2018 and an additional $53 thousand of amortization will occur during 2019.

As part of the First Personal acquisition, the Bancorp acquired First Personal Statutory Trust I. NWIN guarantees the payment of distributions on the trust preferred securities issued by First Personal Statutory Trust I. First Personal Statutory Trust I issued $4.124 million in trust preferred securities in May 2004. The trust preferred securities carry a variable rate of interest priced at the three-month LIBOR plus 275 basis points, payable quarterly and maturing on June 17, 2034. Proceeds from the issuance of these securities were used to purchase junior subordinated debentures with the same financial terms as the trust preferred securities issued by First Personal Statutory Trust I. Management of the Bancorp has determined that the continued maintenance of the trust preferred securities issued by First Personal Statutory Trust I and the corresponding junior subordinated debentures are unnecessary to the Bancorp’s ongoing operations. As a result, the Bancorp’s board of directors has approved the redemption of the junior subordinated debentures, which also will result in the trustee of the First Personal Statutory Trust I redeeming all $4.124 million of the trust preferred securities. The junior subordinated debentures and trust preferred securities will be redeemed on or before December 31, 2018, and therefore, the fair value of the trust preferred securities approximated their carrying value.

Note 78 - Concentrations of Credit Risk

The primary lending area of the Bancorp encompasses ~~all of~~ Lake County in northwest Indiana and Cook County in northeast Illinois, where collectively 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,~~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 nine months ended September 30, ~~2017~~2018 and ~~2016~~2017 are as follows:

	Three Months Ended				Nine Months Ended				Three Months Ended				Nine Months Ended
(Dollars in thousands, except per share data)	September 30,				September 30,				September 30,				September 30,
	2017		2016		2017		2016		2018		2017		2018		2017
Basic earnings per common share:
Net income as reported	$	2,248	$	2,328	$	7,075	$	6,813	$	1,625	$	2,248	$	6,697	$	7,075
Weighted average common shares outstanding		2,864,007		2,860,157		2,863,806		2,858,019		3,029,369		2,864,007		2,922,271		2,863,806
Basic earnings per common share	$	0.78	$	0.81	$	2.47	$	2.38	$	0.54	$	0.78	$	2.29	$	2.47
Diluted earnings per common share:						-
Net income as reported	$	2,248	$	2,328	$	7,075	$	6,813	$	1,625	$	2,248	$	6,697	$	7,075
Weighted average common shares outstanding		2,864,007		2,860,157		2,863,806		2,858,019		3,029,369		2,864,007		2,922,271		2,863,806
Add: Dilutive effect of assumed stock option exercises		155		750		147		750		-		155		-		147
Weighted average common and dilutive
potential common shares outstanding		2,864,162		2,860,907		2,863,953		2,858,769
Weighted average common and dilutive potential common shares outstanding										3,029,369		2,864,162		2,922,271		2,863,953
Diluted earnings per common share	$	0.78	$	0.81	$	2.47	$	2.38	$	0.54	$	0.78	$	2.29	$	2.47

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.

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 nine months ended September 30, ~~2017,~~2018, stock based compensation expense of ~~$142~~$154 thousand was recorded, compared to ~~$104~~$142 thousand for the nine months ended September 30, ~~2016.~~2017. It is anticipated that current outstanding unvested ~~options and~~ awards will result in additional compensation expense of approximately ~~$51~~$441 thousand through 2022 with an additional $50 thousand in ~~2017 and $147~~2018, $184 thousand in ~~2018.~~2019, $150 thousand in 2020, $54 thousand in 2021 and $3 thousand in 2022.

There were no incentive stock options granted during the first nine 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. At September 30, 2018, there were no outstanding incentive stock options.

~~A summary of incentive option activity under the Bancorp’s stock option and incentive plans described above for the nine months ended September 30, 2017 follows:~~

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 September 30, 2017 500 $ 28.50 0.4 6,500
Exercisable at September 30, 2017 500 $ 28.50 0.4 6,500

There were ~~4,575~~4,433 shares of restricted stock granted during the first nine months of ~~2017~~2018 compared to ~~8,740~~4,575 shares granted during the first nine 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 nine months ended September 30, ~~2017 follows:~~2018 follows:

			Weighted-					Weighted
			Average					Average
			Grant Date					Grant
Restricted stock	Shares		Fair Value
Nonvested at January 1, 2017		28,465	$	26.67
								Date
Non-vested Shares					Shares			Fair Value
Non-vested at January 1, 2017						28,465		$	26.67
Granted		4,575		39.00		4,575			39.00
Vested		1,625		25.81		(1,625	)		25.81
Forfeited		725		28.62		(725	)		28.62
Nonvested at September 30, 2017		30,690	$	28.51
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						(7,700	)		22.64
Forfeited						-			-
Non-vested at September 30, 2018						27,423		$	32.58

Note ~~10 - Adoption of New~~11 – 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 new reporting requirements have been incorporated into the fair value of financial instruments table and disclosures.

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, and the adoption of this ASU has not ~~yet quantified~~had a material impact on the ~~impact of the change.~~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.

1416

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 on June 30 and~~annually during 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 ~~September 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, September 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.~~

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

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 September 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.

At September 30, ~~2017, three of the~~2018, trust preferred securities with a cost basis of ~~$3.6~~$3.5 million continue to be in “payment in kind” status. ~~The Bancorp’s~~These trust preferred securities ~~that are~~ classified as “payment in kind” are a result of not receiving the scheduled quarterly interest payments. For ~~the~~these trust preferred 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.

1718

Assets and Liabilities Measured at Fair Value on a Recurring Basis

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

			(Dollars in thousands)
			Fair Value Measurements at September 30, 2017 Using								Fair Value Measurements at September 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)
Available-for-sale debt securities:
Money market fund	$	1,711	$	1,711	$	-	$	-	$	2,018	$	2,018	$	-	$	-
U.S. government sponsored entities		3,914		-		3,914		-		9,768		-		9,768		-
Collateralized mortgage obligations and residential mortgage-backed securities		141,575		-		141,575		-		132,670		-		132,670		-
Municipal securities		93,088		-		93,088		-		91,416		-		91,416		-
Collateralized debt obligations		3,264		-		-		3,264		2,199		-		-		2,199
Total securities available-for-sale	$	243,552	$	1,711	$	238,577	$	3,264	$	238,071	$	2,018	$	233,854	$	2,199

			(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		(136	)		(154	)
Total unrealized gains, included in other comprehensive income		991			1,184
Transfers in and/or (out) of Level 3		-			-
Ending balance, September 30, 2017	$	3,264
Ending balance, December 31, 2017				$	3,439

Beginning balance, January 1, 2018				$	3,439
Principal payments					(38	)
Total unrealized gains, included in other comprehensive income					101
Sale out of Level 3					(1,303	)
Ending balance, September 30, 2018				$	2,199

1819

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

(Dollars in thousands)
Fair Value Measurements at September 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)
Impaired loans $ 1,983 $ - $ - $ 1,983
Foreclosed real estate 1,805 - - 1,805

			(Dollars in thousands)								(Dollars in thousands)
			Fair Value Measurements at December 31, 2016 Using								Fair Value Measurements at September 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	$	2,282	$	-	$	-	$	2,282	$	6,843	$	-	$	-	$	6,843
Foreclosed real estate		2,665		-		-		2,665		2,125		-		-		2,125

			(Dollars in thousands)
			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)
Impaired loans	$	1,818	$	-	$	-	$	1,818
Foreclosed real estate		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 ~~$2.7~~$7.2 million and the related specific reserves totaled approximately ~~$725~~$376 thousand, resulting in a fair value of impaired loans totaling approximately ~~$2.0~~$6.8 million, at September 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.

	September 30, 2017				Estimated Fair Value Measurements at September 30, 2017 Using						September 30, 2018				Estimated Fair Value Measurements at September 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	$	14,128	$	14,128	$	14,128	$	-	$	-	$	13,964	$	13,964	$	13,964	$	-	$	-
Certificates of deposit in other financial institutions												3,754		3,673		-		3,673		-
Securities available-for-sale		243,552		243,552		1,711		238,577		3,264		238,071		238,071		2,018		233,854		2,199
Loans held-for-sale		2,007		2,049		2,049		-		-		4,483		4,566		4,566		-		-
Loans receivable, net		600,905		594,357		-		-		594,357		734,483		717,640		-		-		717,640
Federal Home Loan Bank stock		3,000		3,000		-		3,000		-		3,236		3,236		-		3,236		-
Accrued interest receivable		3,021		3,021		-		3,021		-		3,560		3,560		-		3,560		-

Financial liabilities:
Non-interest bearing deposits		118,797		118,797		118,797		-		-		134,449		134,449		134,449		-		-
Interest bearing deposits		638,763		637,759		465,938		171,821		-		768,307		765,232		514,311		250,921		-
Repurchase agreements		15,946		15,942		14,191		1,751		-		12,585		12,580		10,823		1,757		-
Borrowed funds		41,421		41,417		283		41,134		-		48,314		48,698		13,766		34,932		-
Interest rate swap agreements												111		111		-		111		-
Accrued interest payable		45		45		-		45		-		110		110		-		110		-

1920

	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 period ended September 30, 2018:

Cash and cash equivalents carrying amounts approximate fair value. Certificates of deposit 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 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~~period ended ~~September 30, 2017 and~~ December 31, ~~2016:~~2017:

Cash and cash ~~equivalents~~equivalent carrying amounts approximate fair value. Certificates of deposit 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 September 30, 2018, as compared to December 31, 2017, and the results of operations for the quarter and nine months ending September 30, 2018, and September 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 September 30, ~~2017,~~2018, the Bancorp had total assets of ~~$916.3 million,~~$1.1 billion, total loans receivable of ~~$608.0~~$742.2 million and total deposits of ~~$757.6~~$902.8 million. Stockholders' equity totaled ~~$91.1~~$96.5 million or ~~9.94%~~8.99% of total assets, with a book value per share of ~~$31.82.~~$31.85. Net income for the quarter ended September 30, ~~2017,~~2018, was ~~$2.2~~$1.6 million, or ~~$0.78~~$0.54 earnings per common share for both basic and diluted calculations. For the quarter ended September 30, ~~2017,~~2018, the return on average assets (ROA) was ~~0.98%~~0.62%, while the return on average stockholders’ equity (ROE) was ~~9.80%~~6.70%. Net income for the nine months ended September 30, ~~2017,~~2018, was ~~$7.1~~$6.7 million, or ~~$2.47~~$2.29 earnings per common share for both basic and diluted calculations. For the nine months ended September 30, ~~2017,~~2018, the ROA was ~~1.04%~~0.92%, while the ROE was ~~10.54%~~9.56%.

Recent Developments

Acquisition of First Personal Financial Corp. On July 26, 2018, the Bancorp completed its previously announced acquisition of First Personal Financial Corp., a Delaware corporation (“First Personal”) pursuant to an Agreement and Plan of Merger dated February 20, 2018 (the “First Personal Merger Agreement”) between the Bancorp and First Personal. Pursuant to the terms of the First Personal Merger Agreement, First Personal merged with and into the Bancorp, with the Bancorp as the surviving corporation (the “First Personal Merger”). Simultaneous with the First Personal Merger, First Personal Bank, an Illinois state chartered commercial bank and wholly-owned subsidiary of First Personal, merged with and into Peoples Bank SB, with Peoples Bank as the surviving bank.

In connection with the First Personal Merger, each First Personal stockholder holding 100 or more shares of First Personal common stock received fixed consideration of (i) 0.1246 shares of Bancorp common stock, and (ii) $6.67 per share in cash for each outstanding share of First Personal common stock. Stockholders holding less than 100 shares of First Personal common stock received $12.12 in cash and no stock consideration for each outstanding share of First Personal common stock. Any fractional shares of Bancorp common stock that a First Personal stockholder would have otherwise received in the First Personal Merger were cashed out in the amount of such fraction multiplied by $42.95.

The Bancorp issued a total of approximately 161,875 shares of Bancorp common stock to the former First Personal stockholders, and paid cash consideration of approximately $8.7 million. Based upon the closing price of Bancorp’s common stock on July 25, 2018, the transaction had an implied valuation of approximately $15.6 million.

Merger Agreement with AJS Bancorp, Inc. On July 30, 2018, the Bancorp entered into an Agreement and Plan of Merger (the “AJSB Merger Agreement”) with AJS Bancorp, Inc., a Maryland corporation (“AJSB”). Pursuant to the AJSB Merger Agreement, AJSB will merge with and into NWIN, with NWIN as the surviving corporation (the “AJSB Merger”). Simultaneously with the AJSB Merger, A.J. Smith Federal Savings Bank, a federally chartered savings bank and wholly-owned subsidiary of AJSB (“ AJS Bank”), will merge with and into Peoples Bank SB, with Peoples Bank as the surviving bank.

Upon completion of the AJSB Merger, each AJSB stockholder who holds 100 or more shares of AJSB common stock will have the right to receive fixed consideration of (i) 0.2030 shares of NWIN common stock, and (ii) $7.20 per share in cash for each outstanding share of AJSB’s common stock, subject to adjustment as provided in the AJSB Merger Agreement. Stockholders holding less than 100 shares of AJSB common stock will have the right to receive $16.00 in cash and no stock consideration for each outstanding share of AJSB common stock. In lieu of any fractional shares of NWIN common stock, NWIN will distribute an amount in cash equal to such fraction multiplied by the volume-weighted average per share closing price of a share of NWIN common stock as quoted on the OTC Pink Marketplace during the fifteen consecutive trading days preceding the second business day prior to the closing of the AJSB Merger. Based upon the closing price of the Bancorp’s common stock of $43.00 on July 30, 2018, the transaction had an implied valuation of approximately $34.6 million.

Financial Condition

During the nine months ended September 30, ~~2017,~~2018, total assets increased by ~~$2.7~~$145.8 million ~~(0.3%~~(15.7%), with interest-earning assets increasing by ~~$7.1~~$124.3 million ~~(0.8%~~(14.3%). At September 30, ~~2017,~~2018, interest-earning assets totaled ~~$859.3~~$995.8 million compared to ~~$852.2~~$871.5 million at December 31, ~~2016.~~2017. Earning assets represented ~~93.8%~~92.8% of total assets at September 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 nine months was the result of the completion of the acquisition of First Personal as well as internally generated growth.

Net loans receivable totaled ~~$600.9~~$734.5 million at September 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:

	September 30,
	2017					December 31,					September 30,
	(unaudited)					2016					2018					December 31,
(Dollars in thousands)	Balance		% Loans			Balance		% Loans			(unaudited)					2017
											Balance		% Loans			Balance		% Loans

Residential real estate	$	171,667		28.2	%	$	173,262		29.7	%	$	220,862		29.8	%	$	172,141		27.8	%
Home equity		35,357		5.8	%		32,575		5.6	%		43,234		5.8	%		36,769		5.9	%
Commercial real estate		203,388		33.5	%		195,438		33.5	%		243,304		32.8	%		211,090		34.0	%
Construction and land development		53,983		8.9	%		38,937		6.7	%		54,755		7.4	%		50,746		8.2	%
Multifamily		37,402		6.2	%		36,086		6.2	%		45,752		6.2	%		43,368		7.0	%
Farmland												242		0.0	%		-		0.0	%
Consumer		383		0.1	%		524		0.1	%		5,633		0.8	%		461		0.1	%
Commercial business		75,954		12.5	%		77,299		13.2	%		102,687		13.8	%		76,851		12.4	%
Government		29,830		4.8	%		29,529		5.0	%		25,763		3.4	%		28,785		4.6	%
Loans receivable	$	607,964		100.0	%	$	583,650		100.0	%	$	742,232		100.0	%	$	620,211		100.0	%

Adjustable rate loans / loans receivable	$	349,022		57.4	%	$	332,650		57.0	%	$	417,367		56.2	%	$	348,559		56.2	%

	September 30,						September 30,
	2017			December 31,			2018			December 31,
	(unaudited)			2016			(unaudited)			2017

Loans receivable to total assets		66.3	%		63.9	%		69.2	%		66.9	%
Loans receivable to earning assets		70.8	%		68.5	%		74.5	%		71.2	%
Loans receivable to total deposits		80.3	%		74.8	%		82.2	%		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 nine months ended September 30, ~~2017,~~2018, the Bancorp originated ~~$31.6~~$41.8 million in new fixed rate mortgage loans for sale, compared to ~~$42.1~~$31.6 million during the nine months ended September 30, ~~2016.~~2017. Net gains realized from the mortgage loan sales totaled $1.0 million for the nine months ended September 30, 2018, compared to $883 thousand for the nine months ended September 30, ~~2017, compared to $1.1 million for the nine months ended September 30, 2016.~~2017. At September 30, ~~2017,~~2018, the Bancorp had ~~$2.0~~$4.5 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.

2123

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 September 30, 2017, compared to $6.1 million at December 31, 2016, a decrease of $516 thousand or 8.5%. The decrease in non-performing loans for the first nine 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 0.92% at September 30, 2017, compared to 1.05% at December 31, 2016. The ratio of non-performing loans to total assets was 0.61% at September 30, 2017, compared to 0.67% at December 31, 2016. At September 30, ~~2017,~~2018, all non-performing loans are also accounted for on a non-accrual basis, except for ~~seven~~six residential real estate loans totaling ~~$380~~$885 thousand and one home equity loan totaling $50 thousand that remained accruing and more than 90 days past due.

~~Loans internally classified as substandard totaled $5.8 million at September 30, 2017, compared to $6.1 million at December 31, 2016, a decrease of $276 thousand or 4.5%.~~ 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 $358 thousand for five 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:

(Dollars in thousands)	(unaudited)
Loan Segment	September 30, 2018			December 31, 2017
Residential real estate	$	4,746		$	3,734
Home equity		378			352
Commercial real estate		768			332
Construction and land development		-			133
Multifamily		-			-
Farmland		-			-
Commercial business		514			672
Consumer		-			-
Government		-			-
Total	$	6,406		$	5,223
Nonperforming loans to total loans		0.86	%		0.84	%
Nonperforming loans to total assets		0.60	%		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 September 30, ~~2017~~2018 or December 31, ~~2016.~~ 2017.

The Bancorp's substandard loans are summarized below:

(Dollars in thousands)	(unaudited)
Loan Segment	September 30, 2018		December 31, 2017
Residential real estate	$	4,350	$	3,732
Home equity		432		350
Commercial real estate		1,871		512
Construction and land development		-		134
Multifamily		-		-
Farmland		-		-
Commercial business		780		1,174
Consumer		-		-
Government		-		-
Total	$	7,433	$	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 $11.7 million at September 30, 2017, compared to $10.6 million at December 31, 2016, an increase of $1.1 million or 10.6%. The increase in watch loans is primarily due to the addition of two non-related commercial real estate loans totaling $1.3 million.are summarized below:

(Dollars in thousands)	(unaudited)
Loan Segment	September 30, 2018		December 31, 2017
Residential real estate	$	4,685	$	4,130
Home equity		544		233
Commercial real estate		5,972		6,758
Construction and land development		-		-
Multifamily		154		168
Farmland		-		-
Commercial business		3,144		394
Consumer		20		-
Government		-		-
Total	$	14,519	$	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 September 30, 2017, impaired loans totaled $2.7 million, compared to $3.5 million at December 31, 2016, a decrease of $811 thousand or 23.1%. The decrease in impaired loans for the first nine 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 and four commercial real estate loans totaling $241 thousand. The September 30, 2017 impaired loan balances consist of seven commercial real estate loans, seven commercial business loans, and one construction and land development loan, all of which total $1.4 million that are secured by business assets and real estate, and are personally guaranteed by the owners of the businesses. In addition, 70 Investor Owned Residential Real Estate and purchased credit impaired loans totaling $1.3 million have also been classified as impaired. At September 30, 2017 the ALL contained $725 thousand in specific reserves for impaired loans, compared to $1.2 million at December 31, 2016. There were no other loans considered for impairment as of September 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 September 30, 2017,~~including purchased credit impaired loans, ~~with unpaid principal balances totaled $2.7 million with a recorded investment of $773 thousand.~~are summarized below:

(Dollars in thousands)	(unaudited)
Loan Segment	September 30, 2018		December 31, 2017
Residential real estate	$	1,631	$	1,152
Home equity		270		-
Commercial real estate		3,409		512
Construction and land development		-		134
Multifamily		-		-
Farmland		-		-
Commercial business		1,909		724
Consumer		-		-
Government		-		-
Total	$	7,219	$	2,522

At ~~September 30, 2017,~~times, the Bancorp ~~classified three loans totaling $325 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 $53 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 restructured loans are summarized below:

(Dollars in thousands)	(unaudited)
Loan Segment	September 30, 2018		December 31, 2017
Residential real estate	$	412	$	303
Home equity		147		-
Commercial real estate		1,103		181
Construction and land development		-		-
Multifamily		-		-
Farmland		-		-
Commercial business		394		51
Consumer		-		-
Government		-		-
Total	$	2,056	$	535

The increase in the troubled debt restructure loans reflected in the table above for the nine months ended September 30, 2018 was the result of a $1.1 million commercial relationship as well as a $129 thousand commercial business loan which were modified as part of a troubled debt restructure or renewed with cash flow difficulties. These restructurings along with seven residential real estate and home equity restructurings all contributed to the increase in impaired loans. The $1.1 million relationship was classified as substandard and remains in accrual status.

The increase in the nonperforming, substandard, special mention, and impaired loans reflected in the tables above for the nine months ending September 30, 2018, are the result of the completion of the acquisition of First Personal as well as two large commercial relationships and one commercial customer which were all not related to the acquisition. One $531 thousand commercial real estate loan and First Personal loans totaling $761 thousand contributed to the September 30, 2018 increase in nonperforming loans. One large $1.1 million commercial relationship, one $531 thousand commercial real estate loan and First Personal loans totaling $761 thousand contributed to the September 30, 2018 increase in substandard loans. One $2.1 million commercial relationship and First Personal loans totaling $4.1 million contributed to the September 30, 2018 increase in watch loans, which was offset by the payoff of one $2.3 million commercial real estate loan. One large $1.1 million commercial relationship, one $531 thousand commercial real estate loan, and First Personal purchased credit impaired loans totaling $4.0 million contributed to the September 30, 2018 increase in impaired loans.

At September 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 ~~nine months ended September 30, 2017, $722 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 $846 thousand~~allowance for loan losses given the current risk estimates.

The Bancorp's provision for loan losses for the nine months ended ~~September 30, 2016, a decrease of $124 thousand or 14.7%.~~ are summarized below:

(Dollars in thousands)

	(unaudited)
Loan Segment	September 30, 2018			September 30, 2017
Residential real estate	$	143		$	370
Home equity		51			(157	)
Commercial real estate		210			(195	)
Construction and land development		(39	)		(47	)
Multifamily		(165	)		(31	)
Farmland		3			-
Commercial business		439			44
Consumer		316			738
Government		(8	)		-
Total	$	950		$	722

The ALL provision for the current nine month period is primarily a result of overall loan portfolio growth. For the nine months ended September 30, 2017, charge-offs, net of recoveries, totaled $1.4 million, compared to charge-offs, net of recoveries of $295 thousandBancorp's charge-off and recovery information for the nine months ended ~~September 30, 2016. The increase in net charge-offs the first nine 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 and charge-offs totaling $347 thousand to four commercial business loans. The net loan charge-offs for the first nine months of 2017 were comprised of $911 thousand in residential real estate loans, $48 thousand in consumer loans, $344 thousand in commercial business loans, and $60 thousand in home equity loans. summarized below:

(Dollars in thousands)	(unaudited)
	As of September 30, 2018
Loan Segment	Charge-off			Recoveries		Net Charge-offs
Residential real estate	$	(136	)	$	-	$	(136	)
Home equity		(24	)		-		(24	)
Commercial real estate		(119	)		24		(95	)
Construction and land development		-			-		-
Multifamily		-			-		-
Farmland		-			-		-
Commercial business		(529	)		125		(404	)
Consumer		(41	)		17		(24	)
Government		-			-		-
Total	$	(849	)	$	166	$	(683	)

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 1.16% at September 30, 2017, compared to 1.32% at December 31, 2016. The ALL-to-non-performing~~and non-performing loans ~~(coverage ratio) was 126.3% at September 30, 2017, compared to 126.1% at December 31, 2016.~~ are summarized below:

(Dollars in thousands)	(unaudited)
	September 30, 2018			December 31, 2017

Allowance for loan losses	$	7,749		$	7,482
Total loans	$	742,232		$	620,211
Non-performing loans	$	6,406		$	5,223
ALL-to-total loans		1.04	%		1.21	%
ALL-to-non-performing loans (coverage ratio)		121.0	%		143.3	%

The September 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 September 30, ~~2017,~~2018, foreclosed real estate totaled ~~$1.8~~$2.1 million, which was comprised of ~~sixteen~~twenty-seven properties, compared to ~~$2.7~~$1.7 million and ~~twenty-six~~nineteen properties at December 31, ~~2016.~~2017. The ~~decrease~~increase in foreclosed real estate is the result of the ~~sale~~addition of ~~properties.~~$1.2 million, which was comprised of twenty properties, from the acquisition of First Personal. Net gains from the sale of foreclosed real estate totaled ~~$95~~$154 thousand for the nine months ended September 30, ~~2017, and were the result of proceeds received from the sale of foreclosed properties.~~2018. At the end of September ~~2017~~2018 all of the Bancorp’s foreclosed real estate is located within its primary market ~~area.~~area, which has been expanded into the Cook County, Illinois and Chicagoland metropolitan area with the acquisition of First Personal.

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 ~~$243.6~~$238.1 million at September 30, ~~2017,~~2018, compared to ~~$233.6~~$244.5 million at December 31, ~~2016, an increase~~2017, a decrease of ~~$10.0~~$6.4 million ~~(4.3%~~(2.6%). The ~~increase~~decrease in the securities portfolio during the year is a result of ~~continued reinvestment~~market value adjustments for unrealized losses and the reallocation of ~~income and gains in that portfolio.~~$5.0 million of funds to support loan growth. At September 30, ~~2017,~~2018, the securities portfolio represented ~~28.3%~~23.9% of interest-earning assets and ~~26.6%~~22.2% of total assets compared to ~~27.4%~~28.1% 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:

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

Money market fund	$	1,711		0.7	%	$	222		0.1	%	$	2,018		0.8	%	$	476		0.2	%
U.S. government sponsored entities		3,914		1.6	%		16,274		7.0	%		9,768		4.1	%		3,890		1.6	%
Collateralized mortgage obligations and residential mortgage-backed securities		141,575		58.1	%		117,975		50.5	%		132,670		55.7	%		132,938		54.4	%
Municipal securities		93,088		38.2	%		96,745		41.4	%		91,416		38.4	%		103,747		42.4	%
Collateralized debt obligations		3,264		1.4	%		2,409		1.0	%		2,199		1.0	%		3,439		1.4	%
Total securities available-for-sale	$	243,552		100.0	%	$	233,625		100.0	%	$	238,071		100.0	%	$	244,490		100.0	%

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

Interest bearing deposits in other financial institutions $ 2,306 $ 29,556 $ (27,250 ) -92.2 %
Fed funds sold 468 215 253 117.7 %
Federal Home Loan Bank stock 3,000 3,000 - 0.0 %

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

Interest bearing deposits in other financial institutions	$	2,576	$	139	$	2,437		1753.2	%
Fed funds sold		1,398		357		1,041		291.6	%
Certificates of deposit in other financial institutions		3,754		1,676		2,078		124.0	%
Federal Home Loan Bank stock		3,236		3,000		236		7.9	%

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. The net increase~~deposit, and in fed funds sold is primarily the result of timing of liquidity needs. The increase in Federal Home Loan Bank stock corresponds to stock ownership requirements based on borrowing needs. The increase in certificate of deposits in other financial institutions is the result of First Personal merger.

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:

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

Checking	$	284,187	$	288,149	$	(3,962	)		-1.4	%	$	339,176	$	309,023	$	30,153			9.8	%
Savings		132,397		127,626		4,771			3.7	%		161,357		129,702		31,655			24.4	%
Money market		168,151		178,332		(10,181	)		-5.7	%		148,227		170,359		(22,132	)		-13.0	%
Certificates of deposit		172,825		185,664		(12,839	)		-6.9	%		253,996		183,920		70,076			38.1	%
Total deposits	$	757,560	$	779,771	$	(22,211	)		-2.8	%	$	902,756	$	793,004	$	109,752			13.8	%

~~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~~the acquisition of First Personal. When adjusted for ~~short-term, liquid investment alternatives.~~the First Personal acquisition, overall deposits decreased during the period ended September 30, 2018. This decrease reflects the cyclical nature and timing of municipality money market deposits.

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:

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

Repurchase agreements	$	15,946	$	13,998	$	1,948		13.9	%	$	12,585	$	11,300	$	1,285		11.4	%
Borrowed funds		41,421		25,828		15,593		60.4	%		48,314		20,881		27,433		131.4	%
Total borrowed funds	$	57,367	$	39,826	$	17,541		44.0	%	$	60,899	$	32,181	$	28,718		89.2	%

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 nine months ended September 30, ~~2017,~~2018, cash and cash equivalents ~~decreased~~increased by ~~$31.0~~$2.9 million compared to a ~~$5.0~~$31.0 million ~~increase~~decrease for the nine months ended September 30, ~~2016.~~2017. The primary sources of cash and cash equivalents were sales of loans originated for sale, proceeds from maturities, pay downs, calls, and sales of available-for-sale securities, proceeds from FHLB advances, and ~~borrowed funds.~~additional borrowings. The primary uses of cash and cash equivalents were loan originations, the purchase of securities, ~~loan originations, decreases in deposits,~~ and the repayment of FHLB advances. Cash provided by operating activities totaled ~~$9.1~~$2.3 million for the nine months ended September 30, ~~2017,~~2018, compared to cash provided of ~~$5.5~~$9.1 million for the nine month period ended September 30, ~~2016.~~2017. The ~~increase~~decrease in cash from operating activities was primarily a result of an increase in ~~clearing accounts that facilitate customer transactions.~~loans originated for sale offset by the sale of loans originated for sale and accrued expenses and other liabilities. Cash outflows from investing activities totaled ~~$33.0~~$10.4 million for the current period, compared to cash outflows of ~~$27.9~~$33.0 million for the nine months ended September 30, ~~2016.~~2017. Cash outflows from investing activities for the current nine months were primarily related to the origination of loans receivable and purchases of securities, offset by the sale and maturities for securities available-for-sale, and ~~pay downs~~cash used for the acquisition of ~~securities.~~First Personal. Net cash ~~outflows~~inflows from financing activities totaled ~~$7.1~~$11.0 million during the current period compared to net cash ~~inflows~~outflows of ~~$27.4~~$7.1 million for the nine months ended September 30, ~~2016.~~2017. The net cash ~~outflows~~inflows from financing activities ~~was~~were primarily a result of ~~deposits~~proceeds from FHLB advances and ~~repayment of FHLB advances.~~increased borrowing. On a cash basis, the Bancorp paid dividends on common stock of $2.5 million for the nine months ended September 30, 2018 and $2.4 million for the nine months ended September 30, ~~2017 and $2.3 million for the nine months ended September 30, 2016.~~2017.

At September 30, ~~2017,~~2018, outstanding commitments to fund loans totaled ~~$130.8~~$185.3 million. Approximately ~~51.0%~~51.4% 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 $10.2 million at September 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 nine months ended September 30, ~~2017,~~2018, stockholders' equity increased by ~~$7.0~~$4.4 million ~~(8.3%~~(4.8%). During the nine months ended September 30, ~~2017,~~2018, stockholders’ equity was primarily increased by net income of ~~$7.1~~$6.7 million and ~~an increase to net unrealized gains on security sales~~the issuance of ~~$2.3 million.~~161,875 shares for $6.9 million as part of the acquisition of First Personal. Decreasing stockholders’ equity was the declaration of ~~$2.5~~$2.6 million in cash ~~dividends.~~dividends and a decrease to net unrealized gains (losses) on securities available-for-sale of $6.7 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 nine months of ~~2017~~2018 or ~~2016.~~2017. During 2018, 7,700 restricted stock shares vested under the program outlined in Note 10 of the financial statements, of which 1,658 of these shares were withheld in the form of a net surrender to cover the withholding tax obligations of the vesting employees. The repurchase of these surrendered shares is considered outside of the scope of the formal stock repurchase program.

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 Wall Street Reform and Consumer Protection Act of 2010 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$3 billion in consolidated assets, such as the Bancorp, are exempt from consolidated regulatory capital requirements, unless the FRB determines otherwise in particular cases.

During the nine months ended September 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~~$3.5 million. ~~Three of these~~These investments currently have ratings that are below investment grade. As a result, approximately ~~$19.2~~$18.9 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 September 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 September 30, 2017	Amount		Ratio			Amount		Ratio			Amount		Ratio
At September 30, 2018																Amount		Ratio			Amount		Ratio			Amount	Ratio
Common equity tier 1 capital to risk-weighted assets	$	87.4		13.0	%	$	30.2		4.5	%	$	43.7		6.5	%	$	89.1		11.3	%	$	35.6		4.5	%	N/A	N/A
Tier 1 capital to risk-weighted assets	$	87.4		13.0	%	$	40.3		6.0	%	$	53.8		8.0	%	$	89.1		11.3	%	$	47.5		6.0	%	N/A	N/A
Total capital to risk-weighted assets	$	94.4		14.1	%	$	53.8		8.0	%	$	67.2		10.0	%	$	96.8		12.2	%	$	63.3		8.0	%	N/A	N/A
Tier 1 capital to adjusted average assets	$	87.4		9.6	%	$	36.5		4.0	%	$	45.6		5.0	%	$	89.1		8.6	%	$	41.3		4.0	%	N/A	N/A

(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 $ 82.4 13.1 % $ 28.3 4.5 % $ 40.9 6.5 %
Tier 1 capital to risk-weighted assets $ 82.4 13.1 % $ 37.8 6.0 % $ 50.4 8.0 %
Total capital to risk-weighted assets $ 90.1 14.3 % $ 50.4 8.0 % $ 63.0 10.0 %
Tier 1 capital to adjusted average assets $ 82.4 9.2 % $ 36.0 4.0 % $ 45.0 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	$	88.4		12.9	%	$	30.9		4.5	%	N/A	N/A
Tier 1 capital to risk-weighted assets	$	88.4		12.9	%	$	41.2		6.0	%	N/A	N/A
Total capital to risk-weighted assets	$	96.0		14.0	%	$	55.0		8.0	%	N/A	N/A
Tier 1 capital to adjusted average assets	$	88.4		9.6	%	$	36.8		4.0	%	N/A	N/A

In addition, the following table shows that, at September 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 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 September 30, 2017	Amount		Ratio			Amount		Ratio			Amount		Ratio
At September 30, 2018																Amount		Ratio			Amount		Ratio			Amount		Ratio
Common equity tier 1 capital to risk-weighted assets	$	85.5		12.7	%	$	30.2		4.5	%	$	43.7		6.5	%	$	86.3		10.9	%	$	35.6		4.5	%	$	51.4		6.5	%
Tier 1 capital to risk-weighted assets	$	85.5		12.7	%	$	40.3		6.0	%	$	53.8		8.0	%	$	86.3		10.9	%	$	47.5		6.0	%	$	63.3		8.0	%
Total capital to risk-weighted assets	$	92.5		13.8	%	$	53.8		8.0	%	$	67.2		10.0	%	$	94.1		11.9	%	$	63.3		8.0	%	$	79.1		10.0	%
Tier 1 capital to adjusted average assets	$	85.5		9.4	%	$	36.4		4.0	%	$	45.5		5.0	%	$	86.3		8.4	%	$	41.0		4.0	%	$	51.3		5.0	%

(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	$	81.2		12.9	%	$	28.4		4.5	%	$	41.0		6.5	%	$	86.3		12.6	%	$	30.9		4.5	%	$	44.6		6.5	%
Tier 1 capital to risk-weighted assets	$	81.2		12.9	%	$	37.9		6.0	%	$	50.5		8.0	%	$	86.3		12.6	%	$	41.2		6.0	%	$	54.9		8.0	%
Total capital to risk-weighted assets	$	88.9		14.1	%	$	50.5		8.0	%	$	63.1		10.0	%	$	93.8		13.7	%	$	54.9		8.0	%	$	68.7		10.0	%
Tier 1 capital to adjusted average assets	$	81.2		9.0	%	$	35.9		4.0	%	$	44.9		5.0	%	$	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 August ~~25, 2017~~31, 2018 the Board of Directors of the Bancorp declared a third quarter dividend of ~~$0.29~~$0.30 per share. The Bancorp’s third quarter dividend was paid to shareholders on October ~~5, 2017.~~9, 2018.

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

For the ~~quarter~~three months ended September 30, ~~2017,~~2018, the Bancorp reported net income of ~~$2.2~~$1.6 million, compared to net income of ~~$2.3~~$2.2 million for the quarter ended September 30, ~~2016,~~2017, a decrease of ~~$80~~$623 thousand ~~(3.4%~~(27.7%). For the ~~current~~ quarter, the ROA was ~~0.98%~~0.62%, compared to ~~1.03%~~0.98% for the quarter ended September 30, ~~2016.~~2017. The ROE was ~~9.80%~~6.70% for the quarter ended September 30, ~~2017,~~2018, compared to ~~10.67%~~9.82% for the quarter ended September 30, ~~2016.~~2017.

Net interest income for the ~~three months~~quarter ended September 30, ~~2017~~2018 was ~~$7.8~~$9.0 million, an increase of ~~$190 thousand (2.5%~~$1.2 million (16.0%), compared to ~~$7.6~~$7.8 million for the quarter ended September 30, ~~2016.~~2017. The weighted-average yield on interest-earning assets was 4.26% for the quarter ended September 30, 2018, compared to 3.94% for the ~~three months~~quarter ended September 30, ~~2017, compared to 3.86% for the three months ended September 30, 2016.~~2017. The weighted-average cost of funds for the quarter ended September 30, ~~2017~~2018 was ~~0.32%~~0.56% compared to ~~0.29%~~0.32% for the quarter ended September 30, ~~2016.~~2017. The impact of the ~~3.94%~~4.26% return on interest earning assets and the ~~0.32%~~0.56% cost of funds resulted in an interest rate spread of ~~3.62%~~3.69% for the current quarter, ~~compared to 3.57%~~an increase from the 3.61% spread for the quarter ended September 30, ~~2016. Compared to the three months ended September 30, 2016, total interest income increased by $262 thousand (3.2%) while total interest expense increased by $72 thousand (12.3%).~~2017. The net interest margin on earning assets was 3.72% for the three months ended September 30, 2018 and 3.63% for the three months ended September 30, ~~2017, compared to 3.58% for the quarter ended September 30, 2016.~~2017. On a tax equivalent basis, the Bancorp’s net interest margin was 3.92% for the three months ended September 30, 2018, compared to 3.86% for the three months ended September 30, 2017, compared to 3.82% for the quarter ended September 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 three months ended September 30, 2017, interest income from loans increased by $164 thousand (2.5%), compared to the three months ended September 30, 2016. The change was due to an increase in average balances and average rate. The weighted-average yield on loans outstanding was 4.50% for the current quarter, compared to 4.45% for the three months ended September 30, 2016. Loan balances averaged $606.7 million for the current quarter, an increase of $7.2 million (1.2%) from $599.5 million for the three months ended September 30, 2016. During the three months ended September 30, 2017, interest income on securities and other interest bearing balances increased by $98 thousand (6.5%), compared to the quarter ended September 30, 2016. The change was due to an increase in average balances and average rates. The weighted-average yield on securities and other interest bearing balances was 2.56%, for the current quarter, compared to 2.43% for the three months ended September 30, 2016. Securities balances averaged $244.7 million for the current quarter, up $2.1 million (0.9%) from $242.6 million for the three months ended September 30, 2016. Other interest bearing balances averaged $4.8 million for the current period, up $166 thousand (3.6%) from $4.7 million for the three months ended September 30, 2016.

Interest expense on deposits increased by $73 thousand (16.4%) during the current quarter compared to the three months ended September 30, 2016. 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 deposits for the three month period ended September 30, 2017 was 0.27% compared to 0.24% for the three months ended September 30, 2016. Total deposit balances averaged $770.9 million for the current quarter, an increase of $22.8 million (3.0%) from $748.2 million for the quarter ended September 30, 2016. Interest expense on borrowed funds decreased by $1 thousand (0.7%) during the current quarter due to a decrease in average balances compared to the three months ended September 30, 2016. The weighted-average cost of borrowed funds was 1.30% for the current quarter, compared to 1.02% for the three months ended September 30, 2016. Borrowed funds averaged $43.5 million during the quarter ended September 30, 2017, a decrease of $12.0 million (21.6%) from $55.6 million for the quarter ended September 30, 2016. The decrease in borrowed funds is the result of seasonality of inflows of deposits.

Noninterest income for the quarter ended September 30, 2017 was $2.1 million, a decrease of $112 thousand (5.1%) from $2.2 million for the quarter ended September 30, 2016. Fees and service charges expense totaled $843 thousand for the current quarter, an increase of $80 thousand (10.5%), compared to $763 thousand for the quarter ended September 30, 2016. The increase in fees and service charges is the result of the Bancorp’s continued focus on maintaining competitive fees within its market place. Fees from wealth management operations totaled $459 thousand for the current quarter, an increase of $36 thousand (8.5%), compared to $423 thousand for the quarter ended September 30, 2016. The increase in wealth management income is related to an increase in the book value of assets under management. Gain on sale of loans held-for-sale, net totaled $412 thousand for the current quarter, a decrease of $167 thousand (28.8%), compared to $579 thousand for the quarter ended September 30, 2016. The decrease in gains from the sale of loans is a result of timing differences in customer demand. Gain on sale of securities, net totaled $213 thousand for the current quarter, a decrease of $70 thousand (24.7%), compared to $283 thousand for the quarter ended September 30, 2016. Current market conditions provided fewer opportunities to maintain securities cash flows, while recognizing gains from the sales of securities. Increase in cash value of bank owned life insurance totaled $119 thousand for the current quarter, an increase of $1 thousand (0.8%), compared to $118 thousand for the quarter ended September 30, 2016. Gain on sale of foreclosed real estate, net totaled $2 thousand for the current quarter, a decrease of $4 thousand (66.7%), compared to $6 thousand for the quarter ended September 30, 2016. Other noninterest income totaled $27 thousand for the current quarter, an increase of $12 thousand (80%), compared to $15 thousand for the quarter ended September 30, 2016.

Noninterest expense for the quarter ended September 30, 2017 was $6.9 million, an increase of $377 thousand (5.8%) from $6.5 million for the three months ended September 30, 2016. Compensation and benefits expense totaled $4.1 million for the current quarter, an increase of $193 thousand (4.9%), compared to $3.9 million for the quarter ended September 30, 2016.The increase in compensation and benefits is the result of a continued focus on talent management and retention. Occupancy and equipment expense totaled $845 thousand for the current quarter, a decrease of $55 thousand (6.1%), compared to $900 thousand for the quarter ended September 30, 2016.The decrease in occupancy and equipment expense is the result of lower building operating expenses. Data processing expense totaled $364 thousand for the current quarter, an increase of $21 thousand (6.1%), compared to $343 thousand for the quarter ended September 30, 2016. Data processing expense has increased as a result of increased system utilization. Marketing expense totaled $135 thousand for the current quarter, an increase of $27 thousand (25.0%) compared to $108 thousand for the quarter ended September 30, 2016. The Bancorp proactively markets its products, but varies its timing based on projected benefits and needs. Federal deposit insurance premiums expense totaled $84 thousand for the current quarter, a decrease of $51 thousand (37.8%), compared to $135 thousand for the quarter ended September 30, 2016. The decrease was the result of lower FDIC premiums. Other expense totaled $1.4 million for the current quarter, an increase of $242 thousand (20.8%), compared to $1.2 million for the quarter ended September 30, 2016. The increase in other operating expenses is related to generally higher costs related to foreclosure and collection expense as well as higher third party costs. The Bancorp’s efficiency ratio was 70.3% for the quarter ended September 30, 2017, compared to 67.0% for the three months ended September 30, 2016. The increase in the efficiency ratio was a result of lower noninterest income and higher noninterest expense. The ratio is determined by dividing total noninterest expense by the sum of net interest income and total noninterest income for the period.

Income tax expenses for the three months ended September 30, 2017 totaled $509 thousand, compared to income tax expense of $631 thousand for the three months ended September 30, 2016, a decrease of $122 thousand (19.3%). The combined effective federal and state tax rates for the Bancorp was 18.5% for the three months ended September 30, 2017, compared to 21.3% for the three months ended September 30, 2016. The Bancorp’s lower current quarter 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 self-insurance program through a wholly owned captive insurance company.

~~Results of Operations - Comparison of the Nine Months Ended September 30, 2017 to the Nine Months Ended September 30, 2016~~

For the nine months ended September 30, 2017, the Bancorp reported net income of $7.1 million, compared to net income of $6.8 million for the nine months ended September 30, 2016, an increase of $262 thousand (3.8%). For the current nine months the ROA was 1.04%, compared to 1.03% for the nine months ended September 30, 2016. The ROE was 10.54% for the nine months ended September 30, 2017, compared to 10.63% for the nine months ended September 30, 2016.

Net interest income for the nine months ended September 30, 2017 was $22.9 million, an increase of $469 thousand (2.1%), compared to $22.5 million for the nine months ended September 30, 2016. The weighted-average yield on interest-earning assets was 3.89% for the nine months ended September 30, 2017, compared to 3.90% for the nine months ended September 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 nine months of 2016. The weighted-average cost of funds for the nine months ended September 30, 2017 and September 30, 2016, was 0.30%. The impact of the 3.89% return on interest earning assets and the 0.30% cost of funds resulted in an interest rate spread of 3.59% for the current nine months, compared to 3.60% for the nine months ended September 30, 2016. Compared to the nine months ended September 30, 2016, total interest income increased by $546 thousand (2.3%) while total interest expense increased by $77 thousand (4.4%). The net interest margin for earning assets was 3.60% for the nine months ended September 30, 2017, compared to 3.62% for the nine months ended September 30, 2016. On a tax equivalent basis, the Bancorp’s net interest margin was 3.84% for the nine months ended September 30, 2017, compared to 3.86% for the nine months ended September 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 ~~nine~~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.

Quarter-to-Date
(Dollars in thousands)	Average Balances, Interest, and Rates
	September 30, 2018							September 30, 2017
	Average Balance			Interest		Rate (%)		Average Balance			Interest		Rate (%)
ASSETS
Interest bearing deposits in other financial institutions	$	6,502		$	38		2.34	$	1,696		$	9		2.12
Federal funds sold		1,104			11		3.99		1,480			3		0.81
Certificates of deposit in other financial institutions		3,570			25		2.80		1,657			6		1.45
Securities available-for-sale		236,629			1,674		2.83		241,697			1,553		2.57
Loans receivable		719,654			8,552		4.75		606,709			6,828		4.50
Federal Home Loan Bank stock		3,177			35		4.41		3,000			32		4.27
Total interest earning assets		970,636		$	10,335		4.26		856,239		$	8,431		3.94
Cash and non-interest bearing deposits in other financial institutions		10,348							12,869
Allowance for loan losses		(7,542	)						(7,062	)
Other noninterest bearing assets		68,849							53,385
Total assets	$	1,042,291						$	915,431

LIABILITIES AND STOCKHOLDERS' EQUITY
Total deposits	$	883,405		$	1,018		0.46	$	770,938		$	518		0.27
Repurchase agreements		12,615			47		1.49		13,379			31		0.93
Borrowed funds		38,624			254		2.63		30,162			110		1.46
Total interest bearing liabilities		934,644		$	1,319		0.56		814,479		$	659		0.32
Other noninterest bearing liabilities		10,626							9,369
Total liabilities		945,270							823,848
Total stockholders' equity		97,021							91,583
Total liabilities and stockholders' equity	$	1,042,291						$	915,431

Return on average assets		0.62	%						0.98	%
Return on average equity		6.70	%						9.82	%
Net interest margin (average earning assets)		3.72	%	$	9,016				3.63	%	$	7,772

The increase in interest income for interest bearing deposits in other financial institutions was the result of higher average balances and higher average short term rates for the three months ended September 30, ~~2017, interest income from loans increased by $277 thousand (1.4%),~~2018, compared to the ~~nine~~three months ended September 30, ~~2016.~~2017. The ~~change~~increase in interest income for federal funds sold was primarily ~~due to an increase~~the result of higher average rates received in ~~average balances. The weighted-average yield on loans outstanding was 4.42%~~short term rates for the ~~current nine months, compared to 4.48% for the nine~~three months ended September 30, ~~2016. Loan balances averaged $600.7 million for~~2018, compared to the ~~current nine months, an increase of $16.4 million (2.8%) from $584.3 million for the nine~~three months ended September 30, ~~2016. During~~2017. The increase in interest income for certificates of deposit in other financial institutions was the ~~nine~~result of higher average balances and higher average rates received in short term rates for the three months ended September 30, ~~2017, interest income on securities and other interest bearing balances increased by $269 thousand (5.9%),~~2018, compared to the ~~nine~~three months ended September 30, ~~2016.~~2017. The increase in interest income for securities available-for-sale was ~~due to an increase~~primarily the result of higher average rates received in ~~weighted-average balances and weighted-average yield. The weighted-average yield on securities and other interest bearing balances was 2.60%,~~rates for the ~~current nine months, compared to 2.53% for the nine~~three months ended September 30, ~~2016. Securities balances averaged $241.4 million for~~2018, compared to the ~~current nine months, up $995 thousand (0.4%) from $240.4 million for the nine~~three months ended September 30, ~~2016. Other~~2017. The increase in interest ~~bearing~~income for loans receivable was the result of higher average balances ~~averaged $7.0 million~~and higher weighted average rates for the ~~current period, up $3.3 million (89.2%) from $3.7 million for the nine~~three months ended September 30, ~~2016.~~2018, compared to the three months ended September 30, 2017. The increase in the interest expense of total deposits and borrowed funds was the result of higher average balances and higher weighted average rates for the three months ended September 30, 2018 compared to the three months ended September 30, 2017. The increase in the interest expense for repurchase agreements was the result of higher weighted average rates for the three months ended September 30, 2018 compared to the three months ended September 30, 2017.

2931

~~Interest expense on deposits increased by $160 thousand (12.2%) during~~The following table shows the ~~current nine months compared to the nine months ended September 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 nine months ended September 30, 2017 was 0.26%, compared to 0.24%, for the nine months ended September 30, 2016. Total deposit balances averaged $770.1 million for the current nine months, up $41.6 million (5.7%) from $728.5 million for the nine months ended September 30, 2016. Interest expense on borrowed funds decreased by $83 thousand (18.7%) during the current nine months due to lower average balances, as compared to the nine months ended September 30, 2016. The weighted-average cost of borrowed funds was 1.22% for the current nine months, compared to 1.00% for the nine months ended September 30, 2016. Borrowed funds averaged $39.6 million during the nine months ended September 30, 2017, a decrease of $19.3 million (32.8%) from $58.9 million for the nine months ended September 30, 2016. The decrease was a result of timing in customer deposits and withdrawals for the period.

~~Noninterest~~noninterest income for the ~~nine months ended~~quarter ending September 30, ~~2017 was $5.8 million, an increase of $125 thousand (2.2%) from $5.7 million for the nine months ended~~2018, and September 30, ~~2016. During the current nine months, fees and service charges totaled $2.4 million, an increase of $261 thousand (12.2%) from $2.1 million for the nine months ended September 30, 2016.~~ 2017.

	Three Months Ended
(Dollars in thousands)	September 30,				Three Months Ended
	2018		2017		$ Change			% Change
Noninterest income:
Fees and service charges	$	991	$	843	$	148			17.6	%
Gain on sale of loans held-for-sale, net		451		412		39			9.5	%
Wealth management operations		414		459		(45	)		-9.8	%
Gain on sale of securities, net		151		213		(62	)		-29.1	%
Increase in cash value of bank owned life insurance		130		119		11			9.2	%
Gain on sale of foreclosed real estate, net		54		2		52			2600.0	%
Other		32		27		5			18.5	%
Total noninterest income	$	2,223	$	2,075	$	148			7.1	%

The increase in fees and service charges is the result of the Bancorp’s continued focus on maintaining competitive fees within its market ~~place. Fees from wealth management operations totaled $1.27 million for~~place, as well the ~~nine months ended September 30, 2017, a decrease~~acquisition of ~~$13 thousand (1.0%) from $1.28 million for the nine months ended September 30, 2016.~~First Personal. The decrease in wealth management income is related to book value changes in assets under management. Gains from loan sales totaled $883 thousand for the current nine months, a decrease of $237 thousand (21.2%), compared to $1.1 million for the nine months ended September 30, 2016. The decreaseincrease in gains ~~from the~~on sale of loans is a result of ~~timing differences~~overall increase in customer demand. Gains from the sale of securities totaled $758 thousand for the current nine months, an increase of $58 thousand (8.3%) from $700 thousand for the nine months ended September 30, 2016.loan origination volume. Current market conditions ~~during the nine months~~ provided opportunities to ~~manage~~maintain securities cash flows, while recognizing gains from the sales of securities. ~~Income from an~~The increase in ~~the cash value~~gain on sale of bank owned life insurance totaled $349 thousand for the nine months ended September 30, 2017, a decrease of $5 thousand (1.4%), compared to $354 thousand for the nine months ended September 30, 2016. Gains on foreclosed real estate ~~totaled $95 thousand for~~is the ~~nine months ended September 30, 2017, an increase~~result of ~~$15 thousand (18.8%)~~normal course of business sales from $80 thousand in gains for the nine months ended September 30, 2016. Other noninterest income totaled $64 thousand for the nine months ended September 30, 2017, an increase of $46 thousand (255.6%) from $18 thousand for the nine months ended September 30, 2016.other real estate owned. The increase in other noninterest income is ~~the result of~~primarily driven by rental income from ~~foreclosed~~other real ~~estate.~~estate owned properties.

~~Noninterest~~The following table shows the change in noninterest expense for the ~~nine months ended~~quarter ending September 30, ~~2017 was $19.3 million, an increase of $658 thousand (3.5%) from $18.6 million for the nine months ended~~2018, and September 30, ~~2016. During the current nine months, compensation and benefits totaled $10.8 million, an increase of $313 thousand (3.0%) from $10.5 million for the nine months ended September 30, 2016.~~ 2017.

	Three Months Ended
(Dollars in thousands)	September 30,				Three Months Ended
	2018		2017		$ Change			% Change
Noninterest expense:
Compensation and benefits	$	4,669	$	4,094	$	575			14.0	%
Data processing		1,012		364		648			178.0	%
Occupancy and equipment		829		845		(16	)		-1.9	%
Marketing		223		135		88			65.2	%
Federal deposit insurance premiums		91		84		7			8.3	%
Other		2,233		1,403		830			59.2	%
Total noninterest expense	$	9,057	$	6,925	$	2,132			30.8	%

The increase in compensation and benefits is primarily the result of aincreased compensation in the amount of approximately $200 thousand that resulted from the acquisition of First Personal. Additional increases to compensation and benefits can be attributed to management’s continued focus on talent ~~management. Occupancy~~management and ~~equipment totaled $2.5 million for the current nine months, a decrease of $226 thousand (8.2%), compared to $2.8 million for the nine months ended September 30, 2016.~~retention. The ~~decrease~~increase in ~~occupancy and equipment~~data processing expense is primarily the result of ~~lower building operating expenses. Data processing expense totaled $1.1 million for the nine months ended September 30, 2017, an increase~~data conversion expenses of ~~$87~~approximately $600 thousand ~~(8.7%) from $1.0 million for the nine months ended September 30, 2016. Data processing expense has increased as a result of increased system utilization. Marketing expense~~ related to ~~banking products totaled $469 thousand for~~ the ~~current nine months, an~~acquisition of First Personal as well as increased utilization of systems. The increase of $117 thousand (33.2%) from $352 thousand for the nine months ended September 30, 2016. The Bancorp continues to proactively market its products, but varies its timing based on projected benefits and needs. Federal deposit insurance premium expense totaled $242 thousand for the nine months ended September 30, 2017, a decrease of $161 thousand (40.0%) from $403 thousand for the nine months ended September 30, 2016. The decrease was the result of lower FDIC premiums. Otherin marketing expenses is primarily related to ~~banking operations totaled $4.1 million for~~ the ~~nine months ended September 30, 2017, an increase~~acquisition of ~~$528 thousand (14.9%) from $3.5 million for the nine months ended September 30, 2016.~~First Personal as well as regular advertising initiatives. The increase in other operating expenses is primarily related to ~~generally higher cost related to foreclosure and collection expense~~the increase of approximately $520 thousand that resulted from the acquisition of First Personal, as well as generally higher third party costs. The Bancorp’s efficiency ratio was ~~66.9%~~80.6% for the ~~nine months~~quarter ended September 30, ~~2017,~~2018, compared to ~~66.0%~~70.3% for the ~~nine months~~quarter ended September 30, ~~2016.~~2017. The ~~efficiency~~increased ratio ~~increased as a result of higher~~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. The acquisition of First Personal is discussed in Note 3 of the financial statements.

Income tax expenses for the ~~nine months~~quarter ended September 30, ~~2017~~2018 totaled ~~$1.7 million,~~$245 thousand, compared to income tax expense of ~~$1.9 million~~$509 thousand for the ~~nine months~~quarter ended September 30, ~~2016,~~2017, a decrease of ~~$202~~$264 thousand ~~(10.5%~~(51.9%). The combined effective federal and state tax rates for the Bancorp was ~~19.5%~~13.1% for the quarter ended September 30, 2018, compared to 18.5% for the quarter ended September 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 Nine Months Ended September 30, 2018 to the Nine Months Ended September 30, 2017

For the nine months ended September 30, 2018, the Bancorp reported net income of $6.7 million, compared to net income of $7.1 million for the nine months ended September 30, 2017, a decrease of $378 thousand (5.3%). For the nine months ended September 30, 2018, the ROA was 0.92%, compared to ~~22.0%~~1.04% for the nine months ended September 30, ~~2016.~~2017. The ROE was 9.56% for the nine months ended September 30, 2018, compared to 10.54% for the nine months ended September 30, 2017.

Net interest income for the nine months ended September 30, 2018 was $24.7 million, an increase of $1.8 million (7.8%), compared to $22.9 million for the nine months ended September 30, 2017. The weighted-average yield on interest-earning assets was 4.11% for the nine months ended September 30, 2018, compared to 3.89% for the nine months ended September 30, 2017. The weighted-average cost of funds for the nine months ended September 30, 2018 was 0.51% compared to 0.30% for the nine months ended September 30, 2017. The impact of the 4.11% return on interest earning assets and the 0.51% cost of funds resulted in an interest rate spread of 3.60% for the current nine months, which is a decrease from the spread of 3.59% as of September 30, 2017. The net interest margin on earning assets was 3.62% for the nine months ended September 30, 2018 and 3.60% for the nine months ended September 30, 2017. On a tax equivalent basis, the Bancorp’s net interest margin was 3.81% for the nine months ended September 30, 2018, compared to 3.79% for the nine months ended September 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.

Year-to-Date
(Dollars in thousands)	Average Balances, Interest, and Rates
	September 30, 2018							September 30, 2017
	Average Balance			Interest		Rate (%)		Average Balance			Interest		Rate (%)
ASSETS
Interest bearing deposits in other financial institutions	$	4,203		$	66		2.09	$	4,733		$	32		0.90
Federal funds sold		1,055			30		3.79		1,101			5		0.61
Certificates of deposit in other financial institutions		2,251			38		2.25		1,194			12		1.34
Securities available-for-sale		239,020			5,010		2.79		238,442			4,706		2.63
Loans receivable		661,300			22,803		4.60		600,650			19,931		4.42
Federal Home Loan Bank stock		3,063			117		5.09		3,000			95		4.22
Total interest earning assets		910,892		$	28,064		4.11		852,120		$	24,781		3.89
Cash and non-interest bearing deposits in other financial institutions		10,354							11,888
Allowance for loan losses		(7,415	)						(7,273	)
Other noninterest bearing assets		58,732							53,642
Total assets	$	972,563						$	907,377

LIABILITIES AND STOCKHOLDERS' EQUITY
Total deposits	$	816,880		$	2,531		0.41	$	770,090		$	1,475		0.26
Repurchase agreements		12,374			124		1.34		13,385			80		0.80
Borrowed funds		40,225			682		2.26		26,221			281		1.43
Total interest bearing liabilities		869,479		$	3,337		0.51		809,696		$	1,836		0.30
Other noninterest bearing liabilities		9,676							8,211
Total liabilities		879,155							817,907
Total stockholders' equity		93,408							89,470
Total liabilities and stockholders' equity	$	972,563						$	907,377


Return on average assets		0.92	%						1.04	%
Return on average equity		9.56	%						10.54	%
Net interest margin (average earning assets)		3.62	%	$	24,727				3.60	%	$	22,945

The increase in interest income for interest bearing deposits in other financial institutions and federal funds sold was primarily the result of higher average rates received from increases in short term rates for the nine months ended September 30, 2018, compared to the nine months ended September 30, 2017. The increase in interest income for certificates of deposit in other financial institutions was the result of higher average balances and higher average rates received from increases in short term rates for the nine months ended September 30, 2018, compared to the nine months ended September 30, 2017. The increase in interest income for securities available-for-sale and loans receivable was the result of higher average balances and higher weighted average rates for the nine months ended September 30, 2018, compared to the nine months ended September 30, 2017. The increase in interest expense for total deposits and borrowed funds was the result of higher average balances and higher weighted average rates for the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017. The increase in interest expense for repurchase agreements was the result of higher weighted average rates for the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017.

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

	Nine Months Ended
(Dollars in thousands)	September 30,				Nine Months Ended
	2018		2017		$ Change			% Change
Noninterest income:
Fees and service charges		2,830		2,404	$	426			17.7	%
Wealth management operations		1,253		1,267		(14	)		-1.1	%
Gain on sale of securities, net		1,155		758		397			52.4	%
Gain on sale of loans held-for-sale, net		1,021		883		138			15.6	%
Increase in cash value of bank owned life insurance		358		349		9			2.6	%
Gain on sale of foreclosed real estate, net		154		95		59			62.1	%
Other		104		64		40			62.5	%
Total noninterest income	$	6,875	$	5,820	$	1,055			18.1	%

The increase in fees and service charges is the result of the Bancorp’s continued focus on maintaining competitive fees within its market place, as well as the acquisition of First Personal. Current market conditions provided opportunities to maintain securities cash flows, while recognizing gains from the sales of securities. 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 nine ending September 30, 2018, and September 30, 2017.

	Nine Months Ended
(Dollars in thousands)	September 30,				Nine Months Ended
	2018		2017		$ Change			% Change
Noninterest expense:
Compensation and benefits		12,045		10,847	$	1,198			11.0	%
Occupancy and equipment		2,524		2,542		(18	)		-0.7	%
Data processing		2,076		1,092		984			90.1	%
Marketing		523		469		54			11.5	%
Federal deposit insurance premiums		250		242		8			3.3	%
Other		5,512		4,061		1,451			35.7	%
Total noninterest expense	$	22,930	$	19,253	$	3,677			19.1	%

The increase in compensation and benefits is the result of a continued focus on talent management and retention, as well as the acquisition of First Personal. The increase in data processing expense is primarily the result of data conversion expenses related to the acquisition of First Personal and accounts for approximately $960 thousand of the increase shown. The remainder of the increase in data processing is due to increased system utilization. The increase in marketing expense is a result of the acquisition of First Personal. The increase in other operating expenses is primarily related to the acquisition of First Personal and accounts for approximately $700 thousand of the increase shown. The remainder of the increase in other noninterest expense is primarily related to a shared loss of $125 thousand from the operation of the wholly-owned subsidiary NWIN Risk Management, Inc. (a captive insurance subsidiary), as well as generally higher third party costs. The Bancorp’s efficiency ratio was 72.6% for the nine months ended September 30, 2018, compared to 66.9% for the nine months ended September 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. The acquisition of First Personal is discussed in Note 3 of the financial statements.

Income tax expenses for the nine months ended September 30, 2018 totaled $1.0 million, compared to income tax expense of $1.7 million for the nine months ended September 30, 2017, a decrease of $690 thousand (40.2%). The combined effective federal and state tax rates for the Bancorp was 13.3% for the nine ended September 30, 2018, compared to 19.5% for the quarter ended September 30, 2017. The Bancorp’s lower current ~~nine month~~quarter effective tax rate is primarily a result of ~~increasing investment in low~~the Tax Cuts and Jobs Act that, among other changes, reduces the corporate federal income ~~housing projects, increasing investment in the Bancorp’s real estate investment trust, as well as a self-insurance program through a wholly owned captive insurance company.~~tax rate from 34% to 21% and was effective 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

Not ~~Applicable.~~applicable.

Item 4. Controls and Procedures

(a)

Evaluation of Disclosure Controls and Procedures.

The Bancorp maintains disclosure controls and procedures (as defined in Sections 13a – 15(e) and 15d – 15(e)) of regulations promulgated under the Securities Exchange Act of 1934 (the “Exchange Act”) that are designed to ensure that information required to be disclosed by the Bancorp in the reports that it files or submits under the "Exchange Act" is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. These disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed by the Bancorp in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Bancorp's management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. The Bancorp's ~~chief executive officer~~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 September 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~~ datein 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~~ reportingidentified in connection with the Bancorp’s evaluation of controls that occurred during the nine months ended ~~September~~September 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.

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 nine months ended September 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~~	Maximum Number of
				~~Purchased as Part of~~		Shares That May Yet
	~~Total Number~~		~~Average Price~~	~~Publicly Announced~~		Be Purchased Under
~~Period~~	~~of Shares Purchased~~		~~Paid per Share~~	~~Plans or Programs~~		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
July 1, ~~2017 -~~2018 – July 31, ~~2017~~2018		-	N/A		-		48,828
August 1, ~~2017 -~~2018 – August 31, ~~2017~~2018		-	N/A		-		48,828
September 1, ~~2017 -~~2018 – September 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.~~Applicable

Item 5.

Other Information

~~There are no matters reportable under this item.~~None

Item 6.

Exhibits

	Exhibit
	Number	Description
	2.1	Agreement and Plan of Merger by and among NorthWest Indiana Bancorp and AJS Bancorp, Inc. dated July 30, 2018 (incorporated by reference to Exhibit 2.1 to the registrant’s Current Report on Form 8-K filed with the SEC on July 31, 2018).
	10.1	First Amendment to Employment Agreement ~~between~~dated July 27, 2018 by and among NorthWest Indiana Bancorp, Peoples Bank SB, and Benjamin J. Bochnowski (incorporated by reference to Exhibit 10.2 to the registrant’s Current Report on Form 8-K filed with the SEC on July 30, 2018).
	10.2	Voting Agreement dated ~~August 1, 2017~~July 30, 2018 (incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed with the SEC on ~~August 4, 2017)~~July 31, 2018).
	31.1	Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.
	31.2	Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.
	32.1	Section 1350 Certifications.
	101	The following materials from the Bancorp’s Form 10-Q for the quarterly period ended September 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: ~~October 23, 2017~~November 5, 2018	/s/ Benjamin J. Bochnowski
	Benjamin J. Bochnowski
	President and Chief Executive Officer

Date: ~~October 23, 2017~~November 5, 2018	/s/ Robert T. Lowry
	Robert T. Lowry
	Executive Vice President, Chief Financial
	Officer and Treasurer

3337

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

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

Allowance for loan losses:
Residential real estate	$	1,561	$	(10	)	$	3	$	17		$	1,571
Home equity		76		(35	)		-		41			82
Commercial real estate		2,890		-			-		28			2,918
Construction and land development		600		-			-		(30	)		570
Multifamily		501		-			-		40			541
Consumer		30		(29	)		7		22			30
Commercial business		1,357		(120	)		5		49			1,291
Government		58		-			-		(2	)		56
Total	$	7,073	$	(194	)	$	15	$	165		$	7,059

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

Allowance for loan losses:
Residential real estate	$	1,485	$	(93	)	$	1	$	93		$	1,486
Home equity		285		-			-		4			289
Commercial real estate		3,099		-			-		126			3,225
Construction and land development		761		-			-		(40	)		721
Multifamily		756		-			-		24			780
Consumer		37		(12	)		1		25			51
Commercial business		846		-			8		43			897
Government		68		-			-		(13	)		55
Total	$	7,337	$	(105	)	$	10	$	262		$	7,504

The Bancorp's activity in the allowance for loan losses is summarized below for the nine months ended September 30, 2017:

Allowance for loan losses:
Residential real estate	$	2,111	$	(913	)	$	3	$	370		$	1,571
Home equity		299		(60	)		-		(157	)		82
Commercial real estate		3,113		-			-		(195	)		2,918
Construction and land development		617		-			-		(47	)		570
Multifamily		572		-			-		(31	)		541
Consumer		34		(59	)		11		44			30
Commercial business		896		(365	)		22		737			1,291
Government		56		-			-		-			56
Total	$	7,698	$	(1,397	)	$	36	$	722		$	7,059

The Bancorp's activity in the allowance for loan losses is summarized below for the nine months ended September 30, 2016:

Allowance for loan losses:
Residential real estate	$	1,448	$	(305	)	$	1	$	342		$	1,486
Home equity		263		-			-		26			289
Commercial real estate		2,986		-			-		239			3,225
Construction and land development		692		-			-		29			721
Multifamily		758		-			-		22			780
Consumer		38		(24	)		5		32			51
Commercial business		698		-			28		171			897
Government		70		-			-		(15	)		55
Total	$	6,953	$	(329	)	$	34	$	846		$	7,504

	As of December 31, 2016						For the nine months ended September 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	$	1,309	$	3,293	$	-	$	2,900	$	113
Home equity		-		-		-		-		-
Commercial real estate		304		304		-		1,346		-
Construction and land development		134		134		-		134		-
Multifamily		-		-		-		-		-
Commercial business		212		212		-		260		3
With an allowance recorded:
Residential real estate		1,066		1,066		879		168		4
Home equity		-		-		-		-		-
Commercial real estate		18		18		3		107		5
Construction & land development		-		-		-		-		-
Multifamily		-		-		-		-		-
Commercial business		475		475		354		184		1
Total:
Residential real estate	$	2,375	$	4,359	$	879	$	3,068	$	117
Home equity	$	-	$	-	$	-	$	-	$	-
Commercial real estate	$	322	$	322	$	3	$	1,453	$	5
Construction & land development	$	134	$	134	$	-	$	134	$	-
Multifamily	$	-	$	-	$	-	$	-	$	-
Commercial business	$	687	$	687	$	354	$	444	$	4

(Dollars in thousands)
	September 30, 2017		December 31, 2016
Residential real estate	$	3,307	$	4,342
Home equity		516		179
Commercial real estate		557		322
Construction and land development		134		134
Multifamily		-		-
Consumer		-		-
Commercial business		695		628
Government		-		-
Total	$	5,209	$	5,605

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