LaPorte Bancorp 10-Q 2010 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE

COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2010

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from            to            

LAPORTE BANCORP, INC.

(Exact name of Registrant as Specified in Its Charter)

Federal	001-33733	26-1231235
(State or Other Jurisdiction of Incorporation or Organization)	Commission File Number)	( (I.R.S. Employer Identification Number)

710 Indiana Avenue

La Porte, IN 46350

(219) 362-7511

(Address, Including Zip Code, and Telephone Number, Including Area Code, of

Registrant’s Principal Executive Officers)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  x    NO  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  ¨    NO  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	¨	Accelerated filer	¨
Non-accelerated filer	¨	Smaller reporting company	x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES  ¨    NO  x

Number of shares of common stock outstanding at November 11, 2010: 4,586,363, par value $0.01

TABLE OF CONTENTS

	Page Number
PART I – FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements – LaPorte Bancorp, Inc.
Consolidated Balance Sheets, September 30, 2010 (Unaudited) and December 31, 2009		3
Consolidated Statements of Income and Comprehensive Income, Three Months Ended September  30, 2010 and 2009 (Unaudited) Nine Months Ended September 30, 2010 and 2009 (Unaudited)		4
Consolidated Statements of Changes in Shareholders’ Equity, Nine Months Ended September  30, 2010 and 2009 (Unaudited)		5
Consolidated Statements of Cash Flows, Nine Months Ended September 30, 2010 and 2009 (Unaudited)		6
Notes to Consolidated Financial Statements (Unaudited)		7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		24
Item 3. Quantitative and Qualitative Disclosures About Market Risk		38
Item 4. Controls and Procedures		38
PART II – OTHER INFORMATION
Item 1. Legal Proceedings		39
Item 1A. Risk Factors		39
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		40
Item 3. Defaults Upon Senior Securities		40
Item 4. (Removed and Reserved)		40
Item 5. Other Information		40
Item 6. Exhibits		41
Signatures		42

2

PART I – FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

LAPORTE BANCORP, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

	September 30, 2010			December 31, 2009
	(Unaudited)
ASSETS
Cash and due from financial institutions	$	7,574		$	6,000
Securities available for sale		112,845			102,095
Federal Home Loan Bank (FHLB) stock, at cost (restricted)		4,206			4,206
Loans held for sale, at fair value		3,486			981
Loans, net of allowance for loan losses of $4,442 at September 30, 2010, $2,776 at December 31, 2009		285,057			256,275
Mortgage servicing rights		379			424
Other real estate owned		713			554
Premises and equipment, net		10,431			11,150
Goodwill		8,431			8,431
Other intangible assets		736			939
Bank owned life insurance		9,882			9,618
Accrued interest receivable and other assets		5,243			5,154
Total assets	$	448,983		$	405,827
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits
Non-interest bearing	$	37,061		$	34,066
Interest bearing		282,521			239,342
Total deposits		319,582			273,408
Federal Home Loan Bank advances		60,736			52,773
Subordinated debentures		5,155			5,155
Federal Deposit Insurance Corporation guaranteed unsecured borrowings		4,900			4,852
Federal Reserve Bank discount window borrowings		—			16,675
Accrued interest payable and other liabilities		7,471			3,092
Total liabilities		397,844			355,955
Shareholders’ equity
Preferred stock, no par value; 1,000,000 shares authorized; none issued		—			—
Common stock, $0.01 par value; 19,000,000 shares authorized; 4,783,163 shares issued; and 4,586,363 and 4,607,963 shares outstanding at at September 30, 2010 and December 31, 2009		48			48
Additional paid-in capital		21,164			21,188
Surplus		770			770
Retained earnings		30,659			28,620
Accumulated other comprehensive income, net of tax of $572 at September 30, 2010 and $936 at December 31, 2009		1,112			1,817
Treasury stock, at cost (2010 – 196,800 shares, 2009 – 175,200 shares)		(1,144	)		(1,033	)
Unearned Employee Stock Ownership Plan (ESOP) shares		(1,470	)		(1,538	)
Total shareholders’ equity		51,139			49,872
Total liabilities and shareholders’ equity	$	448,983		$	405,827

See accompanying notes to consolidated financial statements (unaudited)

3

PART I – FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS - continued

LAPORTE BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (Unaudited)

(in thousands, except per share data)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
Interest and dividend income
Loans, including fees	$	4,266		$	3,739		$	12,051		$	10,587
Taxable securities		558			850			2,010			3,024
Tax exempt securities		306			174			834			356
FHLB stock		16			35			58			100
Other interest income		4			1			7			3
Total interest and dividend income		5,150			4,799			14,960			14,070
Interest expense
Deposits		1,185			1,226			3,506			3,741
Federal Home Loan Bank advances		504			663			1,639			2,182
Subordinated debentures		71			71			210			196
FDIC guaranteed unsecured borrowings		50			51			151			127
Federal Reserve Bank discount window borrowings		—			3			10			10
Total interest expense		1,810			2,014			5,516			6,256
Net interest income		3,340			2,785			9,444			7,814
Provision for loan losses		628			184			2,292			442
Net interest income after provision for loan losses		2,712			2,601			7,152			7,372
Noninterest income
Service charges on deposits		178			222			554			632
ATM and debit card fees		95			88			275			230
Brokerage fees		—			—			—			(4	)
Trust fees		—			38			6			110
Earnings on life insurance, net		96			99			284			252
Net gains on mortgage banking activities		299			157			568			796
Loan servicing fees, net		(19	)		5			(4	)		(1	)
Net gains on securities		82			56			925			687
Warehouse loan fees		246			106			561			165
Gains (Losses) on other assets		(113	)		(42	)		(148	)		(136	)
Other income		131			77			345			192
Total noninterest income		995			806			3,366			2,923
Noninterest expense
Salaries and employee benefits		1,522			1,457			4,334			4,001
Occupancy and equipment		443			457			1,360			1,416
Data processing		110			101			350			325
Advertising		43			67			156			178
Bank examination fees		107			149			357			385
Amortization of intangibles		64			80			203			258
FDIC insurance		122			92			324			477
FHLB advances prepayment penalty		—			—			—			427
Collection and other real estate owned		19			30			92			74
Other expenses		268			234			830			823
Total noninterest expense		2,698			2,667			8,006			8,364
Income before income taxes		1,009			740			2,512			1,931
Income tax expense		208			151			473			350
Net income	$	801		$	589		$	2,039		$	1,581
Other comprehensive income (loss):
Unrealized gain on securities available for sale	$	1,263		$	2,129		$	2,276		$	2,962
Reclassification for gain on security sales		(82	)		(56	)		(925	)		(687	)
Unrealized gain (loss) on derivative instrument		(807	)		(90	)		(2,420	)		(2	)
Income tax effect		(126	)		(674	)		364			(772	)
Other comprehensive income (loss)		248			1,309			(705	)		1,501
Comprehensive income	$	1,049		$	1,898		$	1,334		$	3,082
Basic and diluted earnings per share	$	0.18		$	0.13		$	0.46		$	0.35

See accompanying notes to consolidated financial statements (unaudited)

4

PART I – FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS - continued

LAPORTE BANCORP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)

Nine months ended September 30, 2010 and 2009

(in thousands, except share data)

	Common Stock		Additional Paid-In Capital			Surplus		Retained Earnings		Accumulated Other Comprehensive Income, Net of Tax			Treasury Stock			Unearned ESOP Shares			Total
Balance at January 1, 2009	$	48	$	21,235		$	770	$	26,108	$	383		$	(774	)	$	(1,628	)	$	46,142
Comprehensive income:
Net income		—		—			—		1,581		—			—			—			1,581
Other comprehensive income:
Net change in unrealized gain on securities available for sale, net of reclassification adjustments and tax effects		—		—			—		—		1,502			—			—			1,502
Net change in unrealized gain on derivative instrument, net of tax effect		—		—			—		—		(1	)		—			—			(1	)
Total comprehensive income																				3,082
Treasury shares purchased, 22,500 shares		—		—			—		—		—			(131	)		—			(131	)
ESOP shares earned, 6,784 shares		—		(34	)		—		—		—			—			68			34
Balance at September 30, 2009	$	48	$	21,201		$	770	$	27,689	$	1,884		$	(905	)	$	(1,560	)	$	49,127
Balance at January 1, 2010	$	48	$	21,188		$	770	$	28,620	$	1,817		$	(1,033	)	$	(1,538	)	$	49,872
Comprehensive income:
Net income		—		—			—		2,039		—			—			—			2,039
Other comprehensive income (loss):
Net change in unrealized gain (loss) on securities available for sale, net of reclassification adjustments and tax effects		—		—			—		—		891			—			—			891
Net change in unrealized gain (loss) on derivative instruments, net of tax effect		—		—			—		—		(1,596	)		—			—			(1,596	)
Total comprehensive income																				1,334
Treasury shares purchased, 21,600 shares		—		—			—		—		—			(111	)		—			(111	)
ESOP shares earned, 6,784 shares		—		(24	)		—		—		—			—			68			44
Balance at September 30, 2010	$	48	$	21,164		$	770	$	30,659	$	1,112		$	(1,144	)	$	(1,470	)	$	51,139

See accompanying notes to consolidated financial statements (unaudited)

5

PART I – FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS - continued

LAPORTE BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(in thousands)

	Nine Months Ended September 30,
	2010			2009
Cash flows from operating activities
Net income	$	2,039		$	1,581
Adjustments to reconcile net income to net cash from operating activities:
Depreciation		533			593
Provision for loan losses		2,292			442
Net gains on securities		(925	)		(687	)
Net gains on sales of loans		(490	)		(611	)
Originations of loans held for sale		(28,015	)		(43,736	)
Proceeds from sales of loans held for sale		26,000			43,550
Recognition of mortgage servicing rights		(78	)		(185	)
Amortization of mortgage servicing rights		55			105
Net change in loan servicing rights valuation allowance		68			3
Net gains on sales of other real estate owned		(12	)		(10	)
Write down of other real estate owned		153			114
Earnings on life insurance, net		(264	)		(251	)
Amortization of intangible assets		203			258
ESOP compensation expense		44			34
Amortization of issuance costs of unsecured borrowings		48			39
Change in assets and liabilities:
Accrued interest receivable and other assets		187			591
Accrued interest payable and other liabilities		547			867
Net cash from operating activities		2,385			2,697
Cash flows from investing activities
Net change in loans		(31,836	)		(27,098	)
Proceeds from sales of other real estate owned		968			555
Proceeds from maturities, calls and principal repayments of securities available for sale		28,542			22,864
Proceeds from sales of securities available for sale		36,781			25,318
Purchases of securities available for sale		(72,297	)		(39,792	)
Premises and equipment expenditures, net		(320	)		(200	)
Net cash from investing activities		(38,162	)		(18,353	)
Cash flows from financing activities
Net change in deposits		46,174			21,485
Net change in FHLB advances		7,963			(20,644	)
Proceeds from issuance of unsecured borrowing, net of issuance costs		—			4,797
Net change in Federal Reserve Bank discount window borrowings		(16,675	)		8,810
Purchase of treasury stock		(111	)		(131	)
Net cash from financing activities		37,351			14,317
Net change in cash and cash equivalents		1,574			(1,339	)
Cash and cash equivalents at beginning of period		6,000			5,628
Cash and cash equivalents at end of period	$	7,574		$	4,289
Supplemental cash flow information:
Cash paid during the period for:
Interest paid	$	5,539		$	6,304
Income taxes paid		920			45
Supplemental noncash disclosures:
Transfers from loans receivable to other real estate owned	$	762		$	147
Securities purchased not settled		1,500			1,000
Transfer from premises and equipment, net to other real estate owned		506			—

See accompanying notes to consolidated financial statements (unaudited)

6

PART I – FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS - continued

LAPORTE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(in thousands, except share and per share data)

NOTE 1 – BASIS OF PRESENTATION AND CONSOLIDATION

The unaudited consolidated financial statements included herein include the accounts of LaPorte Bancorp, Inc. (“the Bancorp”), its wholly owned subsidiary, The LaPorte Savings Bank (“the Bank”) and the Bank’s former wholly owned subsidiary, LPSB Investments LTD., Cayman (“LPSB Ltd.”) together referred to as “the Company”. The Bancorp was formed on October 12, 2007. LPSB Ltd. began operations in 2002 when the Bank received approval from the Federal Deposit Insurance Corporation to form the subsidiary in the Cayman Islands. LPSB Ltd. held and managed a portion of the Bank’s investment portfolio until July 30, 2008 when the securities were transferred to the Bank as LPSB Ltd. was in the process of being dissolved. LPSB Ltd. was deemed to be dissolved on March 17, 2009. Intercompany transactions and balances are eliminated in consolidation.

The unaudited consolidated financial statements included herein have been prepared by management in accordance with accounting principles generally accepted in the United States of America for interim financial statements and Article 8 of Regulation S-X of the Securities and Exchange Commission. In the opinion of management, the unaudited consolidated financial statements contain all material adjustments (consisting of normal recurring accruals) and disclosures which are necessary in the opinion of management to make the financial statements not misleading and for a fair presentation of the financial position and results of operations for the interim periods presented herein.

Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with United States generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, the interim consolidated financial statements included herein should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2009 included in the Form 10-K Annual Report of LaPorte Bancorp, Inc. for the fiscal year ended December 31, 2009.

The results for the nine-month period ended September 30, 2010 may not indicate the results to be expected for the full year ending December 31, 2010.

Derivatives: At the inception of a derivative contract, the Company designates the derivative as one of three types based on the Company’s intentions and belief as to likely effectiveness as a hedge. These three types are (1) a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment (“fair value hedge”), (2) a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow hedge”), or (3) an instrument with no hedging designation (“stand-alone derivative”). As of September 30, 2010, the Company had entered into four cash flow hedge transactions. The gain or loss on the derivative is reported in other comprehensive income and is reclassified into earnings in the same periods during which the hedged transaction affects earnings. Any changes in the fair value of derivatives that are not highly effective in hedging the changes in fair value or expected cash flows of the hedged item are recognized immediately in current earnings. As of September 30, 2010, the Company had entered into one fair value hedge transaction. The gain or loss on the derivative is reported in noninterest income.

Net cash settlements on these derivatives are recorded in interest income or interest expense, based on the item being hedged. Cash flows on hedges are classified in the cash flow statement the same as the cash flows of the items being hedged.

7

PART I – FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS - continued

LAPORTE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(in thousands, except share and per share data)

NOTE 1 – BASIS OF PRESENTATION AND CONSOLIDATION - continued

The Company formally documents the relationship between derivatives and hedged items, as well as the risk-management objective and the strategy for undertaking hedge transactions at the inception of the hedging relationship. This documentation includes linking fair value or cash flow hedges to specific assets and liabilities on the balance sheet. The Company also formally assesses, both at the hedge’s inception and on an ongoing basis, whether the derivative instruments that are used are highly effective in offsetting changes in fair values or cash flows of the hedged items. The Company discontinues hedge accounting when it determines that the derivative is no longer effective in offsetting changes in the fair value or cash flows of the hedged item, the derivative is settled or terminates, a hedged forecasted transaction is no longer probable, a hedged firm commitment is no longer firm, or treatment of the derivative as a hedge is no longer appropriate or intended.

When hedge accounting is discontinued, subsequent changes in fair value of the derivative are recorded as noninterest income. If the cash flow hedge is discontinued but the hedged cash flows or forecasted transactions are still expected to occur, gains or losses that were accumulated in other comprehensive income are amortized into earnings over the same periods which the hedged transactions will affect earnings.

Reclassifications: Some items in the prior year financial statements were reclassified to conform to the current presentation.

NOTE 2 – RECENT ACCOUNTING PRONOUNCEMENTS

Adoption of New Accounting Standards:

FASB ASC 310

In April 2010, the FASB issued an update (ASU No. 2010-18, Effect of a Loan Modification When the Loan Is Part of a Pool That is Accounted for as a Single Asset) impacting FASB ASC 310-30, Receivables – Loans and Debt Securities Acquired with Deteriorated Credit Quality. Under the amendments, modifications of loans that are accounted for within a pool do not result in the removal of those loans from the pool even if the modification of those loans would otherwise be considered a troubled debt restructuring. An entity will continue to be required to consider whether the pool of assets in which the loan is included is impaired if expected cash flows for the pool change. This update was effective for the Company for the interim reporting period beginning after June 15, 2010. The adoption of this update did not have a material impact on the Company’s consolidated financial condition or results of operations.

FASB ASC 820-10

In July 2010, the FASB issued an update (ASU No. 2010-20,Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses). This update requires companies to provide more information in their disclosures about the credit quality of their financing receivables and the credit reserves held against them. The amendments that require disclosures as of the end of a reporting period are effective for the periods ending on or after December 15, 2010. The amendments that require disclosures about activity that occurs during a reporting period are effective for the periods beginning on or after December 15, 2010. The Company is currently evaluating the impact of adopting this new guidance on the consolidated financial statements.

8

PART I – FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS - continued

LAPORTE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(in thousands, except share and per share data)

NOTE 3 – EARNINGS PER SHARE

Basic earnings per common share is determined by dividing net earnings available to common shareholders by the weighted average number of common shares outstanding for the period. ESOP shares are considered outstanding for this calculation unless unearned. Diluted earnings per common share is determined by dividing net earnings available to common shareholders by the weighted average number of common shares outstanding for the period, adjusted for the dilutive effect of common share equivalents (-0- for the three and nine months ended September 30, 2010 and 2009). Diluted earnings per common share is equal to basic earnings per common share for the periods ended September 30, 2010 and 2009, as there were no potentially dilutive common shares for the three and nine months ended September 30, 2010 and 2009. The factors used in the earnings per common share computation follow:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
Basic
Net income	$	801		$	589		$	2,039		$	1,581
Weighted average common shares outstanding		4,586,363			4,635,663			4,588,359			4,637,504
Less: Average unallocated ESOP shares		(148,107	)		(157,152	)		(150,368	)		(159,413	)
Average shares		4,438,256			4,478,511			4,437,991			4,478,091
Basic earnings per common share	$	0.18		$	0.13		$	0.46		$	0.35

NOTE 4 – SECURITIES AVAILABLE FOR SALE

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

September 30, 2010

	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
U.S. federal agency	$	24,897	$	496	$	(18	)	$	25,375
State and municipal		34,430		1,905		(14	)		36,321
Mortgage-backed securities - residential		22,618		857		(20	)		23,455
Government agency sponsored collateralized mortgage obligations		21,612		440		(25	)		22,027
Privately held collateralized mortgage obligations		5,272		395		—			5,667
Total	$	108,829	$	4,093	$	(77	)	$	112,845

9

PART I – FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS - continued

LAPORTE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(in thousands, except share and per share data)

NOTE 4 – SECURITIES AVAILABLE FOR SALE - continued

December 31, 2009

	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
U.S. federal agency	$	13,112	$	19	$	(159	)	$	12,972
State and municipal		24,761		597		(94	)		25,264
Mortgage-backed securities - residential		29,732		1,350		—			31,082
Government agency sponsored collateralized mortgage obligations		17,718		456		(26	)		18,148
Privately held collateralized mortgage obligations		9,114		398		(18	)		9,494
Corporate debt securities		4,993		165		(23	)		5,135
Total	$	99,430	$	2,985	$	(320	)	$	102,095

Securities with unrealized losses at September 30, 2010 and December 31, 2009, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are as follows:

September 30, 2010	Continuing Unrealized Loss For Less Than 12 Months					Continuing Unrealized Loss For 12 Months or More				Total
Description of Securities	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
U.S. federal agency	$	3,001	$	(18	)	$	—	$	—	$	3,001	$	(18	)
State and municipal		1,832		(14	)		—		—		1,832		(14	)
Mortgage-backed securities - residential		3,288		(20	)		—		—		3,288		(20	)
Government agency sponsored collateralized mortgage obligations		2,056		(25	)		—		—		2,056		(25	)
Total temporarily impaired	$	10,177	$	(77	)	$	—	$	—	$	10,177	$	(77	)

10

PART I – FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS - continued

LAPORTE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(in thousands, except share and per share data)

NOTE 4 – SECURITIES AVAILABLE FOR SALE - continued

December 31, 2009	Continuing Unrealized Loss For Less Than 12 Months					Continuing Unrealized Loss For 12 Months or More					Total
Description of Securities	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
U.S. federal agency	$	10,582	$	(159	)	$	—	$	—		$	10,582	$	(159	)
State and municipal		5,496		(67	)		678		(27	)		6,174		(94	)
Government agency sponsored collateralized mortgage obligations		2,620		(26	)		—		—			2,620		(26	)
Privately held collateralized mortgage obligations		1,236		(1	)		286		(17	)		1,522		(18	)
Corporate debt securities		—		—			962		(23	)		962		(23	)
Total temporarily impaired	$	19,934	$	(253	)	$	1,926	$	(67	)	$	21,860	$	(320	)

At September 30, 2010, the Company held 11 investments in debt securities which were in an unrealized loss position of which 11 were in an unrealized loss position for less than twelve months and none were in an unrealized loss position for twelve months or more. Management periodically evaluates each investment security for potential other-than-temporary impairment, relying primarily on industry analyst reports and observation of market conditions and interest rate fluctuations. Management believes it will be able to collect all amounts due according to the contractual terms of the underlying investment securities and that the noted declines in fair value are considered temporary and due only to normal market interest rate fluctuations. The Company does not intend to sell the securities and is not more likely than not to be required to sell these debt securities before their anticipated recovery.

Sales of securities available for sale for the three and nine months ended September 30, 2010 and 2009 were as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2010		2009		2010			2009
Proceeds	$	5,063	$	1,707	$	36,781		$	25,318
Gross gains		77		57		977			706
Gross losses		—		—		(28	)		(16	)

Proceeds from calls of securities available for sale during the three months ended September 30, 2010 and 2009 were $5,772 and $1,091, with gross gains of $5 and $1 and gross losses of $0 and $(2), respectively.

Proceeds from calls of securities available for sale during the nine months ended September 30, 2010 and 2009 were $14,801 and $6,406 with gross gains of $7 and $1 and gross losses of $(31) and $(4).

11

PART I – FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS - continued

LAPORTE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(in thousands, except share and per share data)

NOTE 4 – SECURITIES AVAILABLE FOR SALE - continued

The amortized cost and fair value of debt securities at September 30, 2010 by contractual maturity were as follows. Securities not due at a single maturity date, primarily mortgage-backed securities and collateralized mortgage obligations (“CMOs”), are shown separately.

	Amortized Cost		Fair Value
Due in one year or less	$	—	$	—
Due from one to five years		17,932		18,382
Due from five to ten years		11,097		11,440
Due after ten years		30,298		31,874
Subtotal		59,327		61,696
Mortgage-backed securities and CMOs		49,502		51,149
Total	$	108,829	$	112,845

Securities pledged at September 30, 2010 and December 31, 2009 had a carrying amount of approximately $45,732 and $70,561 and were pledged to secure public deposits, FHLB advances, short-term borrowings through the Federal Reserve Discount Window, cash flow and fair value hedges.

NOTE 5 – LOANS

Loans at September 30, 2010 and December 31, 2009 were as follows:

	September 30, 2010			December 31, 2009
Commercial	$	17,880		$	18,122
Real Estate:
One- to four-family		61,141			70,126
Five or more family		9,336			6,743
Commercial		81,838			75,506
Construction		6,753			5,420
Land		10,892			11,753
Mortgage warehouse		77,518			43,765
Home equity		14,395			15,704
Automobile and other		9,623			11,790
Subtotal		289,376			258,929
Less: Net deferred loan (fees) costs		123			122
Allowance for loan losses		(4,442	)		(2,776	)
Loans, net	$	285,057		$	256,275

12

PART I – FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS - continued

LAPORTE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(in thousands, except share and per share data)

NOTE 5 – LOANS - continued

During the month of May 2009, a mortgage warehouse lending division was established at the Bank. This division has approved specific mortgage companies through which individual mortgage loans are originated by the mortgage company and funded by the Bank as a secured borrowing with pledge of collateral under the Bank’s agreement with the mortgage company. The individual mortgage loans are held between the time of origination and subsequent repurchase by the mortgage company for sale of the loan into the secondary market. Each individual mortgage is assigned to the Bank until the loan is repurchased and sold to the secondary market by the mortgage company. Also, the Bank takes possession of each original note and forwards such note to the end investor once the mortgage company has sold the loan. The individual loans are typically sold by the mortgage company within 30 days of origination and are seldom held more than 90 days. Interest income is accrued by the Bank during this period and fee income for each loan sold is collected when the sale has been completed. As of September 30, 2010 and 2009, the Bank had repurchase agreements with 9 and 8 mortgage companies, respectively. For the nine months ended September 30, 2010 and 2009, the mortgage companies originated $1,796,025 and $375,314 in mortgage loans and sold $1,762,425 and $342,118 in mortgage loans. The Bank recorded interest income of $1,125 and $583, mortgage warehouse loan fees of $245 and $106, and wire transfer fees of $86 and $30 for the three months ended September 30, 2010 and 2009. For the nine months ended September 30, 2010 and 2009, the Bank recorded interest income of $2,661 and $804, mortgage warehouse loan fees of $561 and $165, and wire transfer fees of $189 and $42.

Activity in the allowance for loan losses was as follows:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
Beginning balance	$	4,351		$	2,610		$	2,776		$	2,512
Provision for loan losses		628			184			2,292			442
Loans charged-off		(544	)		(317	)		(648	)		(510	)
Recoveries		7			9			22			42
Ending balance	$	4,442		$	2,486		$	4,442		$	2,486

Individually impaired loans at September 30, 2010 and December 31, 2009 were as follows:

	September 30, 2010		December 31, 2009
Loans with no allocated allowance for loan losses	$	974	$	3,067
Loans with allocated allowance for loan losses		4,478		4,397
Total	$	5,452	$	7,464
Amount of the allowance for loan losses allocated to impaired loans	$	2,035	$	614

13

PART I – FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS - continued

LAPORTE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(in thousands, except share and per share data)

NOTE 5 – LOANS - continued

Nonperforming loans at September 30, 2010 and December 31, 2009 were as follows:

	September 30, 2010		December 31, 2009
Loans past due over 90 days still on accrual	$	—	$	—
Nonaccrual loans		5,783		7,716

Purchased Loans

The Company purchased loans during 2007, for which there was, at acquisition, evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected. The outstanding balance and carrying amount of those loans is as follows:

	September 30, 2010		December 31, 2009
Commercial	$	73	$	93
Commercial real estate		969		1,000
Home equity		12		16
One- to four-family		166		170
Outstanding balance	$	1,220	$	1,279
Carrying amount, net of allowance of $0	$	1,035	$	797

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
Beginning balance	$	271		$	44		$	28		$	78
Reclassification from non-accretable yield		8			11			297			73
Accretion of income		(23	)		(25	)		(69	)		(121	)
Ending balance	$	256		$	30		$	256		$	30

For the purchased loans disclosed above, the Company did not increase the allowance for loan losses during 2010 or 2009. No allowance for loan losses were reversed during 2010 or 2009.

14

PART I – FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS - continued

LAPORTE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(in thousands, except share and per share data)

NOTE 6 – FAIR VALUE

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:

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 company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The Company used the following methods and significant assumptions to estimate the fair value of each type of financial asset:

Investment Securities Available for Sale: The fair values for investment securities available for sale are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2).

Loans Held for Sale and Loan Commitment Derivatives: The fair value of loans held for sale and residential mortgage loan commitments are determined by obtaining quoted prices for similar loans and commitments with similar interest rates and maturities from major secondary markets (Level 2).

Derivatives-Interest Rate Swaps: The fair value of derivatives are based on valuation models using observable market data as of the measurement date (Level 2). The valuation model inputs consist of available market data, such as interest rates or yield curves. These observable inputs can be validated to external sources, including brokers, market transactions and third-party pricing services.

Impaired Loans: The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.

Other Real Estate Owned: Nonrecurring adjustments to certain commercial and residential real estate properties classified as other real estate owned (OREO) are measured at the lower of carrying amount or fair value, less costs to sell. Fair values are generally based on third party appraisals of the property, resulting in a Level 3 classification. In cases where the carrying amount exceeds the fair value, less costs to sell, an impairment loss is recognized.

15

PART I – FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS - continued

LAPORTE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(in thousands, except share and per share data)

NOTE 6 – FAIR VALUE - continued

Mortgage Servicing Rights: The fair value of mortgage servicing rights is based on a valuation model that calculates the present value of estimated net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income (Level 2). Fair value at September 30, 2010 was determined using a discount rate of 9.0%, prepayment speeds ranging from 17.04% to 26.10%, depending on the stratification of the specific right, and a weighted average default rate of approximately 0.5%. Fair value at December 31, 2009 was determined using a discount rate of 9.0%, prepayment speeds ranging from 11.1% to 22.7%, depending on the stratification of the specific right, and a weighted average default rate of approximately 0.5%.

Assets and liabilities measured at fair value on a recurring basis, including financial assets and liabilities for which the Company has elected the fair value option, are summarized below:

				Fair Value Measurements at September 30, 2010
	Carrying Value			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable  Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
Financial Assets
Investment securities available for sale
U.S. federal agency	$	25,375		$	—	$	25,375		$	—
State and municipal		36,321			—		36,321			—
Mortgage-backed securities-residential		23,455			—		23,455			—
Government agency sponsored collateralized mortgage obligations		22,027			—		22,027			—
Privately held collateralized mortgage obligations		5,667			—		5,667			—
Total investment securities available-for-sale	$	112,845		$	—	$	112,845		$	—
Loans held for sale	$	3,486		$	—	$	3,486		$	—
Derivatives – residential mortgage loan commitments		87			—		87			—
Financial Liabilities
Derivatives – interest rate swaps	$	(2,331	)	$	—	$	(2,331	)	$	—

16

PART I – FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS - continued

LAPORTE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(in thousands, except share and per share data)

NOTE 6 – FAIR VALUE - continued

			December 31, 2009
	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable  Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Financial Assets
Investment securities available for sale
U.S. federal agency	$	12,972	$	—	$	12,972	$	—
State and municipal		25,264		—		25,264		—
Mortgage-backed securities – residential		31,082		—		31,082		—
Government agency sponsored collateralized mortgage obligations		18,148		—		18,148		—
Privately held collateralized mortgage obligations		9,494		—		9,494		—
Corporate debt securities		5,135		—		5,135		—
Total investment securities available-for-sale	$	102,095	$	—	$	102,095	$	—
Loans held for sale	$	981	$	—	$	981	$	—
Derivatives – residential mortgage loan commitments		31		—		31		—
Derivatives – interest rate swaps		88		—		88		—

Loans held for sale were carried at the fair value of $3,486, which was made up of the outstanding balance of $3,441 and a fair value adjustment of $45 at September 30, 2010, resulting in income of $28 and $31 for the three and nine months ended September 30, 2010. At December 31, 2009, loans held for sale were carried at the fair value of $981, which was made up of the outstanding balance of $967 and a fair value adjustment of $14 at December 31, 2009, resulting in income of $14 for the year ending December 31, 2009.

17

PART I – FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS - continued

LAPORTE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(in thousands, except share and per share data)

NOTE 6 – FAIR VALUE - continued

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

			Fair Value Measurements at September 30, 2010
	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable  Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired loans	$	2,443	$	—	$	—	$	2,443
Other real estate owned, net		390		—		—		390
Mortgage servicing rights		339		—		339		—
			Fair Value Measurements at December 31, 2009
	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired loans	$	3,783	$	—	$	—	$	3,783
Other real estate owned, net		230		—		—		230
Mortgage servicing rights		318		—		318		—

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had an outstanding amount of $4,478, with a valuation allowance of $2,035 at September 30, 2010, resulting in an additional provision for loan losses of $515 and $1,943 for the three and nine months ended September 30, 2010. At December 31, 2009, impaired loans had an outstanding amount of $4,397, with a valuation allowance of $614, resulting in an additional provision for loan losses of $323 for the year ending December 31, 2009.

Other real estate owned, which is measured at the lower of cost or fair value less costs to sell, had a net carrying amount of $390, which was made up of the outstanding balance of $506, net of a valuation allowance of $116 at September 30, 2010, resulting in a write-down of $116 and $153 for the three and nine months ending September 30, 2010. At December 31, 2009, other real estate owned had a net carrying amount of $230, which was made up of the outstanding balance of $308, net of a valuation allowance of $78, resulting in a write-down of $78 for the year ending December 31, 2009.

Mortgage servicing rights, which are carried at lower of cost or fair value, were carried at their fair value of $339, which was made up of the outstanding balance of $457, net of a valuation allowance of $118 at September 30, 2010, resulting in a charge of $40 and $68 for the three and nine months ended September 30, 2010. At December 31, 2009, mortgage servicing rights were carried at their fair value of $318, which was made up of the outstanding balance of $368, net of a valuation allowance of $50, resulting in a charge of $8 for the year ending December 31, 2009.

18

PART I – FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS - continued

LAPORTE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(in thousands, except share and per share data)

NOTE 6 – FAIR VALUE - continued

The carrying amounts and estimated fair values of financial instruments, at September 30, 2010 and December 31, 2009 are as follows:

	Carrying Amount			Fair Value
September 30, 2010
Financial assets
Cash and due from financial institutions	$	7,574		$	7,574
Securities available-for-sale		112,845			112,845
Federal Home Loan Bank stock		4,206			N/A
Loans held for sale		3,486			3,486
Loans, net		285,057			290,528
Accrued interest receivable		1,400			1,400
Financial liabilities
Deposits	$	(319,582	)	$	(322,543	)
Federal Home Loan Bank advances		(60,736	)		(63,901	)
Subordinated debentures		(5,155	)		(4,596	)
FDIC guaranteed unsecured borrowings		(4,900	)		(5,207	)
Accrued interest payable		(373	)		(373	)
Derivatives – interest rate swaps		(2,330	)		(2,330	)
	Carrying Amount			Fair Value
December 31, 2009
Financial assets
Cash and due from financial institutions	$	6,000		$	6,000
Securities available-for-sale		102,095			102,095
Federal Home Loan Bank stock		4,206			N/A
Loans held for sale		981			981
Loans, net		256,275			260,311
Accrued interest receivable		1,650			1,650
Derivatives – interest rate swaps		88			88
Financial liabilities
Deposits	$	(273,408	)	$	(263,933	)
Federal Home Loan Bank advances		(52,773	)		(54,547	)
Subordinated debentures		(5,155	)		(4,360	)
FDIC guaranteed unsecured borrowings		(4,852	)		(5,152	)
Federal Reserve Bank discount window borrowings		(16,675	)		(16,675	)
Accrued interest payable		(396	)		(396	)

19

PART I – FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS - continued

LAPORTE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(in thousands, except share and per share data)

NOTE 6 – FAIR VALUE - continued

The methods and assumptions, not previously presented, used to estimate fair value are described as follows:

Carrying amount is the estimated fair value for cash and due from financial institutions, accrued interest receivable and payable, demand deposits, Federal Reserve Bank discount window borrowings, and variable rate loans or deposits that reprice frequently and fully. The methods for determining the fair values for securities, loans held for sale, and interest rate swap derivatives were described previously. For fixed rate loans or deposits and for variable rate loans or deposits with infrequent repricing or repricing limits, fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk. Fair value of debt is based on current rates for similar financing. It was not practicable to determine the fair value of FHLB stock due to restrictions placed on its transferability. The fair value of off-balance sheet items is not considered material.

NOTE 7 – DERIVATIVES

The Company utilizes interest rate swap agreements as part of its asset liability management strategy to help manage its interest rate risk position. The notional amount of the interest rate swap does not represent an amount exchanged by the parties. The amount exchanged is determined by reference to the notional amount and the other terms of the individual interest rate swap agreement.

Interest Rate Swaps Designated as Cash Flow Hedges: Interest rate swaps with notional amounts of $30.25 million and $15.25 million as of September 30, 2010 and December 31, 2009, were designated as cash flow hedges of subordinated debentures, FHLB advances and certain CDARS deposits and were determined to be fully effective during all periods presented. As such, no amount of ineffectiveness has been included in net income. Therefore, the aggregate fair value of the swaps is recorded in other liabilities with changes in fair value recorded in other comprehensive income (loss). The amount included in accumulated other comprehensive income (loss) would be reclassified to current earnings should the hedges no longer be considered effective. The hedge would no longer be considered effective if a portion of the hedge becomes ineffective, the item hedged is no longer in existence or the Company discontinues hedge accounting. The Company expects the hedges to remain fully effective during the remaining terms of the swaps. The Company does not expect any amounts to be reclassed from other comprehensive income (loss) over the next twelve months.

20

PART I – FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS - continued

LAPORTE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(in thousands, except share and per share data)

NOTE 7 – DERIVATIVES - continued

Information related to the interest-rate swaps designated as cash flow hedges as of September 30, 2010 is as follows:

Subordinated debentures
Notional amount	$	5,000
Fixed interest rate payable		5.54	%
Variable interest rate receivable (Three month LIBOR plus 3.10%)		3.39	%
Maturity date		March 26, 2014
Unrealized losses		(253	)
CDARS deposits
Notional amount	$	10,250
Fixed interest rate payable		3.19	%
Variable interest rate receivable (One month LIBOR plus 0.55%)		0.81	%
Maturity date		October 9, 2014
Unrealized losses		(635	)
FHLB advance
Notional amount	$	5,000
Fixed interest rate payable		3.54	%
Variable interest rate receivable (Three month LIBOR plus 0.22%)		0.51	%
Maturity date		September 20, 2015
Unrealized losses		(457	)
FHLB advance
Notional amount	$	10,000
Fixed interest rate payable		3.69	%
Variable interest rate payable (Three month LIBOR plus 0.25%)		0.77	%
Maturity date		July 19, 2016
Unrealized losses		(987	)

Interest income (expense) recorded on these swap transactions totaled $(148) and $(323) for the three and nine months ended September 30, 2010 and is reported as a component of interest expense on subordinated debentures, deposits and FHLB advances.

21

PART I – FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS - continued

LAPORTE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(in thousands, except share and per share data)

NOTE 7 – DERIVATIVES - continued

The following table presents the net gains (losses) recorded in accumulated other comprehensive income and the Consolidated Statements of Income and Comprehensive Income relating to the cash flow derivative instruments for the three and nine months ended September 30, 2010 and 2009:

	Three Months Ended September 30, 2010
	Net amount of gain (loss) recognized in OCI (Effective  Portion)			Net amount of gain (loss) reclassified from OCI to interest  income		Net amount of gain (loss) recognized in other non interest  income (Ineffective Portion)
Interest rate contracts	$	(532	)	$	—	$	—
	Three Months Ended September 30, 2009
	Net amount of gain (loss) recognized in OCI (Effective  Portion)			Net amount of gain (loss) reclassified from OCI to interest  income		Net amount of gain (loss) recognized in other non interest  income (Ineffective Portion)
Interest rate contracts	$	(59	)	$	—	$	—
	Nine Months Ended September 30, 2010
	Net amount of gain (loss) recognized in OCI (Effective  Portion)			Net amount of gain (loss) reclassified from OCI to interest  income		Net amount of gain (loss) recognized in other non interest  income (Ineffective Portion)
Interest rate contracts	$	(1,596	)	$	—	$	—
	Nine Months Ended September 30, 2009
	Net amount of gain (loss) recognized in OCI (Effective  Portion)			Net amount of gain (loss) reclassified from OCI to interest  income		Net amount of gain (loss) recognized in other non interest  income (Ineffective Portion)
Interest rate contracts	$	(1	)	$	—	$	—

22

PART I – FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS - continued

LAPORTE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(in thousands, except share and per share data)

The following table reflects the cash flow hedges included in the Consolidated Balance Sheet as of September 30, 2010 and December 31, 2009:

	September 30, 2010						December 31, 2009
	Notional Amount			Fair Value			Notional Amount			Fair Value
Included in other assets (liabilities):
Interest rate swaps related to
Subordinated debentures	$	(5,000	)	$	(253	)	$	(5,000	)	$	34
CDARS deposits		(10,250	)		(635	)		(10,250	)		54
FHLB advances		(15,000	)		(1,444	)		—			—
Total included in other assets (liabilities)				$	(2,332	)				$	88

Interest Rate Swaps Designated as Fair Value Hedges: An interest rate swap with a notional amount of $5.0 million as of September 30, 2010 was designated as a fair value hedge of certain brokered deposits. Information related to the interest-rate swap designated as a fair value hedge as of September 30, 2010 is as follows:

Brokered deposits
Notional amount	$	5,000
Variable interest rate payable (One month LIBOR less 0.25%)		0.01	%
Fixed interest rate receivable		1.25	%
Maturity date		September 15, 2020

Interest income (expense) recorded on these swap transactions totaled $3 for the three and nine months ended September 30, 2010 and is reported as a component of interest expense on deposits. Gains (losses) on the fair market value of the fair value hedge are recorded in other noninterest income (expense) and totaled $2 for the three and nine months ended September 30, 2010.

The following table reflects the fair value hedges included in the Consolidated Balance Sheet as of September 30, 2010:

	September 30, 2010
	Notional Amount			Fair Value
Included in other assets (liabilities):
Interest rate swaps related to Brokered deposits	$	(5,000	)	$	(2	)
Total included in other assets (liabilities)				$	(2	)

The counterparty to the Company’s derivatives is exposed to credit risk whenever the derivative is in a liability position. As a result, the Company has collateralized the liability with cash and security collateral held in safekeeping by Bank of New York. At September 30, 2010 and December 31, 2009, the Company had $220 and $100 in cash, respectively, and securities with a fair value of $2,276 and $251, respectively, posted as collateral for these derivatives.

23

PART I – FINANCIAL INFORMATION

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

This document (including information incorporated by reference) contains, and future oral and written statements of the Company and its management may contain, forward-looking statements, as such term is defined in the Private Securities Litigation Reform Act of 1995, with respect to the financial condition, results of operations, plans, objectives, future performance and business of the Company. Forward-looking statements, which may be based upon beliefs, expectations and assumptions of the Company’s management and on information currently available to management, are generally identifiable by the use of words such as “believe,” “expect,” “anticipate,” “plan,” “intend,” “estimate,” “may,” “will,” “would,” “could,” “should” or other similar expressions. Additionally, all statements in this document, including forward-looking statements, speak only as of the date they are made, and the Company undertakes no obligation to update any statement in light of new information or future events.

The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. The factors which could have a material adverse effect on the operations and future prospects of the Company and certain subsidiaries are detailed in ”Item 1A – Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2009 and in our other filings with the Securities and Exchange Commission. In addition to these risk factors, there are other factors that may impact any public company, including ours, which could have a material adverse effect on the operations and future prospects of the Company and its subsidiaries. These additional factors include, but are not limited to, the following:

• changes in prevailing real estate values and loan demand both nationally and within our current and future market area;

• increased competitive pressures among financial services companies;

• changes in consumer spending, borrowing and savings habits;

• the amount of assessments and premiums we are required to pay for FDIC deposit insurance;

• legislative or regulatory changes that affect our business including the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) and its impact on our compliance costs;

• our ability to successfully manage our commercial lending;

• the financial health of certain entities, including government sponsored enterprises, the securities of which are owned or acquired by the Company;

• adverse changes in the securities market;

• the costs, effects and outcomes of existing or future litigation;

• the economic impact of past and any future terrorist attacks, acts of war or threats thereof and the response of the United States to any such threats and attacks;

• the success of our mortgage warehouse lending program including the impact of the Dodd-Frank Act on the mortgage companies; and

• the ability of the Company to manage the risks associated with the foregoing factors as well as anticipated risk factors.

These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.

24

PART I – FINANCIAL INFORMATION

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued

Comparison of Financial Condition at September 30, 2010 and December 31, 2009

General:Total assets increased $43.2 million, or 10.6%, to $449.0 million at September 30, 2010 from $405.8 million at December 31, 2009. The increase was primarily due to an increase in net loans of $28.8 million attributable to the increase in mortgage warehouse loans, as well as an increase in securities available for sale of $10.8 million. This increase in assets was funded through an increase in total deposits of $46.2 million.

Investment Securities:Total securities available for sale increased $10.8 million, or 10.5%, to $112.8 million at September 30, 2010 from $102.1 million at December 31, 2009 primarily due to an increase in deposits. We have increased the percentage of government agency and tax exempt securities owned and have reduced the exposure in CMO and mortgage backed securities when compared to December 31, 2009. During the same time period, we eliminated our exposure in corporate bonds.

As of September 30, 2010, management reviewed the securities portfolio for possible other-than-temporary impairment and determined there were no impairment charges to be recorded. At September 30, 2010, total available for sale securities portfolio reflected a net unrealized gain of $4.0 million compared to a net unrealized gain of $2.7 million at December 31, 2009.

Loans Held for Sale:Loans held for sale increased $2.5 million to $3.5 million at September 30, 2010 compared to $981,000 at December 31, 2009 primarily due to the increased volume of one-to-four-family residential loans being sold to the secondary market during the third quarter of 2010.

Net Loans:Net loans increased $28.8 million, or 11.2%, to $285.1 million at September 30, compared to $256.3 million at December 31, 2009. This increase is primarily attributable to an increase in mortgage warehouse lending over the same time period due to the low mortgage interest rates and the refinance activity across the country. We also experienced an increase in five or more family residential real estate loans as well as an increase in commercial real estate and construction loans. We continued to see a decrease in one-to-four-family residential loans during the third quarter of 2010 due to the refinance activity and also because we continue to sell the majority of the loans we originate into the secondary market. Consumer lending demand remains slow due to the current economic environment we are experiencing.

There was no material change in commercial business loans at September 30, 2010 compared to December 31, 2009, primarily attributable to the overall national and local economic concerns. Due to the increased risk associated with commercial business loans, management revised the Bank’s loan policy during the second quarter of 2010 increasing the required debt service coverage ratio for loans secured by equipment, accounts receivable and inventory.

Commercial real estate loans increased $6.3 million, or 8.4%, to $81.8 million at September 30, 2010 compared to $75.5 million at December 31, 2009. $4.7 million of this increase was attributable to the financing of a business complex in Michigan City, Indiana which houses a hotel and medical office.

Total construction loans increased $1.3 million, or 24.6%, to $6.8 million at September 30, 2010 compared to $5.4 million at December 31, 2009. This increase is primarily due to a $3.5 million loan for the construction of an apartment complex in La Porte, Indiana partially offset by a decrease of $2.6 million in loans that moved into permanent financing and are now reflected in the commercial real estate balances. At September 30, 2010, unused commitments on construction loans totaled $5.3 million.

Mortgage Warehouse loans increased $33.8 million, to $77.5 million at September 30, 2010 compared to $43.8 million at December 31, 2009. This increase is primarily due to the continued low level of interest rates and the continued refinance activity, particularly on the east and west coasts.

25

PART I – FINANCIAL INFORMATION

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued

One-to-four-family residential loans decreased $9.0 million, or 12.8%, to $61.1 million at September 30, 2010 compared to $70.1 million at December 31, 2009, primarily attributable to refinance activity in addition to repayment activity. We continue to sell the majority of the residential loans originated, which results in a decrease to the overall portfolio.

We have seen an increased demand for five or more family residential loans due to the increase demand for this type of housing, and as a result the balance increased $2.6 million, or 38.5%, to $9.3 million at September 30, 2010 compared to $6.7 million at December 31, 2009. The increase was primarily due to a $3.1 million loan for an existing apartment complex in South Bend, Indiana.

Home equity loans decreased $1.3 million, or 8.3%, to $14.4 million at September 30, 2010 compared to $15.7 million at December 31, 2009, primarily due to the current economic conditions and the continued decline in home values. Other consumer loans, including indirect automobile loans, decreased $2.2 million, or 18.4%, at September 30, 2010 compared to December 31, 2009. Competitive interest rates offered through the automobile dealers have contributed to this decrease, along with a decrease in the overall demand.

The allowance for loan losses increased $1.7 million, or 60.0%, to $4.4 million at September 30, 2010 compared to $2.8 million at December 31, 2009. The allowance for loan losses to total loans ratio was 1.54% at September 30, 2010 compared to 1.07% at December 31, 2009. The allowance for loan losses to non-performing loans was 76.8% at September 30, 2010 compared to 36.0% at December 31, 2009. The increase in the allowance for loan losses is primarily attributable to two commercial loan relationships that continued to deteriorate over the last nine months, in addition to the overall increase in the provision for the general pool classifications given the current economic environment. There was also an increase in the provision for the mortgage warehouse loans from the previous year-end attributable to the increase in the outstanding balance on those loans.

Total nonperforming loans to total loans ratio was 2.00% as of September 30, 2010 compared to 2.98% at December 31, 2009. The total nonperforming loans decreased $1.9 million, to $5.8 million as of September 30, 2010 compared to $7.7 million as of December 31, 2009. As of September 30, 2010, nonaccrual loans to wholesale trade – chemical companies totaled $2.2 million, to entertainment and recreation business totaled $729,000, to accommodation food services totaled $385,000, to real estate rental and leasing totaled $352,000, to construction contractors totaled $134,000, and all other commercial industry types totaled $425,000. One-to-four-family residential loans on nonaccrual totaled $1.3 million as of September 30, 2010. Home equity loans on non-accrual totaled $171,000 and all other consumer and land loans on non-accrual totaled $95,000.

26

PART I – FINANCIAL INFORMATION

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued

Nonperforming Assets:The table below sets forth the amounts and categories of our nonperforming assets at the dates indicated.

	September 30, 2010			December 31, 2009
	(Dollars in thousands)
Nonaccrual loans:
Real estate:
One- to four- family (1)	$	1,334		$	1,059
Five or more family		—			—
Commercial (2)		2,945			3,854
Construction		858			858
Land		90			1,169
Total real estate	$	5,227		$	6,940
Consumer and other loans:
Home equity (3)		171			392
Commercial		381			381
Automobile and other		4			3
Total consumer and other loans		556			776
Total nonaccrual loans	$	5,783		$	7,716
Troubled debt restructured
Commercial real estate	$	—		$	—
Total troubled debt restructured	$	—		$	—
Loans greater than 90 days delinquent and still accruing:
Real estate:
One- to four- family	$	—		$	—
Five or more family		—			—
Commercial		—			—
Construction		—			—
Land		—			—
Total real estate	$	—		$	—
Consumer and other loans:
Home equity		—			—
Commercial		—			—
Automobile and other		—			—
Total consumer and other loans	$	—		$	—
Total nonperforming loans	$	5,783		$	7,716
Foreclosed assets:
One- to four- family	$	169		$	399
Five or more family		—			—
Commerical		154			155
Construction		—			—
Land		390			—
Consumer		—			—
Business assets		—			—
Total foreclosed assets	$	713		$	554
Total nonperforming assets	$	6,496		$	8,270
Ratios:
Nonperforming loans to total loans		2.00	%		2.98	%
Nonperforming assets to total assets		1.45	%		2.04	%

(1) $116 and $120 of the nonaccrual one- to four- family loans at September 30, 2010 and December 31, 2009, respectively, were loans acquired with credit deterioration from the acquisition of City Savings Bank.

(2) $151 of the nonaccrual commercial real estate loans at September 30, 2010 was a loan acquired with credit deterioration from the acquisition of City Savings Bank.

(3) $12 and $16 of the nonaccrual home equity loans at September 30, 2010 and December 31, 2009, respectively, were loans acquired with credit deterioration from the acquisition of City Savings Bank.

27

PART I – FINANCIAL INFORMATION

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued

Other Real Estate:Other real estate owned increased $159,000, or 28.7%, to $713,000 at September 30, 2010 compared to $554,000 at December 31, 2009, primarily due to the transfer of an asset previously classified as land. The Company acquired a piece of land in Michigan City, Indiana through the acquisition of City Savings Bank in 2007, which was being held for future branch development by City Savings Bank. During the third quarter of 2010 management elected to transfer this property into other real estate owned at its current market value due to the fact that the land was not going to be developed into an additional branch location. The market value transferred into other real estate during the third quarter of 2010 was $390,000.

Goodwill and Other Intangible Assets:The Company’s goodwill totaled $8.4 million at September 30, 2010 and at December 31, 2009. Accounting standards require goodwill to be tested for impairment on an annual basis, or more frequently if circumstances indicate that an asset might be impaired, by comparing the fair value of such goodwill to its recorded or carrying amount. If the carrying amount of the goodwill exceeds the fair value, an impairment charge must be recorded in an amount equal to the excess. The annual impairment review of the $8.4 million of goodwill previously recorded was performed in the fourth quarter of 2009. As a result of the impairment testing performed, no impairment charge was recorded by the Company.

The Company’s stock price has increased from the previous analysis and earnings have continued to increase, therefore, management determined that an updated analysis from an independent third party as of the end of the third quarter was not necessary at this time. A full independent review will be done to test the goodwill for impairment annually unless circumstances indicate an updated review is necessary. As the Company’s stock price per common share is currently less than its book value per common share, it is reasonably possible that management may conclude that goodwill, totaling $8.4 million at September 30, 2010, is impaired as a result of a future assessment. If our goodwill is determined to be impaired, the related charge to earnings could be material.

Deposits:Total deposits increased $46.2 million, or 16.9%, to $319.6 million at September 30, 2010 compared to $273.4 million at December 31, 2009, which was used to fund the increase in the mortgage warehouse division. There were increases in all types of deposit accounts; however the largest increases were in money market and interest checking accounts. Money market accounts increased $10.5 million, or 61.0%, and interest-bearing demand accounts increased $20.5 million. New Public fund deposits from Porter County accounted for approximately $23.5 million of the increase in these accounts. We also continue to see an increase in core retail and commercial growth in the Michigan City, Chesterton and La Porte markets. Certificates of deposit and IRA accounts increased $10.8 million, or 7.5%, at September 30, 2010 compared to December 31, 2009, primarily attributable to an increase of $6.8 million in certificates of deposit over $100,000 and an increase of $5.3 million in brokered certificates of deposit.

Borrowed Funds:Total borrowed funds decreased $8.7 million during the nine months ended September 30, 2010. Federal Home Loan Bank of Indianapolis (“FHLBI”) borrowings increased $8.0 million, or 15.1%, to $60.7 million at September 30, 2010 compared to $52.8 million at December 31, 2009. This increase was in the overnight advance borrowings, which is used to partially fund the mortgage warehouse loans. The increase in FHLBI borrowings was offset by a decrease of $16.7 million in overnight borrowings at the Federal Reserve discount window at September 30, 2010 compared to December 31, 2009. During the second quarter of 2010, the Federal Reserve announced that they would be returning to their original intent of “lender of last resort” and therefore we increased our borrowing at the FHLBI.

Total Shareholders’ Equity:Total shareholders’ equity increased $1.3 million, or 2.5%, to $51.1 million at September 30, 2010 compared to $49.9 million at December 31, 2009, due to an increase in retained earnings of $2.0 million offset by a decrease in other comprehensive income (loss) of $705,000. The other comprehensive income on securities available for sale increased $892,000 over the same time period primarily due to an overall increase in the fair values on such securities held in the Company’s available-for-sale investment portfolio. There was a decrease of $1.6 million in other comprehensive income (loss) related to the interest rate swaps the Company has entered into as of September 30, 2010 compared to December 31, 2009, primarily attributable to the continued decline in interest rates and the impact this has on the fair value of these swaps. The interest rate swaps are tested monthly by an independent third party for effectiveness and at September 30, 2010 all of the cash flow hedge interest rate swaps were effective.

28

PART I – FINANCIAL INFORMATION

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued

Comparison of Operating Results For Three Month Period Ended September 30, 2010 and September 30, 2009

Net Income:Net income increased $212,000, or 36.0%, to $801,000 for the three months ended September 30, 2010 compared to $589,000 for the three months ended September 30, 2009. This increase is primarily due to an increase in net interest income and fees attributable to the mortgage warehouse division as well as an increase in net gains on the sale of one-to-four-family loans originated locally. The increase in both of these divisions is primarily a result of the continued low level of interest rates and the refinance activity. Also contributing to the increase in net income is a decrease in annualized average cost of interest-bearing liabilities of 54 basis points during the third quarter of 2010 compared to the prior year period. The increases were partially offset by an increase in the provision for loan losses of $444,000 in the third quarter of 2010 compared to the same prior year period.

Net Interest Income:Net interest income increased $555,000, or 19.9%, to $3.3 million for the three months ended September 30, 2010 compared to $2.8 million for the same prior year period. The increase is primarily due to an increase in the annualized net interest spread of 25 basis points, to 3.15%, for the third quarter of 2010 compared to 2.90% for the same prior year period. This is attributable to a continued decrease in the annualized average cost of interest bearing deposits as well as borrowings, partially offset by a decrease in the annualized average yield on the securities portfolio.

Interest and Dividend Income:Interest and dividend income increased $351,000, or 7.3%, for the three months ended September 30, 2010 compared to the same prior year period, primarily due to an increase in the average total interest-earning assets of $45.8 million. The increase in average assets was primarily due to the increase in mortgage warehouse loans. Partially offsetting the increase in interest and dividend income is a decrease in income from taxable securities due to a decrease in the annualized average yield on the taxable securities portfolio of 140 basis points due to the decline in interest rates and the impact this has had on the securities portfolio.

Interest income on loans, including fees increased $527,000, or 14.1%, for the three month period ending September 30, 2010 compared to the same prior year period. This increase is due to an increase in the average loan balances of $30.5 million, primarily in the mortgage warehouse loans. The annualized average yield on loans increased 9 basis points in the third quarter of 2010 compared to the prior year period, primarily due to an increase in the yield on commercial, land, construction, home equity and consumer loans. The increases were partially offset by a decrease in the commercial real estate and mortgage warehouse loan yields. The annualized average yield on the mortgage warehouse portfolio was 6.91% for the third quarter 2010 compared to 7.70% in the same prior year period. This is attributable to the continued decline in interest rates and the competitive rates offered by other lenders.

Interest income from taxable securities decreased $292,000, or 34.3%, for the third quarter of 2010 compared to the same prior year period, primarily due to a decrease in the average yield of 140 basis points. The decrease in interest income from taxable securities was partially offset by an increase in interest income from tax exempt securities of $132,000, or 75.9% over the same time period. This was primarily due to an increase in the average balance of tax exempt securities of $14.7 million despite a decrease of 26 basis points in average yield. The average balance was increased in order to take advantage of the tax benefit available on qualified municipal bonds.

Dividend income from Federal Home Loan Bank of Indianapolis (FHLBI) stock decreased $19,000, or 54.3%, in the current period compared to the same prior year period, primarily due to the decrease in the annualized average yield of 181 basis points.

29

PART I – FINANCIAL INFORMATION

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued

The following table sets forth the average balance sheet, average annualized yield and cost and certain other information for the three months ended September 30, 2010 and September 30, 2009. No tax-equivalent yield adjustments were made. All average balances are daily average balances. Nonaccrual loans were included in the computation of average balances, but have been reflected in the table as loans carrying a zero yield. The annualized yields set forth below include the effect of deferred fees, and discounts and premiums that are amortized or accreted to interest income or expense.

	For the Three Months Ended September 30,
	2010							2009
	(Dollars in thousands)
	Average Outstanding Balance		Interest		Annualized Yield/Cost			Average Outstanding Balance		Interest		Annualized Yield/Cost
Loans	$	275,186	$	4,266		6.20	%	$	244,724	$	3,739		6.11	%
Taxable securities		73,265		558		3.05	%		76,469		850		4.45	%
Tax exempt securities		31,486		306		3.89	%		16,788		174		4.15	%
Federal Home Loan Bank of Indianapolis stock		4,206		16		1.52	%		4,206		35		3.33	%
Federal funds sold and other interest-bearing deposits		5,634		4		0.28	%		1,793		1		0.22	%
Total interest earning assets		389,777		5,150		5.29	%		343,980		4,799		5.58	%
Non-interest earning assets		41,415							40,988
Total assets	$	431,192						$	384,968
Savings deposits	$	45,100		13		0.12	%	$	44,580		12		0.11	%
Money market and NOW accounts		79,692		179		0.90	%		42,989		90		0.84	%
CDs and IRAs		149,888		993		2.65	%		143,160		1,124		3.14	%
Total interest-bearing deposits		274,680		1,185		1.73	%		230,729		1,226		2.13	%
FHLB advances		53,824		504		3.75	%		58,119		663		4.56	%
Subordinated debentures		5,155		71		5.51	%		5,155		71		5.51	%
FDIC guaranteed unsecured borrowing		4,890		50		4.09	%		4,826		51		4.23	%
Federal Reserve Bank discount window borrowings		11		—		0.00	%		1,757		3		0.68	%
Total interest-bearing liabilities		338,560		1,810		2.14	%		300,586		2,014		2.68	%
Non-interest bearing deposits		36,380							32,577
Other liabilities		5,800							3,875
Total liabilities		380,740							337,038
Shareholders’ equity		50,452							47,930
Total liabilities & shareholders’ equity	$	431,192						$	384,968
Net interest income			$	3,340						$	2,785
Net interest rate spread						3.15	%						2.90	%
Net interest margin						3.43	%						3.24	%

30

PART I – FINANCIAL INFORMATION

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued

Interest Expense:Interest expense decreased $204,000, or 10.1%, for the three months ended September 30, 2010 compared to the same prior year period. The annualized average cost of interest-bearing liabilities decreased 54 basis points to 2.14% for the current period from 2.68% for the same prior year period. The annualized average cost of certificates of deposit and IRA time deposits decreased 49 basis points, primarily due to the continued decrease in the interest rates paid on new and maturing deposits. The average cost of savings, money market and NOW accounts remained relatively unchanged. The Company has continued to offer a competitive interest rate on money market accounts in order to attract relatively low cost funds to help fund its mortgage warehouse division.

Interest expense on FHLBI advances decreased $159,000, or 24.0%, for the three months ended September 30, 2010 compared to the same prior year period. This decrease is primarily due to the decrease in the average balance of $4.3 million as well as a decrease in the annualized average cost of 81 basis points.

Provision for Loan Losses:The Bank recognizes a provision for loan losses, which is charged to earnings, at a level necessary to absorb known and inherent losses that are both probable and reasonably estimable at the date of the financial statements. In evaluating the level of the allowance for loan losses, management considers historical loan loss experience, the types of loans and the amount of loans in the loan portfolio, adverse situations that may affect borrowers’ ability to repay, the estimated value of any underlying collateral, peer group information and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available or as future events occur. After an evaluation of these factors, management recognized a provision for loan losses of $628,000 for the third quarter of 2010 compared to $184,000 for the same prior year period. Net charge-offs for the 2010 and 2009 periods were $536,000 and $308,000, respectively.

The increase in the provision for loan losses is primarily attributable to one commercial loan relationship that continued to deteriorate during the third quarter of 2010, requiring an additional discount on the collateral value securing the loan. During the third quarter of 2010 an additional reserve of $404,000 was added for this relationship when we became aware of a ruling in favor of a subcontractor involved with the construction of the underlying collateral. The balance of this relationship, net of specific reserves, is now $590,000. In addition, the provision for the general pool classifications increased during the quarter due to the increase in the Company’s historical charge off percentage rates applied due to the higher level of charge-offs as previously discussed. One of the factors management considers when evaluating the allowance for loan losses is the historical loan loss experience. During the first three quarters of 2010 there was also an increase in the provision for the mortgage warehouse loans from the previous year-end attributable to the increase in the outstanding balance on those loans.

Noninterest Income:Noninterest income increased $189,000, or 23.5%, to $995,000 for the three months ended September 30, 2010 compared to $806,000 for the same prior year period. This increase is primarily attributable to a $142,000 increase in gain on mortgage banking activities, a $140,000 gain on mortgage warehouse loan fees and a $41,000 increase in wire transfer fees associated with the mortgage warehouse program. The increase in residential mortgage refinance activity in the third quarter of 2010 compared to the prior year period contributed to the increase in this fee income.

Partially offsetting these increases in noninterest income was a decrease in gain on other assets. The Company acquired a piece of land in Michigan City, Indiana through the acquisition of City Savings Bank in 2007, which was being held for future branch development by City Savings. During the third quarter of 2010 management elected to transfer this property into other real estate owned at its current market value due to a decision made in the third quarter that the land was not going to be developed into an additional branch location. As a result of this transfer, the company recorded a loss of $116,000 during the third quarter of 2010. There was also a decrease in overdraft charges of $41,000 compared to the same prior year period, primarily attributable to the impact of the new “opt in” regulations regarding overdraft protection. Trust fees decreased $38,000 attributable to the closure of the trust department in early 2010.

31

PART I – FINANCIAL INFORMATION

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued

Noninterest Expense:There was no material change in total noninterest expense for the three months ended September 30, 2010 compared to the same prior year period. Salaries and wages increased $65,000, or 4.5%, primarily attributable to an increase in commission expense paid in the third quarter due to the increase in mortgage originations and a change in the pay structure of the retail mortgage division during 2010. Bank examination fees decreased $42,000, or 28.2%, primarily due to a decrease in audit fees attributable to SOX 404(b) testing by our external audit firm as audit fees had been incurred in 2009 prior to the temporary extension that was received in the prior year. TheDodd-Frank Wall Street Reform and Consumer Protection Act, passed by Congress, provides a permanent exemption for smaller public companies. Advertising expense decreased $24,000, or 35.8%, primarily attributable to a decrease in promotions expense compared to the prior year period.

Income Taxes:Income tax expense increased $57,000, or 37.8%, for the three months ended September 30, 2010 compared to the same prior year period, primarily due to the increase in income before taxes of $269,000. The effective tax rate was 20.6% for the third quarter of 2010 and 20.4% for the same prior year period.

Comparison of Operating Results For Nine Month Period Ended September 30, 2010 and September 30, 2009

Net Income:Net income increased $458,000, or 29.0%, to $2.0 million for the nine months ended September 30, 2010 compared to $1.6 million for the same prior year period. This increase is primarily attributable to an increase in net interest income of $1.6 million, and an increase in noninterest income of $443,000. The mortgage warehousing line of business continues to have a positive impact on interest and fee income compared to the prior year period, in addition to an increase in net gains on the sale of one-to-four-family residential loans originated locally. Partially offsetting the increase in net income was an increase in the provision for loan losses of $1.9 million compared to the prior year end. The Company continues to add to its allowance for loan losses during the challenging economic conditions and high local unemployment.

Net Interest Income:Net interest income increased $1.6 million, or 20.9%, for the first nine months of 2010 compared to the same prior year period. This increase is primarily due to an increase in the annualized net interest spread of 32 basis points to 3.07% from 2.75%, as well as an increase in the average net interest-earning assets of $9.3 million. The primary reason for the increase in the net interest spread is the continued decrease in the annualized average cost of interest bearing deposits and borrowings, as well as an increase in the annualized yield on the loan portfolio attributable to the warehouse division.

Interest and Dividend Income:Interest and dividend income increased $890,000, or 6.3%, for the nine months ended September 30, 2010 compared to the same prior year period, primarily due to an increase in the average total interest-earning assets of $35.9 million. The mortgage warehouse program originated in May of 2009 and therefore is not fully reflected in the prior year, which resulted in an increase in average warehouse loans of $36.8 million. The increase in the average balance of interest earning assets more than offset the decrease of 21 basis points in average yield.

Interest income on loans, including fees, increased $1.5 million, or 13.8%, for the first nine months of 2010 compared to the same prior year period, primarily due to an increase in the average loan balances of $26.6 million attributable to the warehouse division. The increase in interest income on loans was also impacted by an increase of 14 basis points in the annualized average yield on loans. The increase in yield was primarily attributable to the growth in the warehouse loans as a percentage of the total loan portfolio. The average annualized yield on the warehouse loans for the first nine months of 2010 was 6.97% compared to the yield on the total loan portfolio of 6.17%.

32

PART I – FINANCIAL INFORMATION

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued

The following table sets forth the average balance sheet, average annualized yield and cost and certain other information for the nine months ended September 30, 2010 and September 30, 2009. No tax-equivalent yield adjustments were made. All average balances are daily average balances. Nonaccrual loans were included in the computation of average balances, but have been reflected in the table as loans carrying a zero yield. The annualized yields set forth below include the effect of deferred fees, and discounts and premiums that are amortized or accreted to interest income or expense.

	For the Nine Months Ended September 30,
	2010							2009
	(Dollars in thousands)
	Average Outstanding Balance		Interest		Annualized Yield/Cost			Average Outstanding Balance		Interest		Annualized Yield/Cost
Loans	$	260,622	$	12,051		6.17	%	$	233,997	$	10,587		6.03	%
Taxable securities		77,295		2,010		3.47	%		87,581		3,024		4.60	%
Tax exempt securities		28,011		834		3.97	%		11,378		356		4.17	%
Federal Home Loan Bank of Indianapolis stock		4,206		58		1.84	%		4,206		100		3.17	%
Federal funds sold and other interest-bearing deposits		4,760		7		0.20	%		1,796		3		0.22	%
Total interest earning assets		374,894		14,960		5.32	%		338,958		14,070		5.53	%
Non-interest earning assets		41,373							42,007
Total assets	$	416,267						$	380,965
Savings deposits	$	45,100		38		0.11	%	$	43,830		40		0.12	%
Money market and NOW accounts		69,243		465		0.90	%		40,311		248		0.82	%
CDs and IRAs		146,883		3,003		2.73	%		139,876		3,453		3.29	%
Total interest-bearing deposits		261,226		3,506		1.79	%		224,017		3,741		2.23	%
FHLB advances		53,081		1,639		4.12	%		63,836		2,182		4.56	%
Subordinated debentures		5,155		210		5.43	%		5,155		196		5.07	%
FDIC guaranteed unsecured borrowing		4,875		151		4.13	%		4,100		127		4.13	%
Federal Reserve Bank discount window borrowings		1,950		10		0.68	%		2,591		10		0.51	%
Total interest-bearing liabilities		326,287		5,516		2.25	%		299,699		6,256		2.78	%
Non-interest bearing deposits		35,351							30,464
Other liabilities		4,514							3,436
Total liabilities		366,152							333,599
Shareholders’ equity		50,115							47,366
Total liabilities & shareholders’ equity	$	416,267						$	380,965
Net interest income			$	9,444						$	7,814
Net interest rate spread						3.07	%						2.75	%
Net interest margin						3.36	%						3.07	%

33

PART I – FINANCIAL INFORMATION

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued

Interest income from taxable securities decreased $1.0 million, or 33.5%, for the nine months ended September 30, 2010, primarily due to a decrease in the annualized average yield of 113 basis points as well as a decrease in the average balance of $10.3 million. This is primarily due to the company restructuring and selling some of its taxable securities during 2010 and reinvesting into tax exempt securities and at the same time recording securities gains. The decrease in the interest income from taxable securities was partially offset by an increase in income on tax exempt securities of $478,000 over the same time period. The average balance of tax exempt securities increased $16.6 million over the same time period. The company expects to reduce its income tax expense as a result of the increase in tax exempt securities income.

Dividend income from Federal Home Loan Bank of Indianapolis (“FHLBI”) stock decreased $42,000, or 42.0%, for the first nine months of 2010 compared to the same prior year period, attributable to the decrease in the annualized average yield to 1.84% from 3.17%. Although the FHLBI has continued to pay a dividend, it has decreased the dividend consistently due to impairment charges they have recorded attributable to their private label mortgage backed securities.

Interest Expense:Interest expense decreased $740,000, or 11.8%, for the nine months ended September 30, 2010 compared to the same prior year period. The annualized average cost of interest-bearing liabilities decreased 53 basis points to 2.25% for the current period from 2.78% for the same prior year period. The annualized average cost of certificates of deposit and IRA time deposits decreased 56 basis points, primarily due to the continued decrease in the interest rates paid on new and maturing deposits. The average cost of savings, money market and NOW accounts remained relatively unchanged. The Company has continued to offer a competitive interest rate on money market accounts in order to attract relatively low cost funds to help fund its mortgage warehouse division.

Interest expense on FHLBI advances decreased $543,000, or 24.9%, or 44 basis points for the first nine months of 2010 compared to the same prior year period. This is primarily attributed to a decrease in the average balance of $10.8 million and a decrease of 44 basis points in the average rate due to decreases in the rates paid on advances that renewed during the nine month period.

Provision for Loan Losses:The Bank recognizes a provision for loan losses, which is charged to earnings, at a level necessary to absorb known and inherent losses that are both probable and reasonably estimable at the date of the financial statements. In evaluating the level of the allowance for loan losses, management considers historical loan loss experience, the types of loans and the amount of loans in the loan portfolio, adverse situations that may affect borrowers’ ability to repay, the estimated value of any underlying collateral, peer group information and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available or as future events occur. After an evaluation of these factors, management recognized a provision for loan losses of $2.3 million for the first nine months of 2010 compared to $442,000 for the same prior year period. Net charge-offs for the 2010 and 2009 periods were $625,000 and $468,000, respectively.

The increase in the provision for loan losses from the prior year was partially attributable to two commercial loan relationships. One of these relationships, totaling $2.2 million, is secured by a chemical manufacturing facility, equipment and inventory and a personal guarantee. The Company had a more extensive review of the chemical inventory securing the loan in late March, which led to an additional $859,000 reserve in the first quarter. During the third quarter of 2010 an additional reserve of $404,000 was added when we became aware of a ruling in favor of a subcontractor involved with the construction of the underlying collateral. The balance of this relationship, net of specific reserves, is now $590,000. The second relationship consists of one commercial real estate loan in the amount of $350,000 with a 50% SBA guarantee as well as a commercial business loan in the amount of $400,000 secured by inventory, accounts receivable and equipment. During the second quarter of 2010, negotiations for the sale of the business ceased and the business subsequently closed, which led to an additional reserve of $475,000 in the second quarter. During the third quarter of 2010 the business filed for Chapter 7 bankruptcy and the loans were partially charged-off to a remaining balance of $105,000, net of specific reserves, at September 30, 2010.

34

PART I – FINANCIAL INFORMATION

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued

The provision for the mortgage warehouse loans also increased in the first nine months of 2010 compared to the prior year period, due to the increase in the outstanding loan balances and also due to an increase in the historical loan loss factors used to establish the minimum reserve ratios for the general loan pools due to higher levels of charge-offs in 2010 versus prior years.

Noninterest Income:Noninterest income increased $443,000, or 15.2%, to $3.4 million for the first nine months of 2010 compared to $2.9 million for the same prior year period. This increase is primarily attributable to an increase in mortgage warehouse loan fees and wire transfer fees of $549,000 compared to the prior year period. There was also an increase in net gains on securities of $238,000 in the first nine months of 2010, primarily due to gains taken during the first quarter of 2010. Management’s analysis determined that market conditions provided the opportunity to sell a number of securities and add these gains to capital permanently without a negative impact to long-term earnings. The potential for rising interest rates at some point in the future, and the announcement that the Federal Reserve Board’s program to purchase mortgage backed securities will end sometime in 2010, led to concern of eroding prices on these securities and the potential to negatively impact capital. ATM and debit card fees increased $45,000, or 19.6%, attributable to increased activity as well as an increase to the foreign card usage fee in late 2009.

Partially offsetting these increases in noninterest income was a decrease of $228,000, or 28.6%, in net gains on mortgage banking activities in the first nine months of 2010 compared to the prior year period. Mortgage banking activity had slowed down significantly during the first half of 2010 compared to the prior year, however did increase significantly in the most recent quarter. Trust fees decreased $104,000, or 94.6%, attributable to the closing of the trust department in early 2010. However, trust referral fee income increased $17,000 during the same period, partially offsetting the decrease. Service charges on deposit accounts decreased $78,000, or 12.3%, in the first nine months of 2010 compared to the prior year period. This decrease was attributable to a decrease in overdraft charges of $78,000 as a result of the new “opt in” regulations governing overdraft activity and the Bank’s ability to charge for this service.

Noninterest Expense:Noninterest expense decreased $358,000, or 4.3%, to $8.0 million for the nine months ending September 30, 2010 compared to $8.4 million for the same prior year period. This decrease is primarily due to the $427,000 prepayment penalty fee assessed to retire the FHLB advance in the prior year period as well as a decrease in FDIC insurance of $153,000. In the prior year period there was also a special assessment of 5 basis points on total assets less Tier 1 Capital as of June 30, 2009. The special assessment resulted in an expense of $176,000 in the second quarter of 2009 which was not applicable in the current period. Occupancy expense decreased $56,000, or 4.0%, in the first nine months of 2010 compared to the same prior year period, primarily due to a decrease in depreciation expense of $59,000. Amortization of intangibles decreased $55,000, or 21.3%, since the core deposit intangible asset is amortized into expense on an accelerated basis. Bank examination fees decreased $28,000, or 7.3%, primarily due to a decrease in audit fees attributable to SOX 404(b) testing by our external audit firm as audit fees had been incurred in 2009 prior to the temporary extension that was received in the prior year. The Dodd-Frank Wall Street Reform and Consumer Protection Act, passed by Congress, provides a permanent exemption for smaller public companies. Advertising expense decreased $22,000, or 12.4%, primarily attributable to a decrease in promotions expense compared to the prior year period.

These decreases in noninterest expense were partially offset by an increase in salaries and employee benefits of $333,000, or 8.3%, over the 2009 period. This was primarily attributable to the termination in the prior year period of one of the Bank’s post retirement life insurance benefit plans that it had established for a limited number of exempt employees, resulting in a $161,000 decrease in that expense for the nine months ended September 30, 2009. There was also an increase in exempt payroll expense of $81,000, primarily due to the addition of the mortgage warehouse staff in the second quarter of 2009. Commission expense paid to mortgage originators also increased $39,000 primarily due to a change in the pay structure of the retail mortgage division during 2010. There was no material change in other expense during the nine months of 2010 compared to the prior year period.

35

PART I – FINANCIAL INFORMATION

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued

Income Taxes:Income tax expense increased $123,000, or 35.1%, for the nine months ended September 30, 2010 compared to the same prior year period, primarily due to the increase in income before taxes of $581,000. The effective tax rate was 18.8% for the first nine months of 2010 and 18.1% for the same prior year period. Our deferred tax asset has increased from $1.0 million at December 31, 2009 to $1.6 million at September 30, 2010, primarily due to an increase in the deferred tax asset for bad debt expense from $1.1 million at December 31, 2009 to $1.7 million at September 30, 2010.

Liquidity and Capital Resources

Maintenance of adequate liquidity requires that sufficient resources be available at all times to meet cash flow requirements of the Company. Liquidity in a banking institution is required primarily to provide for deposit withdrawals and the credit needs of customers and to take advantage of investment opportunities as they arise. A bank may achieve desired liquidity from both assets and liabilities. Cash and deposits held in other financial institutions, Federal funds sold, other short term investments in interest-bearing time deposits in other financial institutions and securities available-for-sale, maturing loans and investments, payments of principal and interest on loans and investments, and potential loan sales are sources of asset liquidity. Deposit growth and access to credit lines established with correspondent banks, the Federal Home Loan Bank and market sources of funds are sources of liability liquidity. The Company reviews its liquidity position on a regular basis based upon its current position and expected trends of loans and deposits. The policy of the Board of Directors is to maintain sufficient capital at not less than the “well-capitalized” thresholds established by banking regulators. Management believes that the Company maintains adequate sources of liquidity to meet its liquidity needs.

The Company’s liquid assets, defined as cash and due from financial institutions and the market value of unpledged securities available-for-sale totaled $73.2 million at September 30, 2010 and constituted 16.30% of total assets at that date, compared to $37.4 million, or 9.22%, of total assets at December 31, 2009.

The Company also maintains lines of credit with the Federal Home Loan Bank. The total of these lines of credit were $83.8 million at September 30, 2010, of which $60.7 million in Federal Home Loan Bank advances were outstanding. The Company has additional securities and certain approved real estate loans available to pledge as collateral in order to increase our lines of credit with the Federal Home Loan Bank. At September 30, 2010, we had $65.6 million in unpledged securities available for sale. The Company actively utilizes its borrowing capacity with the Federal Home Loan Bank to manage liquidity and to provide a funding alternative to time deposits, if the Federal Home Loan Bank’s rates and terms are more favorable. The advances from the Federal Home Loan Bank can have maturities from overnight to multiple years. At September 30, 2010, $28.4 million of these advances were due within one year, and $32.3 million had maturities greater than a year.

The Company may also utilize the Federal Reserve discount window as a source of short-term funding from time to time. At September 30, 2010, the Company’s overnight borrowings with the Federal Reserve Bank discount window totaled $0. The Company’s borrowing capacity at the Federal Reserve Bank discount window is based on the collateral value of pledged securities. The collateral value of securities pledged to the Federal Reserve discount window at September 30, 2010 totaled $16.8 million. At September 30, 2010, we had $65.6 million in unpledged securities available for sale.

During the third quarter of 2010, the Company was extended an accommodation from First Tennessee Bank National Association to borrow federal funds up to the amount of $15.0 million. This federal funds accommodation is not and shall not be a confirmed line or loan, and First Tennessee Bank National Association may cancel such accommodation at any time, in whole or in part, without cause or notice, in its sole discretion. At September 30, 2010, the Company’s borrowings from First Tennessee Bank National Association totaled $0.

36

PART I – FINANCIAL INFORMATION

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued

Federal regulations establish guidelines for calculating “risk-adjusted” capital ratios and minimum ratio requirements. Under these regulations, banks are required to maintain a total risk-based capital ratio of 8.0% of risk-weighted assets and a Tier 1 risk-based capital ratio (primarily total shareholders’ equity less intangible assets) of at least 4.0% of risk-weighted assets. The Bank had total and Tier 1 risk-based capital ratios of 14.86% and 13.60% at September 30, 2010, and was “well-capitalized” under the regulatory guidelines.

In addition, regulators have adopted a minimum leverage ratio standard for Tier 1 capital to average assets. The minimum ratio for top-rated institutions may be as low as 3%. However, regulatory agencies have stated that most institutions should maintain ratios at least 1 to 2 percentage points above the 3% minimum. As of September 30, 2010, the Bank’s leverage ratio was 10.12%. Capital levels for the Bank remain above the established regulatory capital requirements.

Impact of Inflation

The primary impact of inflation on the Bank is its effect on interest rates. The Bank’s primary source of income is net interest income, which is affected by changes in interest rates. The Bank attempts to limit the impact of inflation on its net interest margin through management of interest rate-sensitive assets and liabilities and analyses of interest rate sensitivity. The effect of inflation on premises and equipment as well as on noninterest expenses has not been significant for the periods presented.

37

PART I – FINANCIAL INFORMATION

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Proper management of the interest rate sensitivity and maturities of our assets and liabilities is required to protect and enhance our net interest margin and asset values, subject to market conditions. Interest rate sensitivity spread management is an important tool for achieving this objective and for developing ways in which to improve profitability.

The Company constantly monitors earning asset and deposit levels, developments and trends in interest rates, liquidity, capital adequacy and marketplace opportunities. Management responds to all of these to protect and possibly enhance net interest income while managing risks within acceptable levels as set forth in the Company’s policies. In addition, alternative business plans and transactions are contemplated for their potential impact. This process is known as asset/liability management and is carried out by changing the maturities and relative proportions of the various types of loans, investments, deposits and borrowings in the ways described above.

A commonly used tool to manage and analyze the interest rate sensitivity of a bank is a computer simulation model. To quantify the extent of risks in both the Company’s current position and in transactions it might make in the future, the Company uses a model to simulate the impact of different interest rate scenarios on net interest income. The hypothetical impact of a 12 month nonparallel ramp (generally, a nonparallel change in interest rates of +/- 3.00%) and smaller incremental interest rate changes are modeled at least quarterly, representing the primary means the Company uses for interest rate risk management decisions.

At September 30, 2010, given a +3.00% or –3.00% shock in interest rates, our model results in the Bank’s net interest income for the next twelve months changing by $115,000, or 0.77%, and $(450,000), or (3.01)%, respectively.

The Company measures its economic value of equity at risk on a quarterly basis. Economic value of equity at risk measures the Company’s exposure to changes in its economic value of equity due to changes in a forecast interest rate environment. At September 30, 2010, given a +3.00% or -3.00% shock in interest rates, our model results in the Bank’s economic value of equity at risk for the next twelve months changing by (2.09)%, and (9.99)%, respectively.

When preparing its modeling, the Company makes significant assumptions about the lag in the rate of change in various asset and liability categories. The Company bases its assumptions on past experience and comparisons with other banks, and tests the validity of its assumptions by reviewing actual results with projected expectations.

ITEM 4. CONTROLS AND PROCEDURES

The Company has adopted disclosure controls and procedures designed to facilitate financial reporting. The Company’s disclosure controls currently consist of communications among the Company’s Chief Executive Officer, the Company’s Chief Financial Officer and each department head to identify any transactions, events, trends, risks or contingencies which may be material to its operations. These disclosure controls also contain certain elements of the Company’s internal controls adopted in connection with applicable accounting and regulatory guidelines. In addition, the Company’s Chief Executive Officer, Chief Financial Officer, Audit Committee and independent registered public accounting firm also meet on a quarterly basis to discuss disclosure matters. The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report and found them to be effective.

The Company maintains internal control over financial reporting. There have not been any significant changes in such internal control over financial reporting in the last quarter that has materially affected, or is likely to materially affect, our internal control over financial reporting.

38

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

As of September 30, 2010, there are no material pending legal proceedings to which the Company or its subsidiaries is a party other than ordinary routine litigation incidental to their respective businesses.

ITEM 1A. RISK FACTORS

In addition to the other information contained in this Quarterly Report on Form 10-Q, the following risk factor represents a material update and addition to the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009. Additional risks not presently known to us, or that we currently deem immaterial, may also adversely affect our business, financial condition or results of operations. Further, to the extent that any of the information contained in this Quarterly Report on Form 10-Q constitutes forward-looking statements, the risk factor set forth below also is a cautionary statement identifying important factors that could cause our actual results to differ materially from those expressed in any forward-looking statements made by or on behalf of us.

Financial reform legislation recently enacted by Congress will, among other things, eliminate the Office of Thrift Supervision, tighten capital standards, create a new Consumer Financial Protection Bureau and result in new laws and regulations that are expected to increase our costs of operations.

Congress recently enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). This new law will significantly change the current bank regulatory structure and affect the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies. The Dodd-Frank Act requires various federal agencies to adopt a broad range of new implementing rules and regulations, and to prepare numerous studies and reports for Congress. The federal agencies are given significant discretion in drafting the implementing rules and regulations, and consequently, many of the details and much of the impact of the Dodd-Frank Act may not be known for many months or years.

Certain provisions of the Dodd-Frank Act are expected to have a near-term impact on the Company. For example, the new law provides that the Office of Thrift Supervision, which currently is the primary federal regulator for the Company, will cease to exist one year from the date of the new law’s enactment. The Board of Governors of the Federal Reserve System will supervise and regulate all savings and loan holding companies that were formerly regulated by the Office of Thrift Supervision, including the Company and The La Porte Savings Bank, MHC.

Also effective one year after the date of enactment is a provision of the Dodd-Frank Act that eliminates the federal prohibitions on paying interest on demand deposits, thus allowing businesses to have interest bearing checking accounts. Depending on competitive responses, this significant change to existing law could have an adverse impact on the Company’s interest expense.

The Dodd-Frank Act also broadens the base for Federal Deposit Insurance Corporation insurance assessments. Assessments will now be based on the average consolidated total assets less tangible equity capital of a financial institution. The Dodd-Frank Act also permanently increases the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per depositor, retroactive to January 1, 2009, and non-interest bearing transaction accounts have unlimited deposit insurance through December 31, 2013.

The Dodd-Frank Act will require publicly traded companies to give stockholders a non-binding vote on executive compensation and so-called “golden parachute” payments, and by authorizing the Securities and Exchange Commission to promulgate rules that would allow stockholders to nominate their own candidates using a company’s proxy materials. The legislation also directs the Federal Reserve Board to promulgate rules prohibiting excessive compensation paid to bank holding company executives, regardless of whether the company is publicly traded or not.

39

PART II – OTHER INFORMATION

ITEM 1A. RISK FACTORS - continued

The Dodd-Frank Act creates a new Consumer Financial Protection Bureau with broad powers to supervise and enforce consumer protection laws. The Consumer Financial Protection Bureau has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The Consumer Financial Protection Bureau has examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets. Savings institutions such as Legacy Banks with $10 billion or less in assets will continue to be examined for compliance with the consumer laws by their primary bank regulators.

It is difficult to predict at this time what specific impact the Dodd-Frank Act and the yet to be written implementing rules and regulations will have on community banks. However, it is expected that at a minimum they will increase our operating and compliance costs and could increase our interest expense.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(a) Unregistered Sales of Equity Securities: Not applicable

(b) Use of Proceeds: Not applicable

(c) Repurchase of Our Equity Securities: Not applicable

The following table presents a summary of the Company’s share repurchases during the quarter ended September 30, 2010.

Period	Total number of shares purchased		Average price paid per share		Total number of shares purchased as part of publicly announced plans or programs(1)		Maximum number of shares that may yet be purchased under the plans or programs(1)
July 1-September 30		—		—		—		14,100
Total		—		—		—		14,100

(1) On November 13, 2009, the Company commenced a stock repurchase program pursuant to which the Company intends to repurchase, in the open market and in privately negotiated transactions, up to 3 percent (approximately 63,400 shares) of the Company’s then outstanding public shares. The timing of the repurchases will depend on certain factors, including but not limited to, market conditions and prices, the Company’s liquidity requirements and alternative uses of capital. Any repurchased shares will be held as treasury stock and will be available for general corporate purposes.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. REMOVED AND RESERVED

ITEM 5. OTHER INFORMATION

None

40

PART II – OTHER INFORMATION

ITEM 6. EXHIBITS

Exhibit Number	Description
31.01	Certification of Principal Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.02	Certification of Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.01	Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

41

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.

	LaPorte Bancorp, Inc.
November 12, 2010	/s/ Lee A. Brady
Date	Lee A. Brady,
	President and Chief Executive Officer
November 12, 2010	/s/ Michele M. Thompson
Date	Michele M. Thompson,
	Executive Vice President and
	Chief Financial Officer

42