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 ~~March 31,~~June 30, 2018 or

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

For the transition period from~~______~~to ______to ______

Commission File Number: 0-26128

NorthWest Indiana Bancorp

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

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YesxNo¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yesx No¨

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

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

Smaller Reporting Company¨Emerging growth company¨

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

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

There were 2,867,911 shares of the registrant’s Common Stock, without par value, outstanding at ~~May 8,~~July 20, 2018.

NorthWest Indiana Bancorp

Index

NorthWest Indiana Bancorp

Consolidated Balance Sheets

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

Cash and non-interest bearing deposits in other financial institutions	$	9,800		$	10,529		$	16,429		$	10,529
Interest bearing deposits in other financial institutions		10,361			139			2,524			139
Federal funds sold		254			357			839			357

Total cash and cash equivalents		20,415			11,025			19,792			11,025

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

Securities available-for-sale		241,471			244,490			238,164			244,490
Loans held-for-sale		1,908			1,592			4,329			1,592
Loans receivable		624,662			620,211			646,288			620,211
Less: allowance for loan losses		(7,097	)		(7,482	)		(7,448	)		(7,482	)
Net loans receivable		617,565			612,729			638,840			612,729
Federal Home Loan Bank stock		3,000			3,000			3,017			3,000
Accrued interest receivable		3,052			3,262			3,253			3,262
Premises and equipment		19,436			19,559			19,221			19,559
Foreclosed real estate		1,432			1,699			1,087			1,699
Cash value of bank owned life insurance		19,462			19,355			19,583			19,355
Goodwill		2,792			2,792			2,792			2,792
Other assets		6,449			6,080			7,347			6,080

Total assets	$	938,508		$	927,259		$	958,951		$	927,259

LIABILITIES AND STOCKHOLDERS' EQUITY

Deposits:
Non-interest bearing	$	126,582		$	120,556		$	120,418		$	120,556
Interest bearing		668,791			672,448			685,559			672,448
Total		795,373			793,004			805,977			793,004
Repurchase agreements		13,396			11,300			14,236			11,300
Borrowed funds		30,360			20,881			35,679			20,881
Accrued expenses and other liabilities		9,571			10,014			12,482			10,014

Total liabilities		848,700			835,199			868,374			835,199

Stockholders' Equity:
Preferred stock, no par or stated value; 10,000,000 shares authorized, none outstanding		-			-			-			-
Common stock, no par or stated value; 10,000,000 shares authorized; shares issued: March 31, 2018 - 2,924,978 December 31, 2017 - 2,920,545 shares outstanding: March 31, 2018 - 2,868,940 December 31, 2017 - 2,864,507		361			361
Common stock, no par or stated value; 10,000,000 shares authorized; shares issued: June 30, 2018 - 2,924,978 December 31, 2017 - 2,920,545 shares outstanding: June 30, 2018 - 2,867,911 December 31, 2017 - 2,864,507								361			361
Additional paid-in capital		4,558			4,506			4,565			4,506
Accumulated other comprehensive income/(loss)		(3,348	)		684			(4,237	)		684
Retained earnings		88,237			86,509			89,888			86,509

Total stockholders' equity		89,808			92,060			90,577			92,060

Total liabilities and stockholders' equity	$	938,508		$	927,259		$	958,951		$	927,259

See accompanying notes to consolidated financial statements.

NorthWest Indiana Bancorp

Consolidated Statements of Income

(unaudited)

	Three Months Ended				Three Months Ended				Six Months Ended
(Dollars in thousands)	March 31,				June 30,				June 30,
	2018		2017		2018		2017		2018		2017
Interest income:
Loans receivable
Real estate loans	$	5,917	$	5,421	$	6,134	$	5,606	$	12,051	$	11,027
Commercial loans		1,072		1,013		1,119		1,053		2,191		2,066
Consumer loans		5		5		4		5		9		10
Total loan interest		6,994		6,439		7,257		6,664		14,251		13,103
Securities		1,722		1,617		1,696		1,599		3,418		3,216
Other interest earning assets		17		22		43		9		60		31

Total interest income		8,733		8,078		8,996		8,272		17,729		16,350

Interest expense:
Deposits		675		459		838		498		1,513		957
Repurchase agreements		32		21		45		28		77		49
Borrowed funds		191		83		237		88		428		171

Total interest expense		898		563		1,120		614		2,018		1,177

Net interest income		7,835		7,515		7,876		7,658		15,711		15,173
Provision for loan losses		341		234		297		323		638		557

Net interest income after provision for loan losses		7,494		7,281		7,579		7,335		15,073		14,616

Noninterest income:
Fees and service charges	$	892	$	740	$	947	$	821	$	1,839	$	1,561
Gain on sale of securities, net		758		293		246		252		1,004		545
Wealth management operations		415		410		424		398		839		808
Gain on sale of loans held-for-sale, net		211		200		359		271		570		471
Increase in cash value of bank owned life insurance		108		115		120		115		228		230
Gain on sale of foreclosed real estate, net		32		-		68		93		100		93
Other		33		27		39		10		72		37

Total noninterest income		2,449		1,785	$	2,203	$	1,960	$	4,652	$	3,745

Noninterest expense:
Compensation and benefits		3,860		3,613	$	3,516	$	3,140	$	7,376	$	6,753
Occupancy and equipment		853		882		842		815		1,695		1,697
Data processing		361		368		703		360		1,064		728
Marketing		134		135		166		199		300		334
Federal deposit insurance premiums		84		77		75		81		159		158
Other		1,675		1,225		1,604		1,433		3,279		2,658

Total noninterest expense		6,967		6,300	$	6,906	$	6,028	$	13,873	$	12,328

Income before income tax expenses		2,976		2,766		2,876		3,267		5,852		6,033
Income tax expenses		415		468		365		738		780		1,206

Net income	$	2,561	$	2,298	$	2,511	$	2,529	$	5,072	$	4,827

Earnings per common share:
Basic	$	0.89	$	0.80	$	0.88	$	0.89	$	1.77	$	1.69
Diluted	$	0.89	$	0.80	$	0.88	$	0.89	$	1.77	$	1.69

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

See accompanying notes to consolidated financial statements.

NorthWest Indiana Bancorp

Consolidated Statements of Comprehensive Income ~~(Loss)~~

(unaudited)

	Three Months Ended						Three Months Ended						Six Months Ended
(Dollars in thousands)	March 31,						June 30,						June 30,
	2018			2017			2018			2017			2018			2017

Net income	$	2,561		$	2,298		$	2,511		$	2,529		$	5,072		$	4,827

Net change in net unrealized gains and losses on securities available-for-sale:
Unrealized gains (losses) arising during the period		(4,350	)		1,468
Unrealized gains/(losses) arising during the period								(880	)		1,978			(5,230	)		3,446
Less: reclassification adjustment for gains included in net income		(758	)		(293	)		(246	)		(252	)		(1,004	)		(545	)
Net securities gain (loss) during the period		(5,108	)		1,175
Net securities gain/(loss) during the period								(1,126	)		1,726			(6,234	)		2,901
Tax effect		1,076			(399	)		237			(586	)		1,313			(986	)
Net of tax amount		(4,032	)		776			(889	)		1,140			(4,921	)		1,915

Other comprehensive income (loss), net of tax		(4,032	)		776
Other comprehensive income/(loss), net of tax								(889	)		1,140			(4,921	)		1,915

Comprehensive income (loss), net of tax	$	(1,471	)	$	3,074
Comprehensive income, net of tax							$	1,622		$	3,669		$	151		$	6,742

See accompanying notes to consolidated financial statements.

NorthWest Indiana Bancorp

Consolidated Statements of Changes in Stockholders' Equity

(unaudited)

	Three Months Ended						Three Months Ended						Six Months Ended
(Dollars in thousands)	March 31,						June 30,						June 30,
	2018			2017			2018			2017			2018			2017

Balance at beginning of period	$	92,060		$	84,108		$	89,808		$	86,427		$	92,060		$	84,108

Comprehensive income:
Net income		2,561			2,298			2,511			2,529			5,072			4,827
Net unrealized gains (losses) on securities available-for-sale, net of reclassifications and tax effects		(4,032	)		776
Net unrealized gains/(losses) on securities available-for-sale, net of reclassifications and tax effects								(889	)		1,140			(4,921	)		1,915
Comprehensive income, net of tax		(1,471	)		3,074			1,622			3,669			151			6,742

Stock based compensation expense		52			47			51			43			104			90
Repurchase of shares								(45	)		-			(45	)		-
Cash dividends		(833	)		(802	)		(859	)		(831	)		(1,693	)		(1,632	)

Balance at end of period	$	89,808		$	86,427		$	90,577		$	89,308		$	90,577		$	89,308

See accompanying notes to consolidated financial statements.

NorthWest Indiana Bancorp

Consolidated Statements of Cash Flows

(unaudited)

	Three Months Ended						Six Months Ended
(Dollars in thousands)	March 31,						June 30,
	2018			2017			2018			2017
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	2,561		$	2,298		$	5,072		$	4,827
Adjustments to reconcile net income to net cash provided by/(used in) operating activities:
Origination of loans for sale		(8,250	)		(6,332	)		(24,266	)		(17,633	)
Sale of loans originated for sale		8,145			7,876			22,099			17,611
Depreciation and amortization, net of accretion		650			620			1,312			1,267
Amortization of mortgage servicing rights		16			13			32			31
Stock based compensation expense		52			47			104			90
Repurchase of shares								(45	)		-
Gain on sale of securities, net		(758	)		(293	)		(1,004	)		(545	)
Gain on sale of loans held-for-sale, net		(211	)		(200	)		(570	)		(471	)
Gain on sale of foreclosed real estate, net		(32	)		-			(100	)		(93	)
Provision for loan losses		341			234			638			557
Net change in:
Interest receivable		210			191			9			80
Other assets		690			587			(17	)		(476	)
Accrued expenses and other liabilities		(443	)		(1,383	)		2,468			(212	)
Total adjustments		410			1,360			660			206
Net cash - operating activities		2,971			3,658			5,732			5,033

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of certificates of deposits in other financial institutions		150			-			150			-
Proceeds from maturities and pay downs of securities available-for-sale		5,313			6,700			10,314			12,995
Proceeds from sales of securities available-for-sale		14,668			17,964			22,545			26,428
Purchase of securities available-for-sale		(21,604	)		(27,117	)		(32,339	)		(43,656	)
Net change in loans receivable		(5,430	)		(13,504	)		(27,002	)		(18,434	)
Purchase of Federal Home Loan Bank Stock								(17	)		-
Purchase of premises and equipment, net		(235	)		(732	)		(398	)		(1,064	)
Proceeds from sale of foreclosed real estate, net		552			-			965			550
Change in cash value of bank owned life insurance		(108	)		(115	)		(228	)		(230	)
Net cash - investing activities		(6,694	)		(16,804	)		(26,010	)		(23,411	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposits		2,369			(9,142	)		12,973			7,210
Proceeds from FHLB advances		32,000			-			44,000			-
Repayment of FHLB advances		(19,000	)		(4,000	)		(29,000	)		(6,000	)
Change in other borrowed funds		(1,425	)		(2,237	)		2,734			1,419
Dividends paid		(831	)		(800	)		(1,662	)		(1,601	)
Net cash - financing activities		13,113			(16,179	)		29,045			1,028
Net change in cash and cash equivalents		9,390			(29,325	)		8,767			(17,350	)
Cash and cash equivalents at beginning of period		11,025			45,109			11,025			45,109
Cash and cash equivalents at end of period	$	20,415		$	15,784		$	19,792		$	27,759

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest	$	873		$	567		$	1,949		$	1,186
Income taxes		-			-			955			920
Noncash activities:
Transfers from loans to foreclosed real estate	$	253		$	-		$	253		$	-

See accompanying notes to consolidated financial statements.

NorthWest Indiana Bancorp

Notes to Consolidated Financial Statements

Note 1 - Basis of Presentation

The consolidated financial statements include the accounts of NorthWest Indiana Bancorp (the “Bancorp”), its wholly-owned subsidiaries NWIN Risk Management, Inc. (a captive insurance subsidiary) and Peoples Bank SB (the “Bank”), and the Bank’s wholly-owned subsidiaries, Peoples Service Corporation, NWIN, LLC, NWIN Funding, Incorporated, and Columbia Development Company, LLC. The Bancorp’s business activities include being a holding company for the Bank as well as a holding company for NWIN Risk Management, Inc. The Bancorp’s earnings are primarily dependent upon the earnings of the Bank. The accompanying unaudited consolidated financial statements were prepared in accordance with instructions for Form 10-Q and, therefore, do not include all disclosures required by U.S. generally accepted accounting principles for complete presentation of consolidated financial statements. In the opinion of management, the consolidated financial statements contain all adjustments necessary to present fairly the consolidated balance sheets of the Bancorp as of ~~March 31,~~June 30, 2018 and December 31, 2017, and the consolidated statements of income, comprehensive income, ~~(loss),~~ changes in stockholders’ equity for the three and six months ended June 30, 2018 and 2017 and consolidated statements of cash flows for the ~~three~~six months ended ~~March 31,~~June 30, 2018 and 2017. The income reported for the ~~three~~six month period ended ~~March 31,~~June 30, 2018 is not necessarily indicative of the results to be expected for the full year.

Note 2 - Use of Estimates

Preparing financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period, as well as the disclosures provided. Actual results could differ from those estimates. Estimates associated with the allowance for loan losses, fair values of foreclosed real estate, loan servicing rights, investment securities, deferred tax assets, goodwill, and the status of contingencies are particularly susceptible to material change in the near term.

Note 3 - Acquisition Activity

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

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

Upon completion of the Merger, each First Personal stockholder will have the right to receive fixed consideration of (i) 0.1246 shares of Bancorp common stock, and (ii) $6.67 per share in cash for each share of First Personal’s common stock. Stockholders holding less than 100 shares of First Personal common stock will have the right to receive $12.12 in cash and no stock consideration for each share of First Personal common stock. ~~Based on the Bancorp’s closing stock price of $42.80 as of February 20, 2018, the transaction has an implied valuation of approximately $15.60 million.~~

Subject to certain terms and conditions, the board of directors of First Personal has agreed to recommend the approval and adoption of the Merger Agreement to First Personal’s stockholders and will solicit proxies to vote in favor of the Merger from First Personal’s stockholders. The Merger Agreement also provides for certain termination rights for both the Bancorp and First Personal, and further provides that upon termination of the Merger Agreement under certain circumstances, First Personal will be obligated to pay the Bancorp a termination fee.

First Personal Bank has a home office and two branch offices in Cook County, Illinois. As of ~~December 31, 2017,~~June 30, First Personal Bank reported total assets of ~~$145.8~~$143.2 million, total loans of ~~$99.9~~$98.8 million, and total deposits of ~~$130.1~~$127.5 million. The combined bank is expected to have approximately $1.1 billion in assets, ~~$742.3~~$745.1 million in total loans, and ~~$945.9~~$933.5 million in deposits. The acquisition will expand the Bank’s banking center network into Cook County, Illinois.

Note 4 - Securities

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

(Dollars in thousands)
Gross Gross Estimated
Cost Unrealized Unrealized Fair
Basis Gains Losses Value
March 31, 2018
Money market fund $ 924 $ - $ - $ 924
U.S. government sponsored entities 5,997 3 (162 ) 5,838
Collateralized mortgage obligations and residential mortgage-backed securities 142,412 36 (3,279 ) 139,169
Municipal securities 91,552 1,307 (774 ) 92,085
Collateralized debt obligations 4,823 - (1,368 ) 3,455
Total securities available-for-sale $ 245,708 $ 1,346 $ (5,583 ) $ 241,471

										(Dollars in thousands)
												Gross		Gross			Estimated
										Cost		Unrealized		Unrealized			Fair
June 30, 2018										Basis		Gains		Losses			Value
Money market fund										$	1,608	$	-	$	-		$	1,608
U.S. government sponsored entities											7,997		2		(178	)		7,821
Collateralized mortgage obligations and residential mortgage-backed securities											139,149		24		(4,042	)		135,131
Municipal securities											89,963		972		(814	)		90,121
Collateralized debt obligations											4,810		-		(1,327	)		3,483
Total securities available-for-sale										$	243,527	$	998	$	(6,361	)	$	238,164
	(Dollars in thousands)
			Gross		Gross			Estimated		(Dollars in thousands)
	Cost		Unrealized		Unrealized			Fair				Gross		Gross			Estimated
	Basis		Gains		Losses			Value		Cost		Unrealized		Unrealized			Fair
December 31, 2017										Basis		Gains		Losses			Value
Money market fund	$	476	$	-	$	-		$	476	$	476	$	-	$	-		$	476
U.S. government sponsored entities		3,996		-		(106	)		3,890		3,996		-		(106	)		3,890
Collateralized mortgage obligations and residential mortgage-backed securities		134,224		170		(1,456	)		132,938		134,224		170		(1,456	)		132,938
Municipal securities		100,088		3,709		(50	)		103,747		100,088		3,709		(50	)		103,747
Collateralized debt obligations		4,835		-		(1,396	)		3,439		4,835		-		(1,396	)		3,439
Total securities available-for-sale	$	243,619	$	3,879	$	(3,008	)	$	244,490	$	243,619	$	3,879	$	(3,008	)	$	244,490

The estimated fair value of available-for-sale debt securities at ~~March 31,~~June 30, 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
March 31, 2018	Value		Yield (%)
June 30, 2018					Value		Yield (%)
Due in one year or less	$	1,595		6.54	$	2,279		5.48
Due from one to five years		4,787		4.36		9,996		3.50
Due from five to ten years		24,533		4.88		16,804		4.21
Due over ten years		71,387		4.77		73,954		4.03

Collateralized mortgage obligations and residential mortgage-backed securities		139,169		2.70		135,131		2.72
Total	$	241,471		3.59	$	238,164		3.29

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

	(Dollars in thousands)					(Dollars in thousands)
	March 31,		March 31,			June 30,		June 30,
	2018		2017			2018		2017

Proceeds	$	14,668	$	17,964		$	22,545	$	26,428
Gross gains		758		334			1,004		589
Gross losses		-		(41	)		-		(44	)

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

	(Dollars in thousands)			(Dollars in thousands)
	Unrealized gain/(loss)			Unrealized gain/(loss)
Ending balance, December 31, 2017	$	684		$	684
Current period change		(4,032	)		(4,921	)
Ending balance, March 31, 2018	$	(3,348	)
Ending balance, June 30, 2018				$	(4,237	)

Securities with carrying values of approximately ~~$17.3~~$14.4 million and $21.2 million were pledged as of ~~March 31,~~June 30, 2018 and December 31, 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 ~~March 31,~~June 30, 2018 and December 31, 2017 not recognized in income are as follows:

	(Dollars in thousands)
	Less than 12 months					12 months or longer					Total
	Estimated					Estimated					Estimated
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
June 30, 2018	Value		Losses			Value		Losses			Value		Losses
U.S. government sponsored entities	$	1,995	$	(5	)	$	3,824	$	(173	)	$	5,819	$	(178	)
Collateralized mortgage obligations and residential mortgage-backed securities		97,556		(2,303	)		33,685		(1,739	)		131,241		(4,042	)
Municipal securities		29,715		(675	)		1,721		(139	)		31,436		(814	)
Collateralized debt obligations		-		-			3,483		(1,327	)		3,483		(1,327	)
Total temporarily impaired	$	129,266	$	(2,983	)	$	42,713	$	(3,378	)	$	171,979	$	(6,361	)
Number of securities				105					37					142

(Dollars in thousands)
Less than 12 months 12 months or longer Total
Estimated Estimated Estimated
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
March 31, 2018
U.S. government sponsored entities $ - $ - $ 3,835 $ (162 ) $ 3,835 $ (162 )
Collateralized mortgage obligations and residential mortgage-backed securities 96,178 (1,735 ) 35,217 (1,544 ) 131,395 (3,279 )
Municipal securities 26,877 (639 ) 1,726 (135 ) 28,603 (774 )
Collateralized debt obligations - - 3,455 (1,368 ) 3,455 (1,368 )
Total temporarily impaired $ 123,055 $ (2,374 ) $ 44,233 $ (3,209 ) $ 167,288 $ (5,583 )
Number of securities 99 37 136

	(Dollars in thousands)
	Less than 12 months					12 months or longer					Total					(Dollars in thousands)
	Estimated					Estimated					Estimated					Less than 12 months					12 months or longer					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Estimated					Estimated					Estimated
	Value		Losses			Value		Losses			Value		Losses			Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
December 31, 2017																Value		Losses			Value		Losses			Value		Losses
U.S. government sponsored entities	$	-	$	-		$	3,890	$	(106	)	$	3,890	$	(106	)	$	-	$	-		$	3,890	$	(106	)	$	3,890	$	(106	)
Collateralized mortgage obligations and residential mortgage-backed securities		66,917		(511	)		37,003		(945	)		103,920		(1,456	)		66,917		(511	)		37,003		(945	)		103,920		(1,456	)
Municipal securities		1,790		(3	)		1,815		(47	)		3,605		(50	)		1,790		(3	)		1,815		(47	)		3,605		(50	)
Collateralized debt obligations		-		-			3,439		(1,396	)		3,439		(1,396	)		-		-			3,439		(1,396	)		3,439		(1,396	)
Total temporarily impaired	$	68,707	$	(514	)	$	46,147	$	(2,494	)	$	114,854	$	(3,008	)	$	68,707	$	(514	)	$	46,147	$	(2,494	)	$	114,854	$	(3,008	)
Number of securities				40					37					77					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 5 - Loans Receivable

Loans receivable are summarized below:

(Dollars in thousands)
March 31, 2018 December 31, 2017
Loans secured by real estate:
Residential real estate $ 174,053 $ 172,780
Home equity 36,606 36,718
Commercial real estate 208,482 211,090
Construction and land development 53,775 50,746
Farmland 248 -
Multifamily 44,612 43,369
Total loans secured by real estate 517,776 514,703
Consumer 489 460
Commercial business 76,546 77,122
Government 30,176 28,785
Subtotal 624,987 621,070
Less:
Net deferred loan origination fees (124 ) (130 )
Undisbursed loan funds (201 ) (729 )
Loans receivable $ 624,662 $ 620,211

(Dollars in thousands)

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

(Dollars in thousands) 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 March 31, 2018:

Allowance for loan losses:
Residential real estate $ 1,568 $ (68 ) - $ (7 ) $ 1,493
Home equity 166 (19 ) - 12 159
Commercial real estate 3,125 (119 ) - (10 ) 2,996
Construction and land development 618 - - 43 661
Multifamily 622 - - (7 ) 615
Farmland - - - 4 4
Consumer 31 (8 ) 4 8 35
Commercial business 1,298 (526 ) 10 295 1,077
Government 54 - - 3 57
Total $ 7,482 $ (740 ) $ 14 $ 341 $ 7,097

~~The Bancorp's activity in the allowance for loan losses, by loan segment, is summarized below for the three months ended March 31, 2017:~~

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

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

Allowance for loan losses:
Residential real estate	$	2,111	$	(858	)	$	-	$	42		$	1,295		$	1,493	$	(38	)		-	$	68		$	1,523
Home equity		299		-			-		7			306			159		(5	)		-		29			183
Commercial real estate		3,113		-			-		85			3,198			2,996		-			2		172			3,170
Construction and land development		617		-			-		(24	)		593			661		-			-		(50	)		611
Multifamily		572		-			-		(11	)		561			615		-			-		(8	)		607
Farmland		-		-			-		-			-			4		-			-		-			4
Consumer		34		(5	)		2		(3	)		28			35		(14	)		5		10			36
Commercial business		896		(245	)		8		136			795			1,077		(3	)		107		83			1,264
Government		56		-			-		2			58			57		-			-		(7	)		50
Total	$	7,698	$	(1,108	)	$	10	$	234		$	6,834		$	7,097	$	(60	)	$	114	$	297		$	7,448

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

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

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

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

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

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

The Bancorp's impairment analysis is summarized below:

															Ending Balances

																							Purchased
		*Ending Balances*																					credit
*(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			*Individually*		*Collectively*						impaired
															evaluated for		*evaluated*				Individually		individually		Collectively
The Bancorp's allowance for loan losses impairment evaluation and loan receivables are summarized below at March 31, 2018:
															impairment		for impairment		Loan		evaluated for		evaluated for		evaluated for
															reserves		reserves		receivables		impairment		impairment		impairment

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

Residential real estate		$	31	$	1,462	$	173,866	$	561	$	712	$	172,593		$	30	$	1,493	$	175,492	$	548	$	693	$	174,251
Home equity			-		159		36,658		69		-		36,589			10		173		38,303		124		-		38,179
Commercial real estate			18		2,978		208,482		363		-		208,119			14		3,156		223,598		1,289		-		222,309
Construction and land development			-		661		53,775		134		-		53,641			-		611		51,947		-		-		51,947
Multifamily			-		615		44,612		-		-		44,612			-		607		44,781		-		-		44,781
Farmland			-		4		248		-		-		248			-		4		245		-		-		245
Commercial business			10		1,067		76,354		193		-		76,161			8		1,256		83,699		413		-		83,286
Consumer			-		35		491		-		-		491			-		36		487		-		-		487
Government			-		57		30,176		-		-		30,176			-		50		27,736		-		-		27,736
Total		$	59	$	7,038	$	624,662	$	1,320	$	712	$	622,630		$	62	$	7,386	$	646,288	$	2,374	$	693	$	643,221

The Bancorp's allowance for loan losses impairment evaluation and loan receivables are summarized below at December 31, 2017:	The Bancorp's allowance for loan losses impairment evaluation and loan receivables are summarized below at December 31, 2017:													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		$	21	$	1,547	$	172,141	$	462	$	690	$	170,989
Home equity			-		166		36,769		-		-		36,769			-		166		36,769		-		-		36,769
Commercial real estate			144		2,981		211,090		512		-		210,578			144		2,981		211,090		512		-		210,578
Construction and land development			-		618		50,746		134		-		50,612			-		618		50,746		134		-		50,612
Multifamily.			-		622		43,368		-		-		43,368
Multifamily																-		622		43,368		-		-		43,368
Farmland			-		-		-		-		-		-			-		-		-		-				-
Commercial business			539		759		76,851		724		-		76,127			539		759		76,851		724		-		76,127
Consumer			-		31		461		-		-		461			-		31		461		-		-		461
Government			-		54		28,785		-		-		28,785			-		54		28,785		-		-		28,785
Total		$	704	$	6,778	$	620,211	$	1,832	$	690	$	617,689		$	704	$	6,778	$	620,211	$	1,832	$	690	$	617,689

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

	Credit Exposure - Credit Risk Portfolio By Creditworthiness Category																Credit Exposure - Credit Risk Portfolio By Creditworthiness Category
	March 31, 2018																June 30, 2018
(Dollars in thousands)	2		3		4		5		6		7		8				2		3		4		5		6		7		8
																			Above average				Marginally				Special
Loan Segment	Moderate		Above average acceptable		Acceptable		Marginally acceptable		Pass/monitor		Special mention		Substandard		Total		Moderate		acceptable		Acceptable		acceptable		Pass/monitor		mention		Substandard		Total
Residential real estate	$	614	$	14,951	$	92,844	$	8,649	$	48,937	$	4,186	$	3,685	$	173,866	$	406	$	16,577	$	94,660	$	9,170	$	46,790	$	3,999	$	3,890	$	175,492
Home equity		67		906		34,929		-		173		271		312		36,658		105		956		36,471		-		152		228		391	$	38,303
Commercial real estate		-		2,127		76,593		81,047		42,746		5,606		363		208,482		-		2,074		78,741		93,683		43,224		4,587		1,289	$	223,598
Construction and land development		-		-		23,208		21,159		9,274		-		134		53,775		-		-		20,477		21,194		10,276		-		-	$	51,947
Multifamily		-		-		19,887		22,882		1,610		233		-		44,612		-		-		19,676		23,301		1,582		222		-	$	44,781
Farmland		-		-		248		-		-		-		-		248		-		-		-		245		-		-		-	$	245
Commercial business		7,986		17,545		14,153		22,060		12,275		2,142		193		76,354		7,957		20,484		15,241		25,579		12,263		1,762		413	$	83,699
Consumer		118		3		361		-		-		-		9		491		115		4		368		-		-		-		-	$	487
Government		-		2,220		21,976		5,980		-		-		-		30,176		-		2,220		19,786		5,730		-		-		-	$	27,736
Total	$	8,785	$	37,752	$	284,199	$	161,777	$	115,015	$	12,438	$	4,696	$	624,662	$	8,583	$	42,315	$	285,420	$	178,902	$	114,287	$	10,798	$	5,983	$	646,288

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

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

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 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 ~~quarter~~six months of 2018, three commercial business loans totaling $355 thousand, three commercial real estate loans totaling $935 thousand, two residential real estate loans totaling ~~$115~~$114 thousand and ~~two~~three home equity loans totaling ~~$69~~$124 thousand were modified as a troubled debt restructuring. No troubled debt restructurings have subsequently defaulted during the periods presented. All of the loans classified as troubled debt restructurings are also considered impaired. The valuation basis for the Bancorp’s troubled debt restructurings is based on the present value of cash flows, unless consistent cash flows are not present, then the fair value of the collateral securing the loan is the basis for valuation.

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

For the three months ended
As of March 31, 2018 March 31, 2018
(Dollars in thousands) Recorded
Investment Unpaid Principal
Balance Related Allowance Average Recorded
Investment Interest Income
Recognized
With no related allowance recorded:
Residential real estate $ 1,141 $ 2,871 $ - $ 1,103 $ 6
Home equity 69 69 - 35
Commercial real estate 250 250 - 252 -
Construction and land development 134 134 - 134 -
Commercial business 183 183 - 184 1

With an allowance recorded:
Residential real estate 132 132 31 106 5
Home equity - - - - -
Commercial real estate 113 113 18 186 4
Construction and land development - - - - -
Commercial business 10 10 10 275 -

Total:
Residential real estate $ 1,273 $ 3,003 $ 31 $ 1,209 $ 11
Home equity $ 69 $ 69 $ - $ 35 $ -
Commercial real estate $ 363 $ 364 $ 18 $ 438 $ 4
Construction & land development $ 134 $ 134 $ - $ 134 $ -
Commercial business $ 193 $ 193 $ 10 $ 459 $ 1

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

For the three months ended
As of December 31, 2017 March 31, 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 $ - $ 1,350 $ 11
Home equity - - - - -
Commercial real estate 253 253 - 363 1
Construction and land development 134 134 - 134 -
Commercial business 184 184 - 209 1

With an allowance recorded:
Residential real estate 80 270 21 533 -
Home equity - - - - -
Commercial real estate 259 259 144 79 -
Construction & land development - - - - -
Commercial business 540 540 539 327 -

Total:
Residential real estate $ 1,152 $ 3,621 $ 21 $ 1,883 $ 11
Home equity $ - $ - $ - $ - $ -
Commercial real estate $ 512 $ 512 $ 144 $ 442 $ 1
Construction & land development $ 134 $ 134 $ - $ 134 $ -
Commercial business $ 724 $ 724 $ 539 $ 536 $ 1

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

As a result of 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 ~~March 31,~~June 30, 2018, total purchased credit impaired loans with unpaid principal balances totaled $2.4 million with a recorded investment of ~~$712~~$693 thousand. At December 31, 2017, purchased credit impaired loans with unpaid principal balances totaled $2.6 million with a recorded investment of $690 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
March 31, 2018
Residential real estate $ 2,858 $ 1,222 $ 2,789 $ 6,869 $ 166,997 $ 173,866 $ 46
Home equity 361 - 218 579 36,079 36,658 5
Commercial real estate 1,367 - 183 1,550 206,932 208,482 -
Construction and land development - - 134 134 53,641 53,775 -
Multifamily - 165 - 165 44,447 44,612 -
Farmland - - - - 248 248 -
Commercial business 228 275 142 645 75,709 76,354 -
Consumer 9 - - 9 482 491 -
Government - - - - 30,176 30,176 -
Total $ 4,823 $ 1,662 $ 3,466 $ 9,951 $ 614,711 $ 624,662 $ 51

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

(Dollars in thousands)	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days Past Due		Total Past Due		Current		Total Loans		Recorded Investments Greater than 90 Days Past Due and Accruing
June 30, 2018
Residential real estate	$	2,848	$	1,612	$	2,750	$	7,210	$	168,282	$	175,492	$	71
Home equity		167		200		298		665		37,638		38,303		-
Commercial real estate		8		935		85		1,028		222,570		223,598		-
Construction and land development		-		-		-		-		51,947		51,947		-
Multifamily		66		-		-		66		44,715		44,781		-
Farmland		-		-		-		-		245		245		-
Commercial business		76		198		8		282		83,417		83,699		-
Consumer		-		-		-		-		487		487		-
Government		-		-		-		-		27,736		27,736		-
Total	$	3,165	$	2,945	$	3,141	$	9,251	$	637,037	$	646,288	$	71

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

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

(Dollars in thousands)
March 31,
2018 December 31,
2017
Residential real estate $ 3,221 $ 3,509
Home equity 307 350
Commercial real estate 183 332
Construction and land development 134 133
Multifamily - -
Farmland - -
Commercial business 142 672
Consumer 9 -
Government - -
Total $ 3,996 $ 4,996

(Dollars in thousands)

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

Note 6 - Foreclosed Real Estate

Foreclosed real estate at period-end is summarized below:

	(Dollars in thousands)
	March 31,		December 31,		*(Dollars in thousands)*
	2018		2017		June 30, 2018		December 31, 2017
Residential real estate	$	744	$	914	$	399	$	914
Home equity		-		-		-		-
Commercial real estate		-		97		-		97
Construction and land development		468		468		468		468
Multifamily		-		-		-		-
Farmland		-		-		-		-
Commercial business		220		220		220		220
Consumer		-		-		-		-
Government		-		-		-		-
Total	$	1,432	$	1,699	$	1,087	$	1,699

Note 7 - Goodwill, Other Intangible Assets, and Acquisition Related Accounting

The Bancorp established a goodwill balance totaling $2.8 million with the acquisitions of First Federal Savings & Loan (First Federal) and Liberty Savings Bank (Liberty Savings). Goodwill of $2.0 million was established with the acquisition of First Federal and goodwill of $804 thousand was established with the acquisition of Liberty Savings. Goodwill is tested annually for impairment. Goodwill arising from business combinations represents the value attributable to unidentifiable intangible assets in the business acquired. The Bancorp’s goodwill relates to the value inherent in the banking industry and that value is dependent upon the ability of the Bancorp to provide quality, cost effective banking services in a competitive marketplace. If the implied fair value of goodwill is lower than its carrying amount, goodwill impairment is indicated and goodwill is written down to its implied fair value. There has not been any impairment of goodwill identified or recorded. Goodwill totaled $2.8 million at ~~March 31,~~June 30, 2018 and December 31, 2017.

In addition to goodwill, a core deposit intangible of $93 thousand for the acquisition of First Federal was established and is being amortized over 7.9 years on a straight line basis. Approximately $3$6 thousand of amortization was taken during the ~~quarters~~six months ended ~~March 31,~~June 30, 2018 and ~~March 31,~~June 30, 2017. It is estimated that an additional $9$6 thousand of additional amortization will occur during 2018, and $12 thousand of additional amortization will occur annually from 2019 to 2021, and the remaining amount 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 ~~$15~~$29 thousand of amortization was taken during the ~~three~~six months ended ~~March 31,~~June 30, 2018 and ~~March 31,~~June 30, 2017. It is estimated that ~~$43~~$29 thousand of additional amortization will occur during 2018, and $58 thousand of additional amortization will occur annually from 2019 to 2022, and the remaining amount will be amortized through to the third quarter of 2023.

For the First Federal acquisition, as part of the fair value of loans receivable, a net fair value discount was established for residential real estate, including home equity lines of credit, of $1.1 million that is being accreted over 55 months on a straight line basis. Approximately ~~$36~~$70 thousand of accretion was taken into income for the ~~three~~six months ended ~~March 31,~~June 30, 2018, compared to ~~$37~~$73 thousand for the ~~three~~six months ended ~~March 31,~~June 30, 2017. It is estimated that ~~$123~~$90 thousand of additional accretion will occur in 2018. Similarly, for the Liberty Savings acquisition, as part of the fair value of loans receivable, a net fair value discount was established for residential real estate, including home equity lines of credit, of $1.2 million that is being accreted over 44 months on a straight line basis. Approximately ~~$68~~$134 thousand of accretion was taken into income for the ~~three~~six months ended ~~March 31,~~June 30, 2018, compared to ~~$81~~$152 thousand for the ~~three~~six months ended ~~March 31,~~June 30, 2017. It is estimated that ~~$196~~$131 thousand of additional accretion will occur in 2018, and accretion of $44 thousand will occur during 2019.

Note 8 - Concentrations of Credit Risk

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

Note 9 - Earnings per Share

Earnings per common share is computed by dividing net income by the weighted-average number of common shares outstanding. A reconciliation of the numerators and denominators of the basic and diluted earnings per common share computations for the three and six months ended ~~March 31,~~June 30, 2018 and 2017 are as follows:

Three Months Ended
(Dollars in thousands, except per share data) March 31,
2018 2017
Basic earnings per common share:
Net income as reported $ 2,561 $ 2,298
Weighted average common shares outstanding 2,867,413 2,863,156
Basic earnings per common share $ 0.89 $ 0.80
Diluted earnings per common share:
Net income as reported $ 2,561 $ 2,298
Weighted average common shares outstanding 2,867,413 2,863,156
Add: Dilutive effect of assumed stock option exercises - 139
Weighted average common and dilutive potential common shares outstanding 2,867,413 2,863,295
Diluted earnings per common share $ 0.89 $ 0.80

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

Note 10 - 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 ~~three~~six months ended ~~March 31,~~June 30, 2018, stock based compensation expense of ~~$52~~$104 thousand was recorded, compared to ~~$47~~$90 thousand for the ~~three~~six months ended ~~March 31,~~June 30, 2017. It is anticipated that current outstanding unvested ~~options and~~ awards will result in additional compensation expense of approximately ~~$542~~$489 thousand through 2021 with ~~$153~~$100 thousand in 2018, $184 thousand in 2019, $150 thousand in 2020 and $55 thousand in 2021.

There were no incentive stock options granted during the first ~~three~~six months of 2018 or 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 ~~March 31,~~June 30, 2018, there were no outstanding incentive stock options.

There were 4,433 shares of restricted stock granted during the first~~three~~ six months of 2018 compared to 4,575 shares granted during the first ~~three~~six months of 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 ~~three~~year ended December 31, 2017 and six months ended ~~March 31,~~June 30, 2018 follows:

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

Non-vested at January 1, 2018		30,690		$	28.51		30,690		$	28.51
Granted		4,433			43.50		4,433			43.50
Vested		(3,200	)		21.00		(6,200	)		22.43
Forefited		-					-
Non-vested at March 31, 2018		31,923		$	31.34
Non-vested at June 30, 2018							28,923		$	32.11

Note 11 –- Change in Accounting Principles

In May 2014, FASB issued Accounting Standards Update (ASU) No. 2014-09 and ASU 2015-14,Revenue from Contracts with Customers (Topic 606), 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 is effective for the Bancorp's year ending December 31, 2018 and has been adopted as of January 1, 2018. The use of the modified retrospective approach has 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. 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 recognized when the performance obligation is satisfied. A review of the Bancorp’s noninterest income has not resulted in a change in revenue recognition since adoption.

In January 2016, 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 is effective for the Bancorp's year ending December 31, 2018 and was adopted on January 1, 2018. The adoption of this ASU has not had a material impact on the consolidated financial 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, the adoption of this ASU has not had a material impact on the consolidated financial statements.

Note 12 - Upcoming Accounting Standards

In February 2016, 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, as the Bancorp does not engage in the leasing of property or in leasing of any significant furniture, fixtures, equipment, or software.

~~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.

In June 2016, FASB issued 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 13 - Fair Value

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

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

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

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

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

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

The Bancorp’s management utilizes a specialist to perform an other-than-temporary impairment analysis for each of its four pooled trust preferred securities. The analysis is performed ~~semiannually~~annually on ~~June 30 and~~ December 31 and utilizes analytical models used to project future cash flows for the pooled trust preferred securities based on current assumptions for prepayments, default and deferral rates, and recoveries. The projected cash flows are then tested for impairment consistent with theInvestments – OtherTopic and theInvestments – Debt and Equity SecuritiesTopic. The other-than-temporary impairment testing compares the present value of the cash flows from quarter to quarter to determine if there is a “favorable” or “adverse” change. Other-than-temporary impairment is recorded if the projected present value of cash flows is lower than the book value of the security. To perform the ~~semi-annual~~annual other-than-temporary impairment analysis, management utilizes current reports issued by the trustee, which contain principal and interest tests, waterfall distributions, note valuations, collection detail and credit ratings for each pooled trust preferred security. In addition, a detailed review of the performing collateral was performed. The review of the collateral began with a review of financial information provided by SNL Financial, a comprehensive database, widely used in the industry, which gathers financial data on banks and thrifts from U.S. GAAP financial statements for public companies (annual and quarterly reports on Forms 10-K and 10-Q, respectively), as well as regulatory reports for private companies, including consolidated financial statements for bank holding companies (FR Y-9C reports) and parent company-only financial statements for bank holding companies (FR Y-9LP reports) filed with the Federal Reserve, and bank call reports filed with the FDIC and the Office of the Comptroller of Currency. Using the information sources described above, for each bank and thrift examined the following items were examined: nature of the issuer’s business, years of operating history, corporate structure, loan composition and loan concentrations, deposit mix, asset growth rates, geographic footprint and local economic environment. The issuers’ historical financial performance was reviewed and their financial ratios were compared to appropriate peer groups of regional banks or thrifts with similar asset sizes. The analysis focused on six broad categories: profitability (revenue streams and earnings quality, return on assets and shareholder’s equity, net interest margin and interest rate sensitivity), credit quality (charge-offs and recoveries, non-current loans and total non-performing assets as a percentage of total loans, loan loss reserve coverage and the adequacy of the loan loss provision), operating efficiency (non-interest expense compared to total revenue), capital adequacy (Tier-1, total capital and leverage ratios and equity capital growth), leverage (tangible equity as a percentage of tangible assets, short-term and long-term borrowings and double leverage at the holding company) and liquidity (the nature and availability of funding sources, net non-core funding dependence and quality of deposits). In addition, for publicly traded companies’ stock price movements were reviewed and the market price of publicly traded debt instruments was examined. Based on current market conditions and a review of the trustee reports, management performed an analysis of the four pooled trust preferred securities and no additional impairment was taken at ~~March~~December 31, ~~2018.~~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 ~~June 30,~~December 31, 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, 2017 $ 271
Additions not previously recognized -
Ending balance, March 31, 2018 $ 271

~~The following table contains information regarding the Bancorp’s pooled trust preferred securities impairment evaluation as of December 31, 2017:~~

Cusip 74043CAC1 74042TAJ0 01449TAB9 01450NAC6
Deal name PreTSLXXIV 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 63 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 1 1
Defaults & deferrals as a % of performing collateral 26.56 % 20.06 % 2.93 % 8.11 %
Subordination:
As a % of performing collateral 23.55 % 8.35 % 53.11 % 35.58 %
As a % of performing collateral-adjusted for projected future defaults 18,67 % 1.24 % 49.64 % 31.69 %
Other-than-temporary impairment model assumptions:
Defaults:
Year 1 - issuer average 2.00 % 2.40 % 2.30 % 1.90 %
Year 2 - issuer average 2.00 % 2.40 % 2.30 % 1.90 %
Year 3 - issuer average 2,00 % 2.40 % 2.30 % 1.90 %
> 3 Years - issuer average (1 ) (1 ) (1 ) (1 )
Discount rate - 3 month Libor, plus implicit yield spread at purchase 1 48 % 1.23 % 1.27 % 1.44 %
Recovery assumptions (2 ) (2 ) (2 ) (2 )
Prepayments 0.00 % 0.00 % 0.00 % 0.00 %
Other-than-temporary impairment $ 41 $ 132 $ 36 $ 62

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

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

In the preceding table, the Bancorp’s subordination for each trust preferred security is calculated by taking the total performing collateral and subtracting the sum of the total collateral within the Bancorp’s class and the total collateral within all senior classes, and then stating this result as a percentage of the total performing collateral. This measure is an indicator of the level of collateral that can default before potential cash flow disruptions may occur. In addition, management calculates subordination assuming future collateral defaults by utilizing the default/deferral assumptions in the Bancorp’s other-than-temporary-impairment analysis. Subordination assuming future default/deferral assumptions is calculated by deducting future defaults from the current performing collateral. At March 31, 2018, management reviewed the subordination levels for each security in context of the level of current collateral defaults and deferrals within each security; the potential for additional defaults and deferrals within each security; the length of time that the security has been in “payment in kind” status; and the Bancorp’s class position within each security.

Management calculated the other-than-temporary impairment model assumptions based on the specific collateral underlying each individual security. The following assumption methodology was applied consistently to each of the four pooled trust preferred securities: For collateral that has already defaulted, no recovery was assumed; no cash flows were assumed from collateral currently in deferral, with the exception of the recovery assumptions. The default and recovery assumptions were calculated based on a detailed collateral review. The discount rate assumption used in the calculation of the present value of cash flows is based on the discount margin (i.e., credit spread) at the time each security was purchased using the original purchase price. The discount margin is then added to the appropriate 3-month LIBOR forward rate obtained from the forward LIBOR curve.

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

At ~~March 31,~~June 30, 2018, three of the trust preferred securities with a cost basis of $3.5 million continue to be in “payment in kind” status. The Bancorp’s securities that are classified as “payment in kind” are a result of not receiving the scheduled quarterly interest payments. For the securities in “payment in kind” status, management anticipates to receive the unpaid contractual interest payments from the issuer, because of the self-correcting cash flow waterfall provisions within the structure of the securities. When a tranche senior to the Bancorp’s position fails the coverage test, the Bancorp’s interest cash flows are paid to the senior tranche and recorded as a reduction of principal. The coverage test represents an over collateralization target by stating the balance of the performing collateral as a percentage of the balance of the Bancorp’s tranche, plus the balance of all senior tranches. The principal reduction in the senior tranche continues until the appropriate coverage test is passed. As a result of the principal reduction in the senior tranche, more cash is available for future payments to the Bancorp’s tranche. Consistent with theInvestments – Debt and Equity Securities Topic, management considered the failure of the issuer of the security to make scheduled interest payments in determining whether a credit loss existed. Management will not capitalize the “payment in kind” interest payments to the book value of the securities and will keep these securities in non-accrual status until the quarterly interest payments resume on a consistent basis.

1817

Assets and Liabilities Measured at Fair Value on a Recurring Basis

There were no transfers to or from Levels 1 and 2 during the ~~three~~six months ended ~~March 31,~~June 30, 2018. Assets measured at fair value on a recurring basis are summarized below:

(Dollars in thousands)
Fair Value Measurements at March 31, 2018 Using
(Dollars in thousands) Estimated
Fair
Value Quoted Prices in
Active Markets
for Identical
Assets
(Level 1) Significant Other
Observable
Inputs
(Level 2) Significant
Unobservable
Inputs
(Level 3)
Available-for-sale debt securities:
Money market fund $ 924 $ 924 $ - $ -
U.S. government sponsored entities 5,838 - 5,838 -
Collateralized mortgage obligations and residential mortgage-backed securities 139,169 - 139,169 -
Municipal securities 92,085 - 92,085 -
Collateralized debt obligations 3,455 - - 3,455
Total securities available-for-sale $ 241,471 $ 924 $ 237,092 $ 3,455

											(Dollars in thousands)
											Fair Value Measurements at June 30, 2018 Using
(Dollars in thousands)									Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Available-for-sale debt securities:
Money market fund									$	1,608	$	1,608	$	-	$	-
U.S. government sponsored entities										7,821		-		7,821		-
Collateralized mortgage obligations and
residential mortgage-backed securities										135,131		-		135,131		-
Municipal securities										90,121		-		90,121		-
Collateralized debt obligations										3,483		-		-		3,483
Total securities available-for-sale									$	238,164	$	1,608	$	233,073	$	3,483
			(Dollars in thousands)
			Fair Value Measurements at December 31, 2017 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	$	476	$	476	$	-	$	-	$	476	$	476	$	-	$	-
U.S. government sponsored entities		3,890		-		3,890		-		3,890		-		3,890		-
Collateralized mortgage obligations and residential mortgage-backed securities		132,938		-		132,938		-		132,938		-		132,938		-
Municipal securities		103,747		-		103,747		-		103,747		-		103,747		-
Collateralized debt obligations		3,439		-		-		3,439		3,439		-		-		3,439
Total securities available-for-sale	$	244,490	$	476	$	240,575	$	3,439	$	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, 2017 $ 2,409
Principal payments (154 )
Total unrealized gains, included in other comprehensive income 1,184
Transfers in and/or (out) of Level 3 -
Ending balance, December 31, 2017 $ 3,439

Beginning balance, January 1, 2018 $ 3,439
Principal payments (12 )
Total unrealized gains, included in other comprehensive income 28
Transfers in and/or (out) of Level 3 -
Ending balance, March 31, 2018 $ 3,455

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

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

1918

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

(Dollars in thousands)
Fair Value Measurements at March 31, 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)
Impaired loans $ 1,973 $ - $ - $ 1,973
Foreclosed real estate 1,432 - - 1,432

			(Dollars in thousands)
			Fair Value Measurements at June 30, 2018 Using
(Dollars in thousands)	Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired loans	$	3,005	$	-	$	-	$	3,005
Foreclosed real estate		1,087		-		-		1,087

			(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 ~~$2.0~~$3.1 million and the related specific reserves totaled approximately ~~$59~~$62 thousand, resulting in a fair value of impaired loans totaling approximately ~~$1.9~~$3.0 million, at ~~March 31,~~June 30, 2018. The recorded investment of impaired loans was approximately $2.5 million and the related specific reserves totaled approximately $704 thousand, resulting in a fair value of impaired loans totaling approximately $1.8 million, at December 31, 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.

March 31, 2018 Estimated Fair Value Measurements at March 31, 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)
Financial assets:
Cash and cash equivalents $ 20,415 $ 20,415 $ 20,415 $ - $ -
Certificates of deposit in other financial institutions 1,526 1,493 - 1,493 -
Securities available-for-sale 241,471 241,471 924 237,092 3,455
Loans held-for-sale 1,908 1,949 1,949 - -
Loans receivable, net 617,565 602,764 - - 602,764
Federal Home Loan Bank stock 3,000 3,000 - 3,000 -
Accrued interest receivable 3,052 3,052 - 3,052 -

Financial liabilities:
Non-interest bearing deposits 126,582 126,582 126,582 - -
Interest bearing deposits 668,791 666,925 474,069 192,856 -
Repurchase agreements 13,396 13,387 11,642 1,745 -
Borrowed funds 30,360 30,254 260 29,994 -
Interest rate swap agreements 18 18 - 18 -
Accrued interest payable 42 42 - 42 -

	June 30, 2018				Estimated Fair Value Measurements at June 30, 2018 Using
(Dollars in thousands)	Carrying Value		Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Financial assets:
Cash and cash equivalents	$	19,792	$	19,792	$	19,792	$	-	$	-
Certificates of deposit in other financial institutions		1,526		1,493		-		1,493		-
Securities available-for-sale		238,164		238,164		1,608		233,073		3,483
Loans held-for-sale		4,329		4,411		4,411		-		-
Loans receivable, net		638,840		627,250		-		-		627,250
Federal Home Loan Bank stock		3,017		3,017		-		3,017		-
Accrued interest receivable		3,253		3,253		-		3,253		-

Financial liabilities:
Non-interest bearing deposits		120,418		120,418		120,418		-		-
Interest bearing deposits		685,559		683,809		478,974		204,835		-
Repurchase agreements		14,236		14,231		12,482		1,749		-
Borrowed funds		35,679		35,519		579		34,940		-
Interest rate swap agreements		111		111		-		111		-
Accrued interest payable		110		110		-		110		-

2019

	December 31, 2017				Estimated Fair Value Measurements at December 31, 2017 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	$	11,025	$	11,025	$	11,025	$	-	$	-	$	11,025	$	11,025	$	11,025	$	-	$	-
Certificates of deposit in other financial institutions		1,676		1,640		-		1,640		-		1,676		1,640		-		1,640		-
Securities available-for-sale		244,490		244,490		476		240,575		3,439		244,490		244,490		476		240,575		3,439
Loans held-for-sale		1,592		1,625		1,625		-		-		1,592		1,625		1,625		-		-
Loans receivable, net		612,729		608,506		-		-		608,506		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		3,262		3,262		-		3,262		-		3,262		3,262		-		3,262		-

Financial liabilities:
Non-interest bearing deposits		120,556		120,556		120,556		-		-		120,556		120,556		120,556		-		-
Interest bearing deposits		672,448		670,967		488,528		182,439		-		672,448		670,967		488,528		182,439		-
Repurchase agreements		11,300		11,292		9,545		1,747		-		11,300		11,292		9,545		1,747		-
Borrowed funds		20,881		20,818		600		20,218		-		20,881		20,818		600		20,218		-
Accrued interest payable		42		42		-		42		-		42		42		-		42		-

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

Cash and cash equivalents carrying amounts approximate fair value. The fair values of securities available-for-sale are obtained from broker pricing (Level 2), with the exception of collateralized debt obligations, which are valued by a third-party specialist (Level 3). Loans held-for-sale comprise residential mortgages and are priced based on values established by the secondary mortgage markets (Level 1). The estimated fair value for net loans receivable is based on an exit price basis incorporating discounts for credit, liquidity, and marketability factors (Level 3). This is not comparable with the fair values disclosed for December 31, 2017, which were based on estimates of the rate the Bancorp would charge for similar such loans, applied for the time period until estimated repayment, in addition to appraisals which may utilize a single valuation approach or a combination of approaches including comparable sales and the income ~~approach (Level 3).~~approach. Federal Home Loan Bank stock is estimated at book value due to restrictions that limit the sale or transfer of the security. Fair value of accrued interest receivable and payable approximates book value, as the carrying values are determined using the observable interest rate, balance, and last payment date.

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

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

Cash and cash equivalent carrying amounts approximate fair value. Certificates of deposits in other financial institutions carrying amounts approximate fair value (Level 2). The fair values of securities available-for-sale are obtained from broker pricing (Level 2), with the exception of collateralized debt obligations, which are valued by a third-party specialist (Level 3). Loans held-for-sale comprise residential mortgages and are priced based on values established by the secondary mortgage markets (Level 1). The estimated fair value for net loans receivable is based on estimates of the rate the Bancorp would charge for similar such loans, applied for the time period until estimated repayment, in addition to appraisals which may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach (Level 3). Federal Home Loan Bank stock is estimated at book value due to restrictions that limit the sale or transfer of the security. Fair values of accrued interest receivable and payable 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 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 ~~March 31,~~June 30, 2018, as compared to December 31, 2017, and the results of operations for the quarter and six months ending ~~March 31,~~June 30, 2018, and ~~March 31,~~June 30, 2017. This discussion should be read in conjunction with the consolidated financial statements and other financial data presented elsewhere herein and with the financial statements and other financial data, as well as the Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

At ~~March 31,~~June 30, 2018, the Bancorp had total assets of ~~$938.5~~$959.0 million, total loans receivable of ~~$624.7~~$646.3 million and total deposits of ~~$795.4~~$806.0 million. Stockholders' equity totaled ~~$89.8~~$90.6 million or ~~9.57%~~9.45% of total assets, with a book value per share of ~~$31.30.~~$31.58. Net income for the quarter ended ~~March 31,~~June 30, 2018, was ~~$2.6~~$2.5 million, or ~~$0.89~~$0.88 earnings per common share for both basic and diluted calculations. For the quarter ended ~~March 31,~~June 30, 2018, the return on average assets (ROA) was ~~1.10%~~1.07%, while the return on average stockholders’ equity (ROE) was ~~11.20%~~11.04%. Net income for the six months ended June 30, 2018, was $5.1 million, or $1.77 earnings per common share for both basic and diluted calculations. For the six months ended June 30, 2018, the ROA was 1.08%, while the ROE was 11.12%.

Recent Developments

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

Financial Condition

During the ~~three~~six months ended ~~March 31,~~June 30, 2018, total assets increased by ~~$11.2~~$31.7 million ~~(1.2%~~(3.4%), with interest-earning assets increasing by ~~$11.7~~$25.2 million ~~(1.3%~~(2.9%). At ~~March 31,~~June 30, 2018, interest-earning assets totaled ~~$883.2~~$896.7 million compared to $871.5 million at December 31, 2017. Earning assets represented ~~94.1%~~93.5% of total assets at ~~March 31,~~June 30, 2018 and 94.0% of total assets at December 31, 2017. The increase in total assets and interest earning assets for the ~~three~~six months was the result of internally generated growth.

Net loans receivable totaled ~~$617.6~~$638.8 million at ~~March 31,~~June 30, 2018, compared to $612.7 million at December 31, 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:

	March 31,										June 30,
	2018					December 31,					2018					December 31,
(Dollars in thousands)	(unaudited)					2017					(unaudited)					2017
	Balance		% Loans			Balance		% Loans			Balance		% Loans			Balance		% Loans

Residential real estate	$	173,866		27.8	%		172,141		27.8	%	$	175,492		27.2	%		172,141		27.8	%
Home equity		36,658		5.9	%		36,769		5.9	%		38,303		5.9	%		36,769		5.9	%
Commercial real estate		208,482		33.4	%		211,090		34.0	%		223,598		34.6	%		211,090		34.0	%
Construction and land development		53,775		8.6	%		50,746		8.2	%		51,947		8.0	%		50,746		8.2	%
Multifamily		44,612		7.1	%		43,368		7.0	%		44,781		6.9	%		43,368		7.0	%
Farmland		248		0.1	%		-		0.0	%		245		0.1	%		-		0.0	%
Consumer		491		0.1	%		461		0.1	%		487		0.1	%		461		0.1	%
Commercial business		76,354		12.2	%		76,851		12.4	%		83,699		13.0	%		76,851		12.4	%
Government		30,176		4.8	%		28,785		4.6	%		27,736		4.2	%		28,785		4.6	%
Loans receivable	$	624,662		100.0	%	$	620,211		100.0	%	$	646,288		100.0	%	$	620,211		100.0	%

Adjustable rate loans / loans receivable	$	354,478		56.7	%	$	348,559		56.2	%	$	379,815		58.8	%	$	348,559		56.2	%

March 31,
2018 December 31,
(unaudited) 2017

Loans receivable to total assets 66.6 % 66.9 %
Loans receivable to earning assets 70.7 % 71.2 %
Loans receivable to total deposits 78.5 % 78.2 %

	June 30,
	2018			December 31,
	(unaudited)			2017

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

The Bancorp is primarily a portfolio lender. Mortgage banking activities historically have been limited to the sale of fixed rate mortgage loans with contractual maturities greater than 15 years. These loans are identified as held for sale when originated and sold, on a loan-by-loan basis, in the secondary market. The Bancorp will also retain fixed rate mortgage loans with a contractual maturity greater than 15 years on a limited basis. During the ~~three~~six months ended ~~March 31,~~June 30, 2018, the Bancorp originated ~~$8.3~~$24.3 million in new fixed rate mortgage loans for sale, compared to ~~$6.3~~$17.6 million during the ~~three~~six months ended ~~March 31,~~June 30, 2017. Net gains realized from the mortgage loan sales totaled ~~$211~~$570 thousand for the ~~three~~six months ended ~~March 31,~~June 30, 2018, compared to ~~$200~~$471 thousand for the ~~three~~six months ended ~~March 31,~~June 30, 2017. At ~~March 31,~~June 30, 2018, the Bancorp had ~~$1.9~~$4.3 million in loans that were classified as held for sale, compared to $1.6 million at December 31, 2017.

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.

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 $4.0 million at March 31, 2018, compared to $5.2 million at December 31, 2017, a decrease of $1.2 million or 22.5%. The decrease in non-performing loans for the first three months of 2018 is primarily due to a charge-off totaling $526 thousand for two related commercial business loans, a charge-off of $119 thousand for a commercial real estate loan, and the removal of nine residential real estate loans. The ratio of non-performing loans to total loans was 0.65% at March 31, 2018, compared to 0.84% at December 31, 2017. The ratio of non-performing loans to total assets was 0.43% at March 31, 2018, compared to 0.56% at December 31, 2017. At ~~March 31,~~June 30, 2018, all non-performing loans are also accounted for on a non-accrual basis, except for ~~two~~one residential real estate ~~loans~~loan totaling ~~$51~~$71 thousand that remained accruing and more than 90 days past due.

~~Loans internally classified as substandard totaled $4.7 million at March 31, 2018, compared to $5.9 million at December 31, 2017, a decrease of $1.2 million or 20.5%.~~ The ~~decrease in non-performing~~Bancorp's nonperforming loans ~~for the first three months of 2018 is primarily~~are loans that are more than 90 days past due ~~to a charge-off totaling $526 thousand for two related commercial business~~and those loans ~~a charge-off of $119 thousand for a commercial real estate loan, an upgrade of a $450 thousand commercial business loan~~that have been placed on non-accrual status and ~~the removal of nine residential real estate loans.~~ are summarized below:

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

Substandard loans include non-performing loans and potential problem loans, where information about possible credit issues or other conditions causes management to question the ability of such borrowers to comply with loan covenants or repayment terms. No loans were internally classified as doubtful or loss at ~~March 31,~~June 30, 2018 or December 31, 2017.

The Bancorp's substandard loans are summarized below:

(Dollars in thousands)

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

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

The Bancorp's special mention loans ~~totaled $12.4 million at March 31, 2018, compared to $11.7 million at December 31, 2017, an increase of $753 thousand or 6.4%. The increase~~are summarized below:

(Dollars in watch loans is primarily due to the addition of two related commercial real estate loans totaling $1.6 million, five related commercial business loans totaling $712 thousand, and four related commercial business loans totaling $626 thousand and one commercial business loan for $430 thousand offset by the payoff of one commercial real estate loan for $2.3 million.thousands)

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

A loan is considered impaired when, based on current information and events, it is probable that a borrower will be unable to pay all amounts due according to the contractual terms of the loan agreement. At March 31, 2018, impaired loans totaled $2.0 million, compared to $2.5 million at December 31, 2017, a decrease of $490 thousand or 19.4%. The decrease in impaired loans for the first three months of 2018 is primarily due to a charge-off totaling $526 thousand for two commercial business loans and a charge-off of $119 thousand for a commercial real estate loan. The March 31, 2018 impaired loan balances consist of four commercial real estate loans, four commercial business loans, and one construction and land development loan, all of which total $690 thousand that are secured by business assets and real estate, and are personally guaranteed by the owners of the businesses. In addition, 66 Investor Owned Residential Real Estate and purchased credit impaired loans totaling $1.3 million have also been classified as impaired. At March 31, 2018 the ALL contained $59 thousand in specific reserves for impaired loans, compared to $704 thousand at December 31, 2017. There were no other loans considered for impairment as of March 31, 2018. 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. ~~At March 31, 2018,~~

The Bancorp's impaired loans, including purchased credit impaired loans, ~~with unpaid principal balances totaled $2.4 million with a recorded investment of $712 thousand.~~are summarized below:

(Dollars in thousands)

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

At ~~March 31, 2018,~~times, the Bancorp ~~classified nine loans totaling $717 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 four residential real estate loans in the amount of $417 thousand, one commercial business loan in the amount of $180 thousand for which a reduction in interest rate and change in amortization was granted with no change to the maturity date, two home equity loans in the amount of $69 thousand for which an extension of amortization and reduction in rate was granted, and two accruing commercial business loans totaling $51 thousand for which a reduction in principal payments was granted.restructuring. The valuation basis for the Bancorp’s troubled debt restructurings is based on the present value of expected future cash flows; unless consistent cash flows are not present, then the fair value of the collateral securing the loan is the basis for valuation.

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

(Dollars in thousands)

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

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

At ~~March 31,~~June 30, 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 three months ended March 31, 2018, $341 thousand in provisions to the ALL were required, compared to $234 thousand for the three months ended March 31, 2017, an increase of $107 thousand or 45.7%. The ALL provision for ~~the current three month period is primarily a result of overall~~ loan ~~portfolio growth. For the three months ended March 31, 2018,~~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 ~~totaled $726 thousand, compared~~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 ~~charge-offs, net~~all known relevant internal and external factors that affect loan collectability as of ~~recoveries~~the reporting date. The appropriateness of ~~$1.1 million~~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.

The Bancorp's provision for loan losses for the ~~three~~six months ended ~~March 31, 2017.~~ is summarized below:

(Dollars in thousands)

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

The ~~net loan charge-offs for the first quarter of 2018 were comprised of $87 thousand~~Bancorp's charge-off and recovery information is summarized below:

(Dollars in ~~residential real estate and home equity loans, $4 thousand in consumer loans, $516 thousand in commercial business loans, and $119 thousand in commercial real estate.~~ thousands)

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

The ALL provisions take into consideration management’s current judgments about the credit quality of the loan portfolio, loan portfolio balances, changes in the portfolio mix and local economic conditions. In determining the provision for loan losses for the current period, management has considered risks associated with the local economy, changes in loan balances and mix, and asset quality.

The ~~ALL-to-total~~Bancorp's allowance-to-total loans ~~was 1.14% at March 31, 2018, compared to 1.21% at December 31, 2017.~~ and non-performing loans is summarized below:

(Dollars in thousands)

	June 30,			December 31,
	2018			2017

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

The ~~ALL-to-non-performing loans (coverage ratio) was 175.4% at March 31, 2018, compared to 143.3% at December 31, 2017. The March 31,~~June 30, 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 ~~March 31,~~June 30, 2018, foreclosed real estate totaled ~~$1.4~~$1.1 million, which was comprised of ~~thirteen~~nine properties, compared to $1.7 million and sixteen properties at December 31, 2017. The decrease in foreclosed real estate is the result of the sale of properties. Net gains from the sale of foreclosed real estate totaled ~~$32~~$100 thousand for the ~~three~~six months ended ~~March 31, 2018, and were the result of proceeds received from the sale of foreclosed properties.~~June 30, 2018. At the end of ~~March~~June 2018 all of the Bancorp’s foreclosed real estate is located within its primary market area.

2425

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 ~~$241.5~~$238.2 million at ~~March 31,~~June 30, 2018, compared to $244.5 million at December 31, 2017, a decrease of ~~$3.0~~$6.3 million ~~(1.2%~~(2.6%). The decrease in the securities portfolio is a result of market value adjustments for unrealized ~~losses.~~losses and funding of loan growth. At ~~March 31,~~June 30, 2018, the securities portfolio represented ~~27.3%~~26.6% of interest-earning assets and ~~25.7%~~24.8% of total assets compared to 28.1% of interest-earning assets and 26.4% of total assets at December 31, 2017.

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

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

Money market fund	$	924		0.4	%	$	476		0.2	%	$	1,608		0.7	%	$	476		0.2	%
U.S. government sponsored entities		5,838		2.4	%		3,890		1.6	%		7,821		3.3	%		3,890		1.6	%
Collateralized mortgage obligations and residential mortgage-backed securities		139,169		57.6	%		132,938		54.4	%		135,131		56.7	%		132,938		54.4	%
Municipal securities		92,085		38.1	%		103,747		42.4	%		90,121		37.8	%		103,747		42.4	%
Collateralized debt obligations		3,455		1.5	%		3,439		1.4	%		3,483		1.5	%		3,439		1.4	%
Total securities available-for-sale	$	241,471		100.0	%	$	244,490		100.0	%	$	238,164		100.0	%	$	244,490		100.0	%

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

Interest bearing deposits in other financial institutions	$	10,361	$	139	$	10,222			7354.0	%	$	2,524	$	139	$	2,385			1715.8	%
Fed funds sold		254		357		(103	)		-28.9	%		839		357		482			135.0	%
Certificates of deposit in other financial institutions		1,526		1,676	$	(150	)		-8.9	%		1,526		1,676	$	(150	)		-8.9	%
Federal Home Loan Bank stock		3,000		3,000		-			0.0	%		3,017		3,000		17			0.6	%

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

Deposits are a fundamental and cost-effective source of funds for lending and other investment purposes. The Bancorp offers a variety of products designed to attract and retain customers, with the primary focus on building and expanding relationships.

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

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

Checking	$	297,413	$	309,023	$	(11,610	)		-3.8	%	$	321,588	$	309,023	$	12,565			4.1	%
Savings		134,779		129,702		5,077			3.9	%		131,003		129,702		1,301			1.0	%
Money market		168,458		170,359		(1,901	)		-1.1	%		146,613		170,359		(23,746	)		-13.9	%
Certificates of deposit		194,723		183,920		10,803			5.9	%		206,773		183,920		22,853			12.4	%
Total deposits	$	795,373	$	793,004	$	2,369			0.3	%	$	805,977	$	793,004	$	12,973			1.6	%

The overall increase in total deposits is a result of management’s sales efforts along with current customer preferences for short-term, liquid investment alternatives.

2526

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:

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

Repurchase agreements	$	13,396	$	11,300	$	2,096		18.5	%	$	14,236	$	11,300	$	2,936		26.0	%
Borrowed funds		30,360		20,881		9,479		45.4	%		35,679		20,881		14,798		70.9	%
Total borrowed funds	$	43,756	$	32,181	$	11,575		36.0	%	$	49,915	$	32,181	$	17,734		55.1	%

Repurchase agreements increased as part of normal account fluctuations within that product line. Borrowed funds increased as FHLB advances were 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 ~~three~~six months ended ~~March 31,~~June 30, 2018, cash and cash equivalents increased by ~~$9.4~~$8.8 million compared to a ~~$29.3~~$17.4 million decrease for the ~~three~~six months ended ~~March 31,~~June 30, 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, and borrowed funds. The primary uses of cash and cash equivalents were the purchase of securities, loan originations, and the repayment of FHLB advances. Cash provided by operating activities totaled ~~$3.0~~$5.7 million for the ~~three~~six months ended ~~March 31,~~June 30, 2018, compared to cash provided of ~~$3.7~~$5.0 million for the ~~three~~six month period ended ~~March 31,~~June 30, 2017. The ~~decrease~~increase in cash from operating activities was primarily a result of an increase in the sale of loans originated for sale and accrued expenses and other liabilities, offset by origination of loans for ~~sale.~~sale and gain on sale of securities. Cash outflows from investing activities totaled ~~$6.7~~$26.0 million for the current period, compared to cash outflows of ~~$16.8~~$23.4 million for the ~~three~~six months ended ~~March 31,~~June 30, 2017. Cash outflows from investing activities for the current ~~three~~six months were primarily related to the origination of loans receivable and purchases of securities, offset by the sale and maturities ~~and pay downs of securities.~~for securities available-for-sale. Net cash inflows from financing activities totaled ~~$13.1~~$29.0 million during the current period compared to net cash ~~outflows~~inflows of ~~$16.2~~$1 million for the ~~three~~six months ended ~~March 31,~~June 30, 2017. The net cash inflows from financing activities was primarily a result of proceeds from FHLB ~~advances.~~advances, an increase in deposits and other borrowed fund. On a cash basis, the Bancorp paid dividends on common stock of ~~$833 thousand~~$1.7 million for the ~~three~~six months ended ~~March 31,~~June 30, 2018 and ~~$800 thousand~~$1.6 million for the ~~three~~six months ended ~~March 31,~~June 30, 2017.

At ~~March 31,~~June 30, 2018, outstanding commitments to fund loans totaled ~~$140.4~~$151.5 million. Approximately ~~55.4%~~49.1% of the commitments were at variable rates. Standby letters of credit, which are conditional commitments issued by the Bancorp to guarantee the performance of a customer to a third party, totaled $8.7 million at ~~March 31,~~June 30, 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 ~~three~~six months ended ~~March 31,~~June 30, 2018, stockholders' equity decreased by ~~$2.3~~$1.5 million ~~(2.4%~~(1.6%). During the ~~three~~six months ended ~~March 31,~~June 30, 2018, stockholders’ equity was primarily increased by net income of ~~$2.6~~$5.1 million. Decreasing stockholders’ equity was the declaration of ~~$833 thousand~~$1.7 million in cash dividends and a decrease to net unrealized gains (losses) on securities available-for-sale of ~~$4.0~~$4.9 million. On April 24, 2014 the Bancorp’s Board of Directors authorized a stock repurchase program to repurchase up to 50,000 shares of the Bancorp’s outstanding common stock, from time to time and subject to market conditions, on the open market or in privately negotiated transactions. The stock repurchase program does not expire and is only limited by the number of shares that can be purchased. The stock repurchase program will be reviewed annually by the Board of Directors. No shares were repurchased under the program during the first ~~three~~six months of 2018 or 2017.

On May 1, 2018 3,000 restricted stock shares vested under the program outlined in Note 10 of the financial statements, of which the Bancorp authorized the repurchase of 1,029 of these shares in the form of a net surrender by the vesting employees. The repurchase of these surrendered shares is considered outside of the scope of the formal stock repurchase program.

2627

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

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

During the ~~three~~six months ended ~~March 31,~~June 30, 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 $4.8 million. Three of these investments currently have ratings that are below investment grade. As a result, approximately ~~$19.4~~$19.1 million of risk-based assets are generated by the trust preferred securities in the Bancorp’s and Bank’s total risk based capital calculation.

The following table shows that, at ~~March 31,~~June 30, 2018, and December 31, 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 March 31, 2018	Amount		Ratio			Amount		Ratio			Amount	Ratio
At June 30, 2018													Amount		Ratio			Amount		Ratio			Amount		Ratio
Common equity tier 1 capital to risk-weighted assets	$	90.3		13.3	%	$	30.5		4.5	%	N/A	N/A	$	91.6		13.0	%	$	31.7		4.5	%		N/A		N/A
Tier 1 capital to risk-weighted assets	$	90.3		13.3	%	$	40.7		6.0	%	N/A	N/A	$	91.6		13.0	%	$	42.3		6.0	%		N/A		N/A
Total capital to risk-weighted assets	$	97.4		14.4	%	$	54.2		8.0	%	N/A	N/A	$	99.0		14.1	%	$	56.3		8.0	%		N/A		N/A
Tier 1 capital to adjusted average assets	$	90.3		9.7	%	$	39.6		4.0	%	N/A	N/A	$	91.6		9.8	%	$	40.5		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, 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 ~~March 31,~~June 30, 2018, and December 31, 2017, the Bank’s capital exceeded all applicable regulatory capital requirements. The dollar amounts are in millions.

(Dollars in millions) Minimum Required To Be
Minimum Required For Well Capitalized Under Prompt
Actual Capital Adequacy Purposes Corrective Action Regulations
At March 31, 2018 Amount Ratio Amount Ratio Amount Ratio
Common equity tier 1 capital to risk-weighted assets $ 88.1 13.0 % $ 30.5 4.5 % $ 44.0 6.5 %
Tier 1 capital to risk-weighted assets $ 88.1 13.0 % $ 40.7 6.0 % $ 54.2 8.0 %
Total capital to risk-weighted assets $ 95.2 14.0 % $ 54.2 8.0 % $ 67.8 10.0 %
Tier 1 capital to adjusted average assets $ 88.1 9.5 % $ 39.6 4.0 % $ 49.5 5.0 %

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

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

The Bancorp’s ability to pay dividends to its shareholders is primarily dependent upon the Bank’s ability to pay dividends to the Bancorp. Under Indiana law, the Bank may pay dividends from its undivided profits (generally, earnings less losses, bad debts, taxes and other operating expenses) as is considered expedient by the Bank’s Board of Directors. However, the Bank must obtain the approval of the Indiana Department of Financial Institutions (DFI) if the total of all dividends declared by the Bank during the current year, including the proposed dividend, would exceed the sum of retained net income for the year to date plus its retained net income for the previous two years. For this purpose, “retained net income,” means net income as calculated for call report purposes, less all dividends declared for the applicable period. An exemption from DFI approval would require that the Bank have been assigned a composite uniform financial institutions rating of 1 or 2 as a result of the most recent federal or state examination; the proposed dividend would not result in a Tier 1 leverage ratio below 7.5%; and that the Bank not be subject to any corrective action, supervisory order, supervisory agreement, or board approved operating agreement. The aggregate amount of dividends that may be declared by the Bank in 2018, without the need for qualifying for an exemption or prior DFI approval, is $10.2 million plus 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 ~~February 16,~~May 18, 2018 the Board of Directors of the Bancorp declared a ~~first~~second quarter dividend of ~~$0.29~~$0.30 per share. The Bancorp’s ~~first~~second quarter dividend was paid to shareholders on ~~April 6,~~July 11, 2018.

Results of Operations - Comparison of the Quarter Ended ~~March 31,~~June 30, 2018 to the Quarter Ended ~~March 31,~~June 30, 2017

For the three months ended ~~March 31,~~June 30, 2018, the Bancorp reported net income of ~~$2.6~~$2.511 million, compared to net income of ~~$2.3~~$2.529 million for the quarter ended ~~March 31,~~June 30, 2017, ~~an increase~~a decrease of ~~$263~~$18 thousand ~~(11.4%~~(0.7%). For the quarter, the ROA was ~~1.10%~~1.07%, compared to ~~1.02%~~1.11% for the quarter ended ~~March 31,~~June 30, 2017. The ROE was ~~11.20%~~11.04% for the quarter ended ~~March 31,~~June 30, 2018, compared to ~~10.73%~~11.30% for the quarter ended ~~March 31,~~June 30, 2017.

Net interest income for the quarter ended ~~March 31,~~June 30, 2018 was ~~$7.8~~$7.9 million, an increase of ~~$320~~$218 thousand ~~(4.3%~~(2.8%), compared to ~~$7.5~~$7.7 million for the quarter ended ~~March 31,~~June 30, 2017. The weighted-average yield on interest-earning assets was ~~3.99%~~4.07% for the quarter ended ~~March 31,~~June 30, 2018, compared to ~~3.84%~~3.89% for the quarter ended ~~March 31,~~June 30, 2017. The weighted-average cost of funds for the quarter ended ~~March 31,~~June 30, 2018 was ~~0.43%~~0.53% compared to ~~0.28%~~0.30% for the quarter ended ~~March 31,~~June 30, 2017. The impact of the ~~3.99%~~4.07% return on interest earning assets and the ~~0.43%~~0.53% cost of funds resulted in an interest rate spread of ~~3.56%~~3.54% for the current quarter, ~~which was~~a decrease from the ~~same~~3.59% spread for the ~~three months~~quarter ended ~~March 31,~~June 30, 2017. The net interest margin on earning assets was ~~3.58%~~3.56% for the three months ended ~~March 31,~~June 30, 2018 and ~~March 31,~~3.60% for the three months ended June 30, 2017. On a tax equivalent basis, the Bancorp’s net interest margin was ~~3.80%~~3.78% for the three months ended ~~March 31,~~June 30, 2018, compared to ~~3.82%~~3.84% for the three months ended ~~March 31,~~June 30, 2017. Comparing the net interest margin on a tax equivalent basis more accurately compares the returns on tax-exempt loans and securities to those on taxable interest-earning assets.

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

(Dollars in thousands) Average Balances, Interest, and Rates
March 31, 2018 March 31, 2017
Average
Balance Interest Rate (%) Average
Balance Interest Rate (%)
ASSETS
Interest bearing deposits in other financial institutions $ 2,396 $ 10 1.67 $ 9,982 $ 20 0.80
Federal funds sold 467 1 0.86 531 - -
Certificates of deposit in other financial institutions 1,636 6 1.47 885 2 0.90
Securities available-for-sale 241,081 1,671 2.77 234,661 1,585 2.70
Loans receivable 626,894 6,994 4.46 591,595 6,439 4.35
Federal Home Loan Bank stock 3,000 51 6.80 3,000 32 4.27
Total interest bearing assets 875,474 $ 8,733 3.99 840,654 $ 8,078 3.84
Cash and non-interest bearing deposits in other financial institutions 13,360 11,940
Allowance for loan losses (7,468 ) (7,644 )
Other noninterest bearing assets 53,643 53,978
Total assets $ 935,009 $ 898,928

LIABILITIES AND STOCKHOLDERS' EQUITY
Total deposits $ 782,382 $ 675 0.35 $ 768,018 $ 459 0.24
Repurchase agreements 11,162 32 1.15 12,426 21 0.68
Borrowed funds 40,764 191 1.87 24,257 83 1.37
Total interest bearing liabilities 834,308 $ 898 0.43 804,701 $ 563 0.28
Other noninterest bearing liabilities 9,288 8,589
Total liabilities 843,596 813,290
Total stockholders' equity 91,413 85,638
Total liabilities and stockholders' equity $ 935,009 $ 898,928

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

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

The increase in yields for interest bearing deposits in other financial institutions and certificates of deposits in other financial institutions was primarily the result of higher average rates received from ~~increased~~increases in short term rates for the three months ended ~~March 31,~~June 30, 2018, compared to the three months ended ~~March 31,~~June 30, 2017. The increase in yields for securities available-for-sale and loans receivable was the result of higher average balances and higher weighted average rates for the three months ended ~~March 31,~~June 30, 2018, compared to the three months ended ~~March 31,~~June 30, 2017. The increase in the cost of total deposits and borrowed funds was the result of higher average balances and higher weighted average rates for the three months ended ~~March 31,~~June 30, 2018 compared to the three months ended ~~March 31,~~June 30, 2017. The increase in the cost of repurchase agreements was the result of higher weighted average rates for the three months ended ~~March 31,~~June 30, 2018 compared to the three months ended ~~March 31,~~June 30, 2017.

The following table shows the change in noninterest income for the quarter ending ~~March 31,~~June 30, 2018, and ~~March 31,~~June 30, 2017.

											Three Months Ended
	Three Months Ended										June 30,
*(Dollars in thousands)*	March 31,				Three Months Ended						(unaudited)				Three Months Ended
	2018		2017		$ Change			% Change			2018		2017		$ Change			% Change
Noninterest income:
Fees and service charges	$	892	$	740	$	152			20.5	%	$	947	$	821	$	126			15.3	%
Gain on sale of securities, net		758		293		465			158.7	%		246		252		(6	)		-2.4	%
Wealth management operations		415		410		5			1.2	%		424		398		26			6.5	%
Gain on sale of loans held-for-sale, net		211		200		11			5.5	%		359		271		88			32.5	%
Increase in cash value of bank owned life insurance		108		115		(7	)		-6.1	%		120		115		5			4.3	%
Gain on sale of foreclosed real estate, net		32		-		32			0.0	%		68		93		(25	)		-26.9	%
Other		33		27		6			22.2	%		39		10		29			290.0	%

Total noninterest income		2,449		1,785		664			37.2	%	$	2,203	$	1,960	$	243			12.4	%

The increase in fees and service charges is the result of the Bancorp’s continued focus on maintaining competitive fees within its market place. Current market conditions provided opportunities to maintain securities cash flows, while recognizing gains from the sales of securities. The increase in gain on sale of foreclosed real estate is the result of normal course of business sales from other real estate owned. The increase in gains from the sale of loans is a result of timing differences in customer demand and overall increase in loan generation. 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 quarter ending ~~March 31,~~June 30, 2018, and ~~March 31,~~June 30, 2017.

	Three Months Ended									Three Months Ended
*(Dollars in thousands)*	March 31,				Three Months Ended					June 30, (unaudited)				Three Months Ended
	2018		2017		$ Change			% Change		2018		2017		$ Change			% Change
Noninterest expense:
Compensation and benefits		3,860		3,613		247			6.8	$	3,516	$	3,140	$	376			12.0	%
Occupancy and equipment		853		882		(29	)		-3.3		842		815		27			3.3	%
Data processing		361		368		(7	)		-1.9		703		360		343			95.3	%
Marketing		134		135		(1	)		-0.7		166		199		(33	)		-16.6	%
Federal deposit insurance premiums		84		77		7			9.1		75		81		(6	)		-7.4	%
Other		1,675		1,225		450			36.7		1,604		1,433		171			11.9	%

Total noninterest expense		6,967		6,300		667			10.6	$	6,906	$	6,028	$	878			14.6	%

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The increase in compensation and benefits is the result of a continued focus on talent management and retention. The increase in data processing expense is the result of data conversion expenses related to the potential acquisition of First Personal as discussed in Note 3 of the financial statements and increased system utilization. The decrease in marketing expense is a result of timing based on projected benefits and needs. The decrease in occupancy and equipment expense is the result of lower building operating expenses. The increase in other operating expenses is related to generally higher costs related to foreclosure and collection expense, legal expenses related to the First Personal acquisition, seminars and education, higher third party costs, and a shared loss of $125 thousand from the operation of its wholly-owned subsidiaries NWIN Risk Management, Inc. (a captive insurance subsidiary). The Bancorp’s efficiency ratio was ~~67.75%~~68.1% for the ~~quarter~~six months ended ~~March 31,~~June 30, 2018, compared to ~~67.74%~~65.2% for the ~~quarter~~six months ended ~~March 31,~~June 30, 2017. ~~Despite higher operating expenses for~~The increased ratio is related primarily to the ~~quarter, increases~~increase in ~~net interest income and~~ noninterest ~~income were sufficient to offset operating expenses.~~expense. The efficiency ratio is determined by dividing total noninterest expense by the sum of net interest income and total noninterest income for the period.

Income tax expenses for the ~~quarter~~six months ended ~~March 31,~~June 30, 2018 totaled ~~$415~~$780 thousand, compared to income tax expense of ~~$468~~$1,206 thousand for the ~~quarter~~six months ended ~~March 31,~~June 30, 2017, a decrease of ~~$53~~$426 thousand ~~(11.3%~~(35.3%). The combined effective federal and state tax rates for the Bancorp was ~~13.9%~~13.3% for the six ended June 30, 2018, compared to 20.0% for the quarter ended ~~March 31, 2018, compared to 16.9% for the quarter ended March 31,~~June 30, 2017. The Bancorp’s lower current quarter effective tax rate is primarily a result of the Tax Cuts and Jobs Act that, among other changes, reduces the corporate federal income tax rate from 34% to 21% and was effective January 1, 2018.

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, 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 2017 Form 10-K.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

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

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

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

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

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

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

Immediate Changes in Rates Immediate Changes in Rates
March 31, 2018 Down 2.00% Down 1.00% Base Up 1.00% Up 2.00% Up 3.00%
Projected interest income:
Loans $ 26,391 $ 27,856 $ 29,650 $ 31,466 $ 33,272 $ 35,055
Securities 6,694 6,997 7,298 7,500 7,674 7,813
Other interest earning assets 4 20 42 66 90 113
Total interest income 33,089 34,873 36,990 39,032 41,036 42,981
Projected interest expense:
Deposits 2,258 2,825 4,273 6,492 8,712 # 10,931
Borrowings 759 798 848 904 962 1,022
Total interest expense 3,017 3,623 5,121 7,396 9,674 11,953
Net interest income $ 30,072 $ 31,250 $ 31,869 $ 31,636 $ 31,362 $ 31,028

Dollar change from base $ (1,797 ) $ (619 ) $ (233 ) $ (507 ) $ (841 )
Percent change from base -5.64 % -1.94 % -0.73 % -1.59 % -2.64 %
~~(Dollars in thousands)~~
Immediate Changes in Rates Immediate Changes in Rates
December 31, 2017 Down 2.00% Down 1.00% Base Up 1.00% Up 2.00% Up 3.00%
Projected interest income:
Loans $ 26,190 $ 27,136 $ 28,751 $ 30,454 $ 32,155 $ 33,874
Securities 6,528 6,844 7,272 7,483 7,672 7,824
Other interest earning assets - - 4 7 11
Total interest income 32,718 33,980 36,023 37,941 39,834 41,709
Projected interest expense:
Deposits 1,777 1,981 2,921 5,056 7,204 9,358
Borrowings 461 577 826 1,079 1,327 1,569
Total interest expense 2,238 2,558 3,747 6,135 8,531 10,927
Net interest income $ 30,480 $ 31,422 $ 32,276 $ 31,806 $ 31,303 $ 30,782

Dollar change from base $ (1,796 ) $ (854 ) $ (470 ) $ (973 ) $ (1,494 )
Percent change from base -5.56 % -2.65 % -1.46 % -3.01 % -4.63 %
30
The Bancorp's net income can be significantly influenced by a variety of external factors, including: overall economic conditions, policies and actions of regulatory authorities, the amounts of and rates at which assets and liabilities reprice, variances in prepayment of loans and securities other than those that are assumed, early withdrawal of deposits, exercise of call options on borrowings or securities, competition, a general rise or decline in interest rates, changes in the slope of the yield-curve, changes in historical relationships between indices (such as LIBOR and prime), and balance sheet growth or contraction. The Bancorp's ALCO seeks to manage interest rate risk under a variety of rate environments by structuring the Bancorp's balance sheet and off-balance sheet positions. The Bancorp enters into derivative instruments that are not designated as hedging instruments to help its commercial customers manage their exposure to interest rate fluctuations. To mitigate the interest rate risk associated with customer contracts, the Bancorp enters into an offsetting derivative contract. The notional amount of these derivative instruments was ~~$3.6~~$18.0 million with an estimated fair value loss of ~~$19~~$111 thousand at ~~March 31,~~June 30, 2018. The Bancorp manages its credit risk, or potential risk of default by its commercial customers through credit limit approval and monitoring procedures. Interest rate risk is monitored and managed within approved policy limits.

The Bancorp utilizes simulation analysis to quantify the impact of various rate scenarios on net interest income. Specific cash flows, repricing characteristics, and embedded options of the assets and liabilities held by the Bancorp are incorporated into the simulation model. Earnings at risk is calculated by comparing the net interest income of a stable interest rate environment to the net interest income of different interest rate environments in order to determine the percentage change. The analysis does not calculate scenarios for a decline of 3% or more due to current market interest rates. The simulation analysis is not indicative of expected actual results.
34

Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures.
The Bancorp maintains disclosure controls and procedures (as defined in Sections 13a – 15(e) and 15d – 15(e)) of regulations promulgated under the Securities Exchange Act of 1934 (the “Exchange Act”) that are designed to ensure that information required to be disclosed by the Bancorp in the reports that it files or submits under the "Exchange Act" is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. These disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed by the Bancorp in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Bancorp's management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. The Bancorp's Chief Executive Officer and Chief Financial Officer evaluate the effectiveness of the Bancorp's disclosure controls and procedures as of the end of each quarter. Based on that evaluation as of ~~March 31,~~June 30, 2018, the Bancorp’s Chief Executive Officer and Chief Financial Officer have concluded that such disclosure controls and procedures were effective as of that date in ensuring that information required to be disclosed by the Bancorp under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and ~~forms.~~forms.

(b)       Changes in Internal Control Over Financial Reporting.
There was no change in the Bancorp's internal control over financial reportingidentified in connection with the Bancorp’s evaluation of controls that occurred during the ~~three~~six months ended ~~March 31,~~June 30, 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
The Bancorp and its subsidiaries, from time to time, are 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
~~The following describes some~~Risk factors that affect the Bancorp’s business and financial results are discussed in “Risk Factors” in Item 1A of ~~the principal risks and uncertainties to which our industry in general, is subject:~~
The banking industry in which we operate is subject to extensive regulation and supervision under federal and state laws and regulations. The restrictions imposed by such laws and regulations limit the manner in which we conduct our business, undertake new investments and activities and obtain financing. These regulations are designed primarily for the protection of the deposit insurance funds and consumers and not to benefit our shareholders. Financial institution regulation has been the subject of significant legislation in recent years and may be the subject of further significant legislation, none of which is in our control. Significant new laws or changes in, or repeals of, existing laws (including changes in federal or state laws affecting corporate taxpayers generally or financial institutions specifically) could have a material adverse effect on our business, financial condition, results of operations or liquidity. Further, federal monetary policy, particularly as implemented through the Federal Reserve System, significantly affects credit conditions, and any unfavorable change in these conditions could have a material adverse effect on our business, financial condition, results of operations or liquidity.
We conduct business from offices that are located in Lake and Porter County in north-western Indiana. Because of the geographic concentration of our operations and customer base, our results depend largely upon economic conditions in this area. Any material deterioration in the economic conditions in these markets could have direct or indirect material adverse impacts on us, or on our customers or on the financial institutions with whom we deal as counterparties to financial transactions. Such deterioration could negatively impact customers’ ability to obtain new loans or to repay existing loans, diminish the values of any collateral securing such loans and could cause increases in the numberPart II of the Bancorp’s ~~customers experiencing financial distress and in~~Quarterly Report on Form 10-Q for the levels of the Bancorp’s delinquencies, non-performing loans and other problem assets, charge-offs and provision for credit losses, all of which could materially adversely affect our financial condition and results of operations. The underwriting and credit monitoring policies and procedures that we have adopted cannot eliminate the risk that we might incur losses on account of factors relatingquarter ended March 31, 2018. There has been no material changes to the ~~economy like those~~ identified ~~above, and those losses could have a material adverse effect on our business, financial condition, results of operations and cash flows.~~risk factors for the quarter ended June 30, 2018

A significant source of risk for any bank or other enterprise that lends money arises from the possibility that losses will be sustained because borrowers, guarantors and related parties may fail (because of financial difficulties or other reasons) to perform in accordance with the terms of their loan agreements. In our case, we originate many loans that are secured, but some loans are unsecured depending on the nature of the loan. With respect to secured loans, the collateral securing the repayment of these loans includes a wide variety of real and personal property that may be insufficient to cover the obligations owed under such loans, due to adverse changes in collateral values caused by changes in prevailing economic, environmental and other conditions, including declines in the value of real estate and other external events.
Our earnings and cash flows are largely dependent upon our net interest income. Interest rates are highly sensitive to many factors that are beyond our control, including general economic conditions, demand for loans, securities and deposits, and policies of various governmental and regulatory agencies and, in particular, the monetary policies of the FRB. If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and other investments, our net interest income, and therefore earnings, could be adversely affected. Earnings could also be adversely affected if the interest rates received on loans and other investments fall more quickly than the interest rates paid on deposits and other borrowings. We maintain an investment portfolio consisting of various high quality liquid fixed-income securities. The nature of fixed-income securities is such that increases in prevailing market interest rates negatively impact the value of these securities, while decreases in prevailing market interest rates positively impact the value of these securities. Any substantial, prolonged change in market interest rates could have a material adverse effect on our financial condition, results of operations, and cash flows.
32
We compete with much larger regional, national, and international competitors, including competitors that have no (or only a limited number of) offices physically located within our markets, many of which compete with us via Internet and other electronic product and service offerings. In addition, banking and other financial services competitors (including newly organized companies) that are not currently represented by physical locations within our geographic markets could establish office facilities within our markets, including through their acquisition of existing competitors. In December 2016, the OCC announced its intent to make special purpose national bank charters available to financial technology companies. While the agency issued a draft supplement to its licensing manual in March 2017, providing more details on how companies applying for such charters would be evaluated, the OCC has not given any definitive indication as to whether or not it intends to move forward in making such special purpose charters available to financial technology companies. In any event, developments increasing the nature or level of our competition, or decreasing the effectiveness by which we compete, could have a material adverse effect on our business, financial condition, results of operations or liquidity.
Our financial condition and results of operations that are presented in our consolidated financial statements, accompanying notes to the consolidated financial statements, and selected financial data appearing in this Report, are, to a large degree, dependent upon our accounting policies. The selection of and application of these policies involve estimates, judgments and uncertainties that are subject to change, and the effect of any change in estimates or judgments that might be caused by future developments or resolution of uncertainties could be materially adverse to our reported financial condition and results of operations. In addition, authorities that prescribe accounting principles and standards for public companies from time to time change those principles or standards or adopt formal or informal interpretations of existing principles or standards. Such changes or interpretations (to the extent applicable to us) could result in changes that would be materially adverse to our reported financial condition and results of operations.
Liquidity is essential to our business. An inability to raise funds through deposits, borrowings, the sale of securities or loans and other sources could have a substantial negative effect on our liquidity. Our access to funding sources in amounts adequate to finance our activities or the terms of which are acceptable to us could be impaired by factors that affect us specifically or the financial services industry or economy in general. Although we have historically been able to replace maturing deposits and borrowings as necessary, we might not be able to replace such funds in the future if, among other things, our results of operations or financial condition or the results of operations or financial condition of our lenders or market conditions were to change.
Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services companies are interrelated as a result of trading, clearing, counterparty, or other relationships. We have exposure to many different industries and counterparties, and we routinely execute transactions with counterparties in the financial services industry. As a result, defaults by, or even rumors or questions about, one or more financial services companies, or the financial services industry generally, have led to market-wide liquidity problems and could lead to losses or defaults by us or by other institutions. Many of these transactions expose us to credit risk in the event of default of our counterparty or client. In addition, our credit risk may be exacerbated when the collateral held by us cannot be realized or is liquidated at prices not sufficient to recover the full amount due us.
Prices and volumes of transactions in the nation’s securities markets can be affected suddenly by economic crises, or by other national or international crises, such as national disasters, acts of war or terrorism, changes in commodities markets, or instability in foreign governments. Disruptions in securities markets may detrimentally affect the value of securities that we hold in our investment portfolio, such as through reduced valuations due to the perception of heightened credit and liquidity risks. There can be no assurance that declines in market value associated with these disruptions will not result in other than temporary impairments of these assets, which would lead to accounting charges that could have a material adverse effect on our net income and capital levels.
Competition for qualified employees and personnel in the financial services industry is intense and there are a limited number of qualified persons with knowledge of our markets. Our success depends to a significant degree upon our ability to attract and retain qualified loan origination executives and sales executives for our trust and investment products and services. We also depend upon the continued contributions of our management personnel, and in particular upon the abilities of our executive management, and the loss of the services of one or more of them could harm our business.
33
Management regularly reviews and updates our internal controls, disclosure controls and procedures, and corporate governance policies and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention of our controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on our business, results of operations, cash flows and financial condition.
In the normal course of our business, we collect, process and retain sensitive and confidential client and customer information on our behalf and on behalf of other third parties. Despite the security measures we have in place, our facilities and systems may be vulnerable to cyber-attacks, security breaches, acts of vandalism, computer viruses, misplaced or lost data, programming and / or human errors, or other similar events.
Information security risks for financial institutions like us have increased recently in part because of new technologies, the use of the Internet and telecommunications technologies (including mobile devices) to conduct financial and other business transactions and the increased sophistication and activities of organized crime, perpetrators of fraud, hackers, terrorists and others. In addition to cyber-attacks or other security breaches involving the theft of sensitive and confidential information, hackers recently have engaged in attacks against large financial institutions, particularly denial of service attacks, designed to disrupt key business services such as customer-facing web sites. We may not be able to anticipate or implement effective preventive measures against all security breaches of these types. Although we employ detection and response mechanisms designed to contain and mitigate security incidents, early detection may be thwarted by sophisticated attacks and malware designed to avoid detection.
We also face risks related to cyber-attacks and other security breaches in connection with credit card transactions that typically involve the transmission of sensitive information regarding our customers through various third parties. Some of these parties have in the past been the target of security breaches and cyber-attacks, and because the transactions involve third parties and environments that we do not control or secure, future security breaches or cyber-attacks affecting any of these third parties could impact us through no fault of our own, and in some cases we may have exposure and suffer losses for breaches or attacks relating to them. We also rely on numerous other third party service providers to conduct other aspects of our business operations and face similar risks relating to them. We cannot be sure that their information security protocols are sufficient to withstand a cyber-attack or other security breach.
Any cyber-attack or other security breach involving the misappropriation, loss or other unauthorized disclosure of confidential customer information could severely damage our reputation, erode confidence in the security of our systems, products and services, expose us to the risk of litigation and liability, disrupt our operations and have a material adverse effect on our business.
We outsource certain information system and data management and processing functions to third party providers. These third party service providers are sources of operational and informational security risk to us, including risks associated with operational errors, information system interruptions or breaches, and unauthorized disclosures of sensitive or confidential client or customer information. If third party service providers encounter any of these issues, or if we have difficulty communicating with them, we could be exposed to disruption of operations, loss of service or connectivity to customers, reputational damage, and litigation risk that could have a material adverse effect on our results of operations or our business.
While we have selected these third party vendors carefully, we do not control their actions. Any problems caused by these third parties, including as a result of their not providing us their services for any reason or their performing their services poorly, could adversely affect our ability to deliver products and services to our customers and otherwise to conduct our business. Replacing these third party vendors could also entail significant delay and expense.
We may acquire other banks, bank branches and other financial-service-related businesses and assets in the future. Acquiring other banks, businesses, or branches involves various risks commonly associated with acquisitions, including, among other things:
§ ~~potential exposure to unknown or contingent liabilities of the acquired assets, operations or company;~~
34
§ ~~exposure to potential asset quality issues of the acquired assets, operations or company;~~
§ ~~environmental liability with acquired real estate collateral or other real estate;~~
§ ~~difficulty and expense of integrating the operations, systems and personnel of the acquired assets, operations or company;~~
§ ~~potential disruption to our ongoing business, including diversion of our management's time and attention;~~
§ ~~the possible loss of key employees and customers of the acquired operations or company;~~
§ ~~difficulty in estimating the value of the acquired assets, operations or company;~~
§ ~~and potential changes in banking or tax laws or regulations that may affect the acquired assets, operations or company.~~
We may not be successful in overcoming these risks or any other problems encountered in connection with mergers or acquisitions. Acquisitions typically involve the payment of a premium over book and market values, and, therefore, some dilution of the Company’s tangible book value per common share or net income per common share (or both) may occur in connection with any future transaction. We may incur substantial costs to expand by acquisition, and such acquisitions may not result in the levels of profits we seek. Integration efforts for any future acquisitions may not be successful and following any future acquisition, after giving it effect, we may not achieve financial results comparable to or better than our historical experience.
Our common stock price constantly changes in response to a variety of factors (some of which are beyond our control), and we expect that our stock price will continue to fluctuate in the future. Factors impacting the price of our common stock include, among others:
§ ~~actual or anticipated variations in our quarterly results of operations;~~
§ ~~recommendations or research reports about us or the financial services industry in general published by securities analysts;~~
§ ~~the failure of securities analysts to cover, or continue to cover, us;~~
§ ~~operating and stock price performance of other companies that investors believe are comparable to us;~~
§ ~~news reports relating to trends, concerns and other issues in the financial services industry;~~
§ ~~perceptions in the marketplace regarding us, or our reputation, competitors or other financial institutions;~~
§ ~~actual or anticipated sales of our equity or equity-related securities;~~
§ ~~our past and future dividend practice;~~
§ ~~departure of our management team or other key personnel;~~
§ ~~new technology used, or services offered, by competitors;~~
§ ~~significant acquisitions or business combinations, strategic partnerships, joint ventures or capital commitments by or involving us or our competitors;~~
§ ~~failure to integrate acquisitions or realize anticipated benefits from acquisitions;~~
35
§ existing or increased regulatory and compliance requirements, changes or proposed changes in laws or regulations, or differing interpretations thereof affecting our business, or enforcement of these laws and regulations; and
§ ~~litigation and governmental investigations.~~
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 ~~three~~six months ended ~~March 31,~~June 30, 2018 under the stock repurchase program.

Period Total Number
of Shares Purchased Average Price
Paid per Share ~~Total Number of Shares~~
~~Purchased as Part of~~
~~Publicly Announced~~
~~Plans or Programs~~ Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs
Maximum Number of
Shares That May Yet
Be Purchased Under
the Program(1)

January 1, 2018 – January 31, 2018 - N/A - 48,828
February 1, 2018 – February 28, 2018 - N/A - 48,828
March 1, 2018 – March 31, 2018 - N/A - 48,828
April 1, 2018 – April 30, 2018 - N/A - 48,828
May 1, 2018 – May 31, 2018 - N/A - 48,828
June 1, 2018 – June 30, 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 UponSenior Securities
There are no matters reportable under this item.

Item 4. Mine Safety Disclosures
Not Applicable.

Item 5. Other Information
On May 7, 2018, the Bank entered into non-solicitation and confidentiality agreements with each of the current executive officers of the Bank other than the Executive Chairman and the President and Chief Executive Officer, both of whom have entered into employment agreements with the Bancorp and the Bank. Under the terms of the non-solicitation and confidentiality agreements, each officer agrees that during the term of the agreement and for a period of 12 months following termination of such officer’s employment with the Bank for any reason, such officer shall not (i) engage or invest in any business that develops, markets, or sells any products or services that are competitive with the products or services developed, marketed, or sold by the Bank; or (ii) employ, hire, or solicit any employee of the Bank or solicit any person who was a customer of the Bank within one year prior to such officer’s termination of employment for business that is competitive with the business of the Bank.None.

The description of the non-solicitation and confidentiality agreements set forth above is not complete and is qualified in its entirety by reference to the full text of the form of non-solicitation and confidentiality agreement between the Bank and each of the Bank’s executive officers, which is filed as Exhibit 10.2 to this Quarterly Report on Form 10-Q and incorporated by reference herein.
Item 6. Exhibits
Exhibit
Number Description
~~2.1~~3.1 ~~Agreement~~Amended and ~~Plan~~Restated By-Laws of ~~Merger by and among~~ NorthWest Indiana Bancorp (Amended and ~~First Personal Financial Corp. dated February 20, 2018~~Restated as of May 18, 2018) (incorporated by reference to Exhibit ~~2.1~~3.1 to the registrant’s Current Report on Form 8-K filed on ~~February~~May 21, 2018).
10.1 ~~Voting Agreement dated February 20, 2018 (incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed on February 21, 2018).~~
~~10.2~~ Form of Non-Solicitation and Confidentiality Agreement between Peoples Bank SB and each of its Executive Officers (incorporated by reference to Exhibit 10.2 to the registrant’s Quaterly Report on Form 10-Q filed on May 9, 2018)
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.
31.2 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 ~~March 31,~~June 30, 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.

36

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: ~~May 9,~~July 24, 2018 /s/ Benjamin J. Bochnowski
Benjamin J. Bochnowski
President and Chief Executive Officer

Date: ~~May 9,~~July 24, 2018 /s/ Robert T. Lowry
Robert T. Lowry
Executive Vice President, Chief Financial
Officer and Treasurer

37

	Page
	Number
PART I. Financial Information

	Item 1.	Unaudited Financial Statements and Notes	1

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2221

	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	3033

	Item 4.	Controls and Procedures	3135

PART II. Other Information	3236

SIGNATURES	37

EXHIBITS
	~~10.2 Form of Non-Solicitation and Confidentiality Agreement between Peoples Bank SB and each of its Executive Officers~~
	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

							For the three months ended
	As of March 31, 2018						March 31, 2018
(Dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Residential real estate	$	1,141	$	2,871	$	-	$	1,103	$	6
Home equity		69		69		-		35
Commercial real estate		250		250		-		252		-
Construction and land development		134		134		-		134		-
Commercial business		183		183		-		184		1

With an allowance recorded:
Residential real estate		132		132		31		106		5
Home equity		-		-		-		-		-
Commercial real estate		113		113		18		186		4
Construction and land development		-		-		-		-		-
Commercial business		10		10		10		275		-

Total:
Residential real estate	$	1,273	$	3,003	$	31	$	1,209	$	11
Home equity	$	69	$	69	$	-	$	35	$	-
Commercial real estate	$	363	$	364	$	18	$	438	$	4
Construction & land development	$	134	$	134	$	-	$	134	$	-
Commercial business	$	193	$	193	$	10	$	459	$	1

							For the three months ended
	As of December 31, 2017						March 31, 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	$	-	$	1,350	$	11
Home equity		-		-		-		-		-
Commercial real estate		253		253		-		363		1
Construction and land development		134		134		-		134		-
Commercial business		184		184		-		209		1

With an allowance recorded:
Residential real estate		80		270		21		533		-
Home equity		-		-		-		-		-
Commercial real estate		259		259		144		79		-
Construction & land development		-		-		-		-		-
Commercial business		540		540		539		327		-

Total:
Residential real estate	$	1,152	$	3,621	$	21	$	1,883	$	11
Home equity	$	-	$	-	$	-	$	-	$	-
Commercial real estate	$	512	$	512	$	144	$	442	$	1
Construction & land development	$	134	$	134	$	-	$	134	$	-
Commercial business	$	724	$	724	$	539	$	536	$	1

(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
March 31, 2018
Residential real estate	$	2,858	$	1,222	$	2,789	$	6,869	$	166,997	$	173,866	$	46
Home equity		361		-		218		579		36,079		36,658		5
Commercial real estate		1,367		-		183		1,550		206,932		208,482		-
Construction and land development		-		-		134		134		53,641		53,775		-
Multifamily		-		165		-		165		44,447		44,612		-
Farmland		-		-		-		-		248		248		-
Commercial business		228		275		142		645		75,709		76,354		-
Consumer		9		-		-		9		482		491		-
Government		-		-		-		-		30,176		30,176		-
Total	$	4,823	$	1,662	$	3,466	$	9,951	$	614,711	$	624,662	$	51

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

(Dollars in thousands)
	March 31, 2018		December 31, 2017
Residential real estate	$	3,221	$	3,509
Home equity		307		350
Commercial real estate		183		332
Construction and land development		134		133
Multifamily		-		-
Farmland		-		-
Commercial business		142		672
Consumer		9		-
Government		-		-
Total	$	3,996	$	4,996

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

Cusip		74043CAC1			74042TAJ0			01449TAB9			01450NAC6
Deal name		PreTSLXXIV			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			63			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			1			1
Defaults & deferrals as a % of performing collateral		26.56	%		20.06	%		2.93	%		8.11	%
Subordination:
As a % of performing collateral		23.55	%		8.35	%		53.11	%		35.58	%
As a % of performing collateral-adjusted for projected future defaults		18,67	%		1.24	%		49.64	%		31.69	%
Other-than-temporary impairment model assumptions:
Defaults:
Year 1 - issuer average		2.00	%		2.40	%		2.30	%		1.90	%
Year 2 - issuer average		2.00	%		2.40	%		2.30	%		1.90	%
Year 3 - issuer average		2,00	%		2.40	%		2.30	%		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

			(Dollars in thousands)
			Fair Value Measurements at March 31, 2018 Using
(Dollars in thousands)	Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Available-for-sale debt securities:
Money market fund	$	924	$	924	$	-	$	-
U.S. government sponsored entities		5,838		-		5,838		-
Collateralized mortgage obligations and residential mortgage-backed securities		139,169		-		139,169		-
Municipal securities		92,085		-		92,085		-
Collateralized debt obligations		3,455		-		-		3,455
Total securities available-for-sale	$	241,471	$	924	$	237,092	$	3,455

	March 31, 2018				Estimated Fair Value Measurements at March 31, 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)
Financial assets:
Cash and cash equivalents	$	20,415	$	20,415	$	20,415	$	-	$	-
Certificates of deposit in other financial institutions		1,526		1,493		-		1,493		-
Securities available-for-sale		241,471		241,471		924		237,092		3,455
Loans held-for-sale		1,908		1,949		1,949		-		-
Loans receivable, net		617,565		602,764		-		-		602,764
Federal Home Loan Bank stock		3,000		3,000		-		3,000		-
Accrued interest receivable		3,052		3,052		-		3,052		-

Financial liabilities:
Non-interest bearing deposits		126,582		126,582		126,582		-		-
Interest bearing deposits		668,791		666,925		474,069		192,856		-
Repurchase agreements		13,396		13,387		11,642		1,745		-
Borrowed funds		30,360		30,254		260		29,994		-
Interest rate swap agreements		18		18		-		18		-
Accrued interest payable		42		42		-		42		-

(Dollars in thousands)	Average Balances, Interest, and Rates
	March 31, 2018							March 31, 2017
	Average Balance			Interest		Rate (%)		Average Balance			Interest		Rate (%)
ASSETS
Interest bearing deposits in other financial institutions	$	2,396		$	10		1.67	$	9,982		$	20		0.80
Federal funds sold		467			1		0.86		531			-		-
Certificates of deposit in other financial institutions		1,636			6		1.47		885			2		0.90
Securities available-for-sale		241,081			1,671		2.77		234,661			1,585		2.70
Loans receivable		626,894			6,994		4.46		591,595			6,439		4.35
Federal Home Loan Bank stock		3,000			51		6.80		3,000			32		4.27
Total interest bearing assets		875,474		$	8,733		3.99		840,654		$	8,078		3.84
Cash and non-interest bearing deposits in other financial institutions		13,360							11,940
Allowance for loan losses		(7,468	)						(7,644	)
Other noninterest bearing assets		53,643							53,978
Total assets	$	935,009						$	898,928

LIABILITIES AND STOCKHOLDERS' EQUITY
Total deposits	$	782,382		$	675		0.35	$	768,018		$	459		0.24
Repurchase agreements		11,162			32		1.15		12,426			21		0.68
Borrowed funds		40,764			191		1.87		24,257			83		1.37
Total interest bearing liabilities		834,308		$	898		0.43		804,701		$	563		0.28
Other noninterest bearing liabilities		9,288							8,589
Total liabilities		843,596							813,290
Total stockholders' equity		91,413							85,638
Total liabilities and stockholders' equity	$	935,009						$	898,928

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

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

Period	Total Number of Shares Purchased		Average Price Paid per Share		~~Total Number of Shares~~ ~~Purchased as Part of~~ ~~Publicly Announced~~ ~~Plans or Programs~~		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number of Shares That May Yet Be Purchased Under the Program(1)
January 1, 2018 – January 31, 2018		-		N/A		-		48,828
February 1, 2018 – February 28, 2018		-		N/A		-		48,828
March 1, 2018 – March 31, 2018		-		N/A		-		48,828
April 1, 2018 – April 30, 2018		-		N/A		-		48,828
May 1, 2018 – May 31, 2018		-		N/A		-		48,828
June 1, 2018 – June 30, 2018		-		N/A		-		48,828
		-		N/A		-		48,828

Exhibit
Number		Description
~~2.1~~3.1		~~Agreement~~Amended and ~~Plan~~Restated By-Laws of ~~Merger by and among~~ NorthWest Indiana Bancorp (Amended and ~~First Personal Financial Corp. dated February 20, 2018~~Restated as of May 18, 2018) (incorporated by reference to Exhibit ~~2.1~~3.1 to the registrant’s Current Report on Form 8-K filed on ~~February~~May 21, 2018).
10.1		~~Voting Agreement dated February 20, 2018 (incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed on February 21, 2018).~~
~~10.2~~		Form of Non-Solicitation and Confidentiality Agreement between Peoples Bank SB and each of its Executive Officers (incorporated by reference to Exhibit 10.2 to the registrant’s Quaterly Report on Form 10-Q filed on May 9, 2018)
31.1		Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.
31.2		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 ~~March 31,~~June 30, 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.

	NORTHWEST INDIANA BANCORP

Date: ~~May 9,~~July 24, 2018	/s/ Benjamin J. Bochnowski
	Benjamin J. Bochnowski
	President and Chief Executive Officer

Date: ~~May 9,~~July 24, 2018	/s/ Robert T. Lowry
	Robert T. Lowry
	Executive Vice President, Chief Financial
	Officer and Treasurer