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, 2015

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)

Maryland	001-35684	35-2456698
(State or Other Jurisdiction of	(Commission	(I.R.S. Employer
Incorporation or Organization)	File Number)	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  x    NO  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See 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, 2015: 5,569,477

TABLE OF CONTENTS

	Page Number
PART I – FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements – LaPorte Bancorp, Inc.
Consolidated Balance Sheets (Unaudited)	3
Consolidated Statements of Income (Unaudited)	4
Consolidated Statements of Comprehensive Income (Unaudited)	5
Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)	6
Consolidated Statements of Cash Flows (Unaudited)	7
Condensed Notes to Consolidated Financial Statements (Unaudited)	9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	36
Item 3. Quantitative and Qualitative Disclosures About Market Risk	48
Item 4. Controls and Procedures	50
PART II – OTHER INFORMATION
Item 1. Legal Proceedings	50
Item 1A. Risk Factors	50
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	51
Item 3. Defaults Upon Senior Securities	51
Item 4. Mine Safety Disclosures	51
Item 5. Other Information	51
Item 6. Exhibits	51
Signatures	52

PART I FINANCIAL INFORMATION

ITEM 1 CONSOLIDATED FINANCIAL STATEMENTS

LAPORTE BANCORP, INC.

CONSOLIDATED BALANCE SHEETS

	September 30, 2015			December 31, 2014
	(Dollars in thousands, except share data)
	(Unaudited)
ASSETS
Cash and due from financial institutions	$	11,458		$	8,698
Interest-earning time deposits in other financial institutions	13,356			6,615
Securities available-for-sale	124,857			155,223
Loans held for sale, at fair value	1,356			763
Loans, net of allowance for loan losses of $3,677 at September 30, 2015 and $3,595 at December 31, 2014	352,650			306,131
Mortgage servicing rights	335			351
Other real estate owned	558			649
Premises and equipment, net	8,696			8,668
Federal Home Loan Bank stock, at cost	4,029			4,275
Goodwill	8,431			8,431
Other intangible assets	164			204
Bank owned life insurance	14,927			14,608
Accrued interest receivable and other assets	3,875			4,000
Total assets	$	544,692		$	518,616
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Non-interest bearing	$	60,623		$	53,030
Interest bearing	279,504			287,738
Total deposits	340,127			340,768
Federal Home Loan Bank advances	88,992			84,919
Subordinated debentures	5,155			5,155
Short-term borrowings	19,908			—
Accrued interest payable and other liabilities	6,158			5,386
Total liabilities	460,340			436,228
Commitments and contingent liabilities
Shareholders’ equity:
Preferred stock, no par value; 50,000,000 shares authorized; none issued	—			—
Common stock, $0.01 par value; 100,000,000 shares authorized at September 30, 2015 and December 31, 2014; 5,568,285 and 5,672,968 shares issued and outstanding at September 30, 2015 and December 31, 2014	56			57
Additional paid-in capital	39,838			40,609
Retained earnings	46,932			44,258
Accumulated other comprehensive income, net of tax expense of $232 at September 30, 2015 and $269 at December 31, 2014	449			522
Unearned Employee Stock Ownership Plan (ESOP) shares	(2,923		)	(3,058		)
Total shareholders’ equity	84,352			82,388
Total liabilities and shareholders’ equity	$	544,692		$	518,616

See accompanying condensed notes to consolidated financial statements (unaudited).

3

LAPORTE BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015		2014
	(Dollars in thousands, except per share data)
Interest and dividend income:
Loans, including fees	$	3,841		$	3,721		$	11,378	$	10,492
Taxable securities	292			452			1,051		1,500
Tax exempt securities	384			411			1,181		1,239
Federal Home Loan Bank stock	45			39			130		132
Other interest income	42			21			81		63
Total interest and dividend income	4,604			4,644			13,821		13,426
Interest expense:
Deposits	312			433			932		1,371
Federal Home Loan Bank advances	343			307			922		862
Subordinated debentures	44			42			128		152
Short-term borrowings	1			1			3		3
Total interest expense	700			783			1,985		2,388
Net interest income	3,904			3,861			11,836		11,038
Provision for loan losses	100			—			255		—
Net interest income after provision for loan losses	3,804			3,861			11,581		11,038
Noninterest income:
Service charges on deposit accounts	86			102			241		313
ATM and debit card fees	114			111			332		325
Wire transfer fees	102			71			271		175
Earnings on bank owned life insurance, net	107			109			319		322
Net gains on mortgage banking activities	235			204			639		558
Loan servicing fees, net	49			37			110		93
Net gains on sales of securities available-for-sale	18			8			99		108
Gains (losses) on other assets	(21		)	(17		)	25		(101		)
Other income	9			62			79		152
Total noninterest income	699			687			2,115		1,945
Noninterest expense:
Salaries and employee benefits	1,928			1,814			5,755		5,297
Occupancy and equipment	411			407			1,314		1,312
Data processing	161			137			468		444
Advertising	74			53			226		170
Bank examination fees	73			41			288		201
FDIC insurance	69			76			201		236
Collection and other real estate owned	95			52			191		179
Amortization of intangible assets	13			18			40		54
Other expenses	350			324			1,127		1,115
Total noninterest expense	3,174			2,922			9,610		9,008
Income before income taxes	1,329			1,626			4,086		3,975
Income tax expense	258			285			739		570
Net income	$	1,071		$	1,341		$	3,347	$	3,405
Earnings per share (Note 3):
Basic	$	0.21		$	0.25		$	0.64	$	0.63
Diluted	0.20			0.25			0.62		0.62

See accompanying condensed notes to consolidated financial statements (unaudited).

4

LAPORTE BANCORP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
	(Dollars in thousands)
Net income	$	1,071		$	1,341		$	3,347		$	3,405
Other comprehensive income:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during the period	787			(124		)	563			3,016
Reclassification adjustment for net gains included in net income	(18		)	(8		)	(99		)	(108		)
Gross unrealized gains (losses)	769			(132		)	464			2,908
Related income tax (expense) benefit	(262		)	46			(158		)	(988		)
Net unrealized gains (losses)	507			(86		)	306			1,920
Unrealized gains (losses) on cash flow hedges:
Gross unrealized gains (losses)	(494		)	135			(575		)	469
Related income tax (expense) benefit	168			(47		)	196			(160		)
Net unrealized gains (losses)	(326		)	88			(379		)	309
Total other comprehensive income (loss)	181			2			(73		)	2,229
Comprehensive income	$	1,252		$	1,343		$	3,274		$	5,634

See accompanying condensed notes to consolidated financial statements (unaudited).

5

LAPORTE BANCORP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

	Common Stock			Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss), Net of Tax			Unearned ESOP Shares			Total
	(Dollars in thousands, except per share data)
Balance at January 1, 2014	$	59		$	44,495		$	40,771		$	(1,838	)	$	(3,238	)	$	80,249
Net income	—			—			3,405			—			—			3,405
Other comprehensive income	—			—			—			2,229			—			2,229
Cash dividends on common stock, $0.12 per share	—			—			(694		)	—			—			(694		)
Repurchase of common stock, 164,800 shares	(3		)	(3,427		)	—			—			—			(3,430		)
ESOP shares earned, 16,864 shares	—			50			—			—			135			185
Exercise of stock options, 4,472 shares	—			28			—			—			—			28
Stock based compensation expense	—			186			—			—			—			186
Balance at September 30, 2014	$	56		$	41,332		$	43,482		$	391		$	(3,103	)	$	82,158
Balance at January 1, 2015	$	57		$	40,609		$	44,258		$	522		$	(3,058	)	$	82,388
Net income	—			—			3,347			—			—			3,347
Other comprehensive loss	—			—			—			(73		)	—			(73		)
Cash dividends on common stock, $0.12 per share	—			—			(673		)	—			—			(673		)
Repurchase of common stock, 109,168 shares	(1		)	(1,418		)	—			—			—			(1,419		)
ESOP shares earned, 16,864 shares	—			93			—			—			135			228
Exercise of stock options, 4,472 shares	—			29			—			—			—			29
Stock based compensation expense	—			525			—			—			—			525
Balance at September 30, 2015	$	56		$	39,838		$	46,932		$	449		$	(2,923	)	$	84,352

See accompanying condensed notes to consolidated financial statements (unaudited).

6

LAPORTE BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine Months Ended September 30,
	2015			2014
	(Dollars in thousands)
Cash flows from operating activities:
Net income	$	3,347		$	3,405
Adjustments to reconcile net income to net cash from operating activities:
Depreciation	426			411
Provision for loan losses	255			—
Net gains on securities available-for-sale	(99		)	(108		)
Net amortization on securities available-for-sale	569			739
Net gains on sales of loans	(603		)	(535		)
Originations of loans held for sale	(20,150		)	(15,695		)
Proceeds from sales of loans held for sale	20,160			14,839
Recognition of mortgage servicing rights	(36		)	(23		)
Amortization of mortgage servicing rights	53			47
Net change in mortgage servicing rights valuation allowance	(1		)	(19		)
Net (gains) losses on sales of other real estate owned	(46		)	9
Write down of other real estate owned and assets held for sale	17			138
Earnings on bank owned life insurance, net	(319		)	(322		)
Amortization of intangible assets	40			54
ESOP compensation expense	228			185
Stock based compensation expense	525			186
Change in assets and liabilities:
Accrued interest receivable and other assets	146			312
Accrued interest payable and other liabilities	197			115
Net cash provided by operating activities	4,709			3,738
Cash flows from investing activities:
Net change in interest-earning time deposits at other financial institutions	(6,741		)	257
Proceeds from sales of securities available-for-sale	21,539			17,805
Proceeds from maturities, calls, and principal repayments of securities available-for-sale	20,200			15,022
Purchases of securities available-for-sale	(11,379		)	(24,109		)
Net change in loans	(46,901		)	(2,473		)
Proceeds from sales of other real estate owned	264			817
Proceeds from redemption of FHLB stock	246			100
Purchase of bank owned life insurance	—			(500		)
Premises and equipment expenditures, net	(454		)	(130		)
Net cash (utilized for) provided by investing activities	(23,226		)	6,789
Cash flows from financing activities:
Net change in deposits	(641		)	(3,647		)
Proceeds from FHLB long-term advances	—			15,000
Repayment of FHLB long-term advances	(25,000		)	—
Net change in FHLB short-term advances	29,073			(26,777		)
Net change in short-term borrowings	19,908			(2,415		)
Stock options exercised	29			28
Dividends paid on common stock	(673		)	(694		)
Repurchase of common stock	(1,419		)	(3,430		)
Net cash provided by (utilized for) financing activities	21,277			(21,935		)
Net increase (decrease) in cash and cash equivalents	2,760			(11,408		)
Cash and cash equivalents at beginning of period	8,698			18,219
Cash and cash equivalents at end of period	$	11,458		$	6,811

(continued)

7

LAPORTE BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

(Unaudited)

	Nine Months Ended September 30,
	2015		2014
	(Dollars in thousands)
Supplemental cash flow information:
Cash paid during the period for:
Interest	$	1,969	$	2,389
Income taxes	807		350
Supplemental noncash disclosures:
Transfers from loans receivable to other real estate owned	$	127	$	64

See accompanying condensed notes to consolidated financial statements (unaudited).

8

LAPORTE BANCORP, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 – BASIS OF PRESENTATION AND CONSOLIDATION

The unaudited consolidated financial statements include the accounts of LaPorte Bancorp, Inc., a Maryland corporation (the “Bancorp”), its wholly owned subsidiaries, LSB Risk Management, Inc., The LaPorte Savings Bank (the “Bank”), the Bank’s wholly-owned subsidiary, LSB Investments, Inc. (“LSB Inc.”), and LSB Inc.’s wholly-owned subsidiary, LSB Real Estate, Inc. (“LSB REIT”), together referred to as the “Company.” The Bancorp was formed in June 2012. LSB Risk Management, LLC was formed on December 27, 2013 as a captive insurance company and is incorporated in Nevada. LSB Inc. was formed on October 1, 2011 to manage a portion of the Bank’s investment portfolio and is incorporated in Nevada. LSB REIT, a real estate investment trust, was formed on January 1, 2013 to invest in assets secured by residential or commercial real estate properties originated by the Bank and is incorporated in Maryland. Intercompany transactions and balances are eliminated in consolidation.

The unaudited consolidated financial statements have been prepared by management in accordance with U.S. generally accepted accounting principles for interim financial statements and Article 8 of Regulation S-X of the Securities and Exchange Commission (“SEC”). In the opinion of management, the unaudited consolidated financial statements contain all material adjustments (consisting of normal recurring accruals) and disclosures which are necessary 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 SEC. Accordingly, the interim consolidated financial statements included herein should be read in conjunction with the audited consolidated financial statements included in the Annual Report on Form 10-K of the Company for the fiscal year ended December 31, 2014. The results for the three and nine month periods ended September 30, 2015 may not indicate the results to be expected for any other interim period or for the full year ending December 31, 2015.

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

NOTE 2 – RECENT ACCOUNTING PRONOUNCEMENTS

In May 2014, the FASB issued ASU No. 2014-09 “Revenue from Contracts with Customers (Topic 606).” This ASU clarifies that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. This ASU is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The amendments can be applied retrospectively to each prior reporting period or retrospectively with the cumulative effect of initially applying this Update recognized at the date of initial application. Adopting this standard is not expected to have a significant impact on the Company’s financial condition or results of operation.

In June 2014, the FASB issued ASU No. 2014-11 “Transfers and Servicing (Topic 860) - Repurchase to Maturity Transactions, Repurchase Financings, and Disclosures.” This ASU aligns the accounting for repurchase to maturity transactions and repurchase agreements executed as a repurchase financing with the accounting for other typical repurchase agreements. Going forward, these transactions would all be accounted for as secured borrowings. ASU 2014-11 became effective for interim and annual periods beginning after December 15, 2014 and did not have a significant impact on the Company’s financial condition or results of operation.

In June 2014, the FASB issued ASU No. 2014-12 “Compensation - Stock Compensation (Topic 718) - Accounting for Share Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period.” This ASU requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. ASU 2014-12 is effective for interim and annual periods beginning after December 15, 2015. The amendments can be applied prospectively to all awards granted or modified after the effective date or retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented and to all new or modified awards thereafter. Adopting this standard is not expected to have a significant impact on the Company’s financial condition or results of operation.

9

LAPORTE BANCORP, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

In August 2014, the FASB issued ASU No. 2014-14 “Receivables - Troubled Debt Restructurings by Creditors (Subtopic 310-40) - Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure.” This ASU requires that a mortgage loan be derecognized and a separate other receivable be recognized upon foreclosure if certain conditions are met. Upon foreclosure, the separate other receivable should be measured based on the amount of the loan balance (principal and interest) expected to be recovered from the guarantor. ASU 2014-14 became effective for interim and annual periods beginning after December 15, 2014 and did not have a significant impact on the Company’s financial condition or results of operations.

In April 2015, the FASB issued ASU No. 2015-05 “Intangibles - Goodwill and Other - Internal Use Software (Subtopic 350-40) - Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement.” This ASU provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The new guidance does not change the accounting for a customer’s accounting for service contracts. ASU 2015-05 is effective for interim and annual reporting periods beginning after December 31, 2015. The Company is evaluating the impact relating to adopting this statement and does not expect it to have a significant impact on the Company’s financial condition or results of operations.

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. Employee Stock Ownership Plan (“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.

The factors used in the earnings per common share computation follow:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
	(Dollars in thousands, except per share data)
Basic:
Net income	$	1,071		$	1,341		$	3,347		$	3,405
Weighted average common shares outstanding	5,568,274			5,691,156			5,603,929			5,788,327
Less: Average unallocated ESOP shares	(368,207		)	(390,692		)	(373,828		)	(396,313		)
Average shares	5,200,067			5,300,464			5,230,101			5,392,014
Basic earnings per common share	$	0.21		$	0.25		$	0.64		$	0.63
Diluted:
Net income	$	1,071		$	1,341		$	3,347		$	3,405
Weighted average common shares outstanding for basic earnings per common share	5,200,067			5,300,464			5,230,101			5,392,014
Add: Dilutive effects of assumed exercises of stock options	134,258			86,333			130,451			83,891
Average shares and dilutive potential common shares	5,334,325			5,386,797			5,360,552			5,475,905
Diluted earnings per common share	$	0.20		$	0.25		$	0.62		$	0.62

10

LAPORTE BANCORP, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 4 – SECURITIES AVAILABLE-FOR-SALE

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

	September 30, 2015
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(Dollars in thousands)
U.S. federal agency obligations	$	8,108	$	21	$	(3	)	$	8,126
State and municipal	51,760		2,410		(23		)	54,147
Mortgage-backed securities – residential	17,593		193		(18		)	17,768
Government agency sponsored collateralized mortgage obligations	43,985		282		(394		)	43,873
Corporate debt securities	1,000		—		(57		)	943
Total	$	122,446	$	2,906	$	(495	)	$	124,857

	December 31, 2014
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(Dollars in thousands)
U.S. federal agency obligations	$	7,447	$	14	$	(66	)	$	7,395
State and municipal	54,298		2,638		(89		)	56,847
Mortgage-backed securities – residential	27,391		185		(88		)	27,488
Government agency sponsored collateralized mortgage obligations	63,140		290		(900		)	62,530
Corporate debt securities	1,000		—		(37		)	963
Total	$	153,276	$	3,127	$	(1,180	)	$	155,223

At September 30, 2015 and December 31, 2014, all of our mortgage-backed securities were issued by U.S. government-sponsored enterprises and all of our collateralized mortgage obligations were issued by either U.S. government-sponsored enterprises or the U.S. Small Business Administration.

Securities with unrealized losses at September 30, 2015 and December 31, 2014, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, were as follows:

	September 30, 2015
	Continuing Unrealized Loss For Less Than 12 Months					Continuing Unrealized Loss For 12 Months or More					Total
	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
	(Dollars in thousands)
U.S. federal agency obligations	$	2,999	$	(3	)	$	—	$	—		$	2,999	$	(3	)
State and municipal	3,349		(10		)	1,229		(13		)	4,578		(23		)
Mortgage-backed securities – residential	—		—			840		(18		)	840		(18		)
Government agency sponsored collateralized mortgage obligations	5,338		(37		)	19,009		(357		)	24,347		(394		)
Corporate debt securities	—		—			943		(57		)	943		(57		)
Total temporarily impaired	$	11,686	$	(50	)	$	22,021	$	(445	)	$	33,707	$	(495	)

11

LAPORTE BANCORP, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

	December 31, 2014
	Continuing Unrealized Loss For Less Than 12 Months					Continuing Unrealized Loss For 12 Months or More					Total
	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
	(Dollars in thousands)
U.S. federal agency obligations	$	2,792	$	(8	)	$	2,942	$	(58	)	$	5,734	$	(66	)
State and municipal	3,571		(11		)	5,506		(78		)	9,077		(89		)
Mortgage-backed securities – residential	13,261		(40		)	3,073		(48		)	16,334		(88		)
Government agency sponsored collateralized mortgage obligations	5,845		(34		)	33,504		(866		)	39,349		(900		)
Corporate debt securities	963		(37		)	—		—			963		(37		)
Total temporarily impaired	$	26,432	$	(130	)	$	45,025	$	(1,050	)	$	71,457	$	(1,180	)

At September 30, 2015, the Company held 46 investments in debt securities totaling $33.7 million, or 27.0% of its total debt securities, in an unrealized loss position, of which 19 were in an unrealized loss position for less than twelve months and 27 were in an unrealized loss position for more than twelve months. At December 31, 2014, the Company held 86 investments in debt securities totaling $71.5 million, or 46.0% of its total debt securities, in an unrealized loss position, of which 32 were in an unrealized loss position for less than twelve months and 54 were in an unrealized loss position for more than twelve months.

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. The unrealized losses on the Company’s investments in U.S. federal agency obligations, mortgage-backed securities, agency collateralized mortgage obligations, and corporate debt securities were a result of changes in interest rates and not a result of a decline in credit quality. 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. The unrealized losses on the Company’s investment in state and municipal securities were also caused by changes in interest rates. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments. The Company does not intend to sell the securities and is not more likely than not to be required to sell them before their anticipated recovery.

Proceeds from sales of securities available-for-sale were as follows:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
	(Dollars in thousands)
Proceeds	$	3,612		$	6,694		$	21,539		$	17,805
Gross gains	22			29			166			167
Gross losses	(4		)	(21		)	(67		)	(59		)

12

LAPORTE BANCORP, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The amortized cost and fair value of debt securities at September 30, 2015 by contractual maturity were as follows. Securities not due at a single maturity date, primarily mortgage-backed securities and collateralized mortgage obligations (“CMO”), are shown separately.

	September 30, 2015
	Amortized Cost		Fair Value
	(Dollars in thousands)
Due in one year or less	$	863	$	876
Due from one to five years	18,534		18,851
Due from five to ten years	29,137		30,268
Due after ten years	12,334		13,221
Subtotal	60,868		63,216
Mortgage-backed securities and government agency sponsored collateralized mortgage obligations	61,578		61,641
Total	$	122,446	$	124,857

Securities pledged at September 30, 2015 and December 31, 2014 had a carrying amount of approximately $36.8 million and $40.2 million, respectively, and were pledged to secure Federal Home Loan Bank (“FHLB”) advances and cash flow hedges.

At September 30, 2015 and December 31, 2014, the Company did not hold any securities of any one issuer, other than the U.S. government and its agencies, in an amount greater than 10% of shareholders’ equity.

NOTE 5 – LOANS

Loans were as follows for the dates indicated:

	September 30, 2015			December 31, 2014
	(Dollars in thousands)
Commercial	$	151,708		$	118,312
Residential mortgage	41,749			39,317
Mortgage warehouse	141,446			132,636
Residential construction	3,053			1,664
Home equity	14,578			13,195
Consumer and other	3,491			4,325
Subtotal	356,025			309,449
Net deferred loan costs	302			277
Allowance for loan losses	(3,677		)	(3,595		)
Loans, net	$	352,650		$	306,131

13

LAPORTE BANCORP, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

At September 30, 2015 and 2014, the Bank’s mortgage warehouse division had repurchase agreements with 34 and 27 mortgage companies, respectively. The following table identifies the activity and related interest and fee income attributable to the mortgage warehouse division for the periods presented:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2015		2014		2015		2014
	(Dollars in thousands)
Mortgage Warehouse:
Originations	$	948,518	$	612,514	$	2,566,083	$	1,543,207
Sold Loans	933,125		622,590		2,491,816		1,536,438
Interest income	1,119		1,307		3,734		3,342
Warehouse fees	299		201		798		488
Wire transfer fees	96		64		253		156
Loan servicing fees	32		—		45		—

NOTE 6 – ALLOWANCE FOR LOAN LOSSES

The following tables present the activity in the allowance for loan losses by portfolio segment for the three months ended September 30, 2015 and 2014:

	Three Months Ended September 30, 2015
	Commercial			Residential Mortgage			Mortgage Warehouse		Residential Construction		Home Equity			Consumer and Other			Unallocated		Total
	(Dollars in thousands)
Allowance for loan losses:
Beginning balance	$	2,346		$	653		$	480	$	4	$	97		$	150		$	—	$	3,730
Charge-offs	—			(30		)	—		—		(18		)	(109		)	—		(157		)
Recoveries	—			—			—		—		—			4			—		4
Provision	10			1			56		1		24			8			—		100
Ending balance	$	2,356		$	624		$	536	$	5	$	103		$	53		$	—	$	3,677
	Three Months Ended September 30, 2014
	Commercial			Residential Mortgage			Mortgage Warehouse		Residential Construction		Home Equity			Consumer and Other			Unallocated		Total
	(Dollars in thousands)
Allowance for loan losses:
Beginning balance	$	2,502		$	507		$	581	$	2	$	107		$	62		$	—	$	3,761
Charge-offs	—			—			—		—		(12		)	(7		)	—		(19		)
Recoveries	—			—			—		—		—			4			—		4
Provision	(96		)	105			13		—		(17		)	(5		)	—		—
Ending balance	$	2,406		$	612		$	594	$	2	$	78		$	54		$	—	$	3,746

14

LAPORTE BANCORP, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table presents the activity in the allowance for loan losses by portfolio segment for the nine months ended September 30, 2015 and 2014:

	Nine Months Ended September 30, 2015
	Commercial			Mortgage			Mortgage Warehouse			Residential Construction		Home Equity			Consumer and Other			Unallocated			Total
	(Dollars in thousands)
Allowance for loan losses:
Beginning balance	$	2,116		$	676		$	654		$	4	$	90		$	55		$	—		$	3,595
Charge-offs	(20		)	(35		)	—			—		(18		)	(118		)	—			(191		)
Recoveries	—			—			—			—		1			17			—			18
Provision	260			(17		)	(118		)	1		30			99			—			255
Ending balance	$	2,356		$	624		$	536		$	5	$	103		$	53		$	—		$	3,677
	Nine Months Ended September 30, 2014
	Commercial			Mortgage			Mortgage Warehouse			Residential Construction		Home Equity			Consumer and Other			Unallocated			Total
	(Dollars in thousands)
Allowance for loan losses:
Beginning balance	$	2,725		$	458		$	508		$	—	$	111		$	83		$	20		$	3,905
Charge-offs	—			(144		)	—			—		(12		)	(21		)	—			(177		)
Recoveries	—			—			—			—		5			13			—			18
Provision	(319		)	298			86			2		(26		)	(21		)	(20		)	—
Ending balance	$	2,406		$	612		$	594		$	2	$	78		$	54		$	—		$	3,746

The following tables present the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of the dates indicated:

	September 30, 2015
	Commercial		Residential Mortgage		Mortgage Warehouse		Residential Construction		Home Equity		Consumer and Other		Unallocated		Total
	(Dollars in thousands)
Allowance for loan losses:
Ending balance attributable to loans:
Individually evaluated for impairment	$	950	$	71	$	—	$	—	$	18	$	—	$	—	$	1,039
Collectively evaluated for impairment	1,406		553		536		5		85		53		—		2,638
Acquired with deteriorated credit quality	—		—		—		—		—		—		—		—
Total ending allowance	$	2,356	$	624	$	536	$	5	$	103	$	53	$	—	$	3,677
Loans:
Individually evaluated for impairment	$	3,877	$	1,689	$	—	$	—	$	100	$	—	$	—	$	5,666
Collectively evaluated for impairment	147,831		39,953		141,446		3,053		14,478		3,491		—		350,252
Acquired with deteriorated credit quality	—		107		—		—		—		—		—		107
Total ending loan balance	$	151,708	$	41,749	$	141,446	$	3,053	$	14,578	$	3,491	$	—	$	356,025

15

LAPORTE BANCORP, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

	December 31, 2014
	Commercial		Residential Mortgage		Mortgage Warehouse		Residential Construction		Home Equity		Consumer and Other		Unallocated		Total
	(Dollars in thousands)
Allowance for loan losses:
Ending balance attributable to loans:
Individually evaluated for impairment	$	764	$	122	$	—	$	—	$	—	$	—	$	—	$	886
Collectively evaluated for impairment	1,352		554		654		4		90		55		—		2,709
Acquired with deteriorated credit quality	—		—		—		—		—		—		—		—
Total ending allowance	$	2,116	$	676	$	654	$	4	$	90	$	55	$	—	$	3,595
Loans:
Individually evaluated for impairment	$	9,005	$	2,206	$	—	$	—	$	7	$	—	$	—	$	11,218
Collectively evaluated for impairment	108,688		36,999		132,636		1,664		13,188		4,325		—		297,500
Acquired with deteriorated credit quality	619		112		—		—		—		—		—		731
Total ending loan balance	$	118,312	$	39,317	$	132,636	$	1,664	$	13,195	$	4,325	$	—	$	309,449

The following table presents information related to impaired loans by class of loans as of the dates indicated:

	September 30, 2015						December 31, 2014
	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated		Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
	(Dollars in thousands)
With no related allowance recorded:
Commercial:
Real estate	$	1,659	$	1,638	$	—	$	2,962	$	2,960	$	—
Five or more family	—		—		—		3,699		3,699		—
Land	—		—		—		138		123		—
Residential mortgage	1,465		1,342		—		1,151		1,103		—
Home equity	81		81		—		8		7		—
Subtotal	3,205		3,061		—		7,958		7,892		—
With an allowance recorded:
Commercial:
Real estate	1,016		918		317		830		769		281
Land	1,913		1,321		633		1,937		1,454		483
Residential mortgage	348		347		71		1,169		1,103		122
Home equity	19		19		18		—		—		—
Subtotal	3,296		2,605		1,039		3,936		3,326		886
Total	$	6,501	$	5,666	$	1,039	$	11,894	$	11,218	$	886

16

LAPORTE BANCORP, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following tables present loans individually evaluated for impairment by class of loans for the periods indicated:

	Three Months Ended September 30,
	2015				2014
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(Dollars in thousands)
With no related allowance recorded:
Commercial:
Real estate	$	1,690	$	21	$	3,015	$	47
Five or more family	—		—		3,722		62
Land	—		—		196		—
Residential mortgage	1,383		7		1,431		1
Residential construction - land	—		—		8		—
Home equity	84		1		2		—
Subtotal	3,157		29		8,374		110
With an allowance recorded:
Commercial:
Real estate	940		—		827		—
Land	1,357		—		1,549		—
Residential mortgage	355		—		722		5
Home equity	20		—		23		—
Subtotal	2,672		—		3,121		5
Total	$	5,829	$	29	$	11,495	$	115

17

LAPORTE BANCORP, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

	Nine Months Ended September 30,
	2015				2014
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(Dollars in thousands)
With no related allowance recorded:
Commercial:
Commercial and other	$	1	$	—	$	—	$	—
Real estate	1,761		81		2,873		127
Five or more family	1,217		60		3,657		172
Land	—		—		199		—
Mortgage	1,045		10		1,448		9
Residential construction - land	—		—		17		—
Home equity	52		2		8		—
Subtotal	4,076		153		8,202		308
With an allowance recorded:
Commercial:
Real estate	1,123		9		818		—
Land	1,390		—		2,221		—
Mortgage	678		7		388		5
Home equity	18		—		26		—
Consumer and other	68		—		—		—
Subtotal	3,277		16		3,453		5
Total	$	7,353	$	169	$	11,655	$	313

The following table presents the recorded investment in nonaccrual loans and loans past due over 90 days still on accrual by class of loans as of the dates indicated.

	Nonaccrual				Loans Past Due Over 90 Days Still Accruing
	September 30, 2015		December 31, 2014		September 30, 2015		December 31, 2014
	(Dollars in thousands)
Commercial:
Commercial and industrial	$	—	$	27	$	—	$	—
Real estate	1,252		879		—		—
Land	1,321		1,577		—		—
Residential mortgage	993		1,933		—		—
Home equity	62		7		2		—
Total	$	3,628	$	4,423	$	2	$	—

18

LAPORTE BANCORP, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following tables present the aging of the recorded investment in past due loans by class of loans as of the dates indicated: 

	September 30, 2015
	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Current		Total
	(Dollars in thousands)
Commercial:
Commercial and industrial	$	—	$	—	$	—	$	—	$	17,227	$	17,227
Real estate	25		512		1,227		1,764		86,928		88,692
Five or more family	—		—		—		—		23,742		23,742
Construction	—		—		—		—		12,005		12,005
Land	—		—		996		996		9,046		10,042
Residential mortgage	8		60		883		951		40,798		41,749
Mortgage warehouse	—		—		—		—		141,446		141,446
Residential construction:
Construction	—		—		—		—		2,145		2,145
Land	—		—		—		—		908		908
Home equity	—		139		47		186		14,392		14,578
Consumer and other	1		—		—		1		3,490		3,491
Total	$	34	$	711	$	3,153	$	3,898	$	352,127	$	356,025

	December 31, 2014
	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Current		Total
	(Dollars in thousands)
Commercial:
Commercial and industrial	$	—	$	—	$	27	$	27	$	17,388	$	17,415
Real estate	72		—		822		894		74,369		75,263
Five or more family	—		—		—		—		16,486		16,486
Construction	—		—		—		—		2,322		2,322
Land	—		—		1,216		1,216		5,610		6,826
Residential mortgage	454		203		920		1,577		37,740		39,317
Mortgage warehouse	—		—		—		—		132,636		132,636
Residential construction:
Construction	—		—		—		—		1,472		1,472
Land	—		—		—		—		192		192
Home equity	—		73		7		80		13,115		13,195
Consumer and other	19		—		—		19		4,306		4,325
Total	$	545	$	276	$	2,992	$	3,813	$	305,636	$	309,449

19

LAPORTE BANCORP, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Troubled Debt Restructurings

A loan modification is considered a troubled debt restructuring (“TDR”) when a borrower is experiencing financial difficulty and the Company grants a concession it would not otherwise consider but for the borrower’s financial difficulties. The following table presents the Company’s TDRs as of the dates indicated:

	September 30, 2015		December 31, 2014
	(Dollars in thousands)
TDRs:
Performing in accordance with modified repayment terms	$	1,753	$	5,873
Nonperforming	66		762
	$	1,819	$	6,635
Specific reserve	$	—	$	23

TDRs previously disclosed resulted in no charge-offs during the three and nine months ended September 30, 2015 and 2014. The Company had not committed to lend additional amounts to customers with outstanding TDR loans at September 30, 2015 and December 31, 2014.

The following tables present loans by class modified as TDRs that occurred during the periods indicated:

	Three Months Ended September 30,
	2015					2014
	Number of Loans	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Number of Loans	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
	(Dollars in thousands)
Commercial:
Real Estate	—	$	—	$	—	1	$	226	$	226
Mortgage	—	—		—		4	514		673
Total	—	$	—	$	—	5	$	740	$	899

	Nine Months Ended September 30,
	2015					2014
	Number of Loans	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Number of Loans	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
	(Dollars in thousands)
Commercial:
Real Estate	4	$	1,213	$	1,221	3	$	3,025	$	3,025
Five or more family	—	—		—		1	3,507		3,750
Mortgage	—	—		—		4	514		673
Home equity	1	73		78		—	—		—
Total	5	$	1,286	$	1,299	8	$	7,046	$	7,448

During the nine months ended September 30, 2015, the concessions granted by the Company consisted of a reduction in monthly payments and loan refinances at below market interest rates. During the three and nine months ended September 30, 2014, the concessions granted by the Company consisted of loan refinances at below market interest rates.

20

LAPORTE BANCORP, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

There were no TDRs that defaulted within twelve months following the modification during the three and nine months ended September 30, 2015 and 2014.

A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms.

In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed by the Company’s Officer Loan Committee.

Credit Quality Indicators

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. The analysis includes loans with risk ratings of Special Mention, Substandard, and Doubtful. This analysis is performed on a quarterly basis. The Company uses the following definitions for risk ratings:

Special Mention. Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass-rated loans. The Bank monitors credit quality on loans not rated through the loan’s individual payment performance.

The following tables present the risk category of loans by class based on the most recent analysis performed as of the dates indicated:

	September 30, 2015
	Pass		Special Mention		Substandard		Doubtful
	(Dollars in thousands)
Commercial:
Commercial and industrial	$	17,227	$	—	$	—	$	—
Real estate	83,549		2,416		2,727		—
Five or more family	23,742		—		—		—
Construction	12,005		—		—		—
Land	8,638		83		1,321		—
Residential mortgage	40,356		22		1,371		—
Mortgage warehouse	141,446		—		—		—
Residential construction:
Construction	2,145		—		—		—
Land	908		—		—		—
Home equity	14,478		—		100		—
Consumer and other	3,491		—		—		—
Total	$	347,985	$	2,521	$	5,519	$	—

21

LAPORTE BANCORP, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

	December 31, 2014
	Pass		Special Mention		Substandard		Doubtful
	(Dollars in thousands)
Commercial:
Commercial and industrial	$	17,397	$	—	$	18	$	—
Real estate	67,597		1,663		5,983		20
Five or more family	12,787		—		3,699		—
Construction	2,322		—		—		—
Land	5,147		102		1,577		—
Residential mortgage	36,827		120		2,370		—
Mortgage warehouse	132,636		—		—		—
Residential construction:
Construction	1,472		—		—		—
Land	192		—		—		—
Home equity	13,113		73		9		—
Consumer and other	4,325		—		—		—
Total	$	293,815	$	1,958	$	13,656	$	20

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 then probable that all contractually required payments would not be collected. The outstanding balance and carrying amount of those loans was as follows:

	September 30, 2015		December 31, 2014
	(Dollars in thousands)
Commercial:
Commercial and industrial	$	—	$	27
Real estate	—		621
Residential mortgage	107		112
Outstanding balance	$	107	$	760
Carrying amount, net of allowance of $0	$	107	$	731

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

	Three Months Ended September 30,					Nine Months Ended September 30,
	2015		2014			2015			2014
	(Dollars in thousands)
Beginning balance	$	—	$	45		$	18		$	73
Reclassification from non-accretable yield	—		—			—			—
Accretion of income	—		(13		)	(18		)	(41		)
Ending balance	$	—	$	32		$	—		$	32

For the purchased loans disclosed above, the Company did not increase the allowance for loan losses during the three and nine months ended September 30, 2015 or 2014. No allowance for loan losses was reversed during the three and nine months ended September 30, 2015 or 2014.

22

LAPORTE BANCORP, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 7 – 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: The fair values for investment securities 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 values of derivatives are based on valuation models using observable market data as of the measurement date (Level 2).

Impaired Loans: At the time a loan is considered impaired, it is valued at the lower of cost or fair value, less estimated costs to sell. Impaired loans carried at fair value generally receive specific allocations of the allowance for loan losses. For collateral dependent loans, fair value is commonly based on recent real estate appraisals performed by qualified independent third-party appraisers. These appraisals may utilize a single valuation approach or a combination of approaches including cost, comparable sales, and the income approach. The cost approach is based on the cost to replace the existing property. The comparable sales approach evaluates the sales prices of comparable properties within the same market area. The income approach considers net operating income generated by the property and the rate of return required by an investor. Adjustments are routinely made in the appraisal process by the independent third-party 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. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

Other Real Estate Owned: Assets acquired through or instead of loan foreclosures are initially recorded at fair value less cost to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at the lower of cost or fair value, less estimated costs to sell. Fair value is commonly based on recent real estate appraisals performed by qualified independent third-party appraisers. These appraisals may utilize a single valuation approach or a combination of approaches including cost, comparable sales, and the income approach. The cost approach is based on the cost to replace the existing property. The comparable sales approach evaluates the sales prices of comparable properties within the same market area. The income approach considers net operating income generated by the property and the rate of return required by an investor. Adjustments are routinely made in the appraisal process by the independent third-party 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.

23

LAPORTE BANCORP, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The President and Chief Financial Officer (“President/CFO”), Senior Vice President – Chief Accounting Officer (“SVP – CAO”), and Executive Vice President – Credit (“EVP – Credit”) are responsible for determining the valuation processes and procedures for the fair value measurement of impaired loans and other real estate owned properties. The President/CFO, SVP – CAO, and EVP – Credit review impaired loans and other real estate owned properties on a quarterly basis to determine the accuracy of third-party appraisals, auction values, values derived from trade publications, any additional data received from the borrower, and the appropriateness of unobservable inputs, generally discounts due to collection issues and current market conditions which are utilized in determining the fair value. The EVP – Credit determines discounts based on the valuation source and asset type for impaired loans. These discounts are reviewed periodically, annually at a minimum, for appropriateness. Current trends in market values and gains and losses on sales of similar assets are also considered when determining discounts of asset categories.

The tables below present the valuation methodology and unobservable inputs for impaired loans and other real estate owned at September 30, 2015 and December 31, 2014.

	September 30, 2015
	Valuation Methodology	Unobservable Inputs	Range of Inputs	Average of Inputs
Impaired loans:
Commercial:
Real estate	Appraisals	Discounts for changes in market conditions	10-20%	18%
Land	Appraisals	Discounts for changes in market conditions	0-20%	15%
Mortgage	Appraisals	Discounts for changes in market conditions	10-15%	15%
Home equity	Appraisals	Discounts for changes in market conditions	100%	100%

	December 31, 2014
	Valuation Methodology	Unobservable Inputs	Range of Inputs	Average of Inputs
Impaired loans:
Commercial:
Real estate	Appraisals	Discounts for changes in market conditions	20-90%	34%
Land	Appraisals	Discounts for changes in market conditions	10-20%	18%
Residential mortgage	Appraisals	Discounts for changes in market conditions	0-20%	7%
Other real estate owned, net:
Commercial:
Real estate	Appraisals	Discounts for changes in market conditions	10%	10%
Land	Appraisals	Discounts for changes in market conditions	0-37%	18%
Residential construction:
Land	Appraisals	Discounts for changes in market conditions	20%	20%

24

LAPORTE BANCORP, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Mortgage Servicing Rights: On a quarterly basis, loan servicing rights are evaluated for impairment based on the fair value of the rights as compared to the carrying amount. If the carrying amount of an individual tranche exceeds fair value, impairment is recorded on that tranche so that the servicing asset is carried at fair value. Fair value is determined at a tranche level, based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model utilizes assumptions that market participants would use in estimating future net servicing income and that can be validated against available market data (Level 2).

Fair value at September 30, 2015 was determined using a discount rate of 10.0%; prepayment speeds ranging from 7.6% to 22.7%, depending on the stratification of the specific right; and a weighted average default rate of approximately 0.5%. Fair value at December 31, 2014 was determined using a discount rate of 10.0%; prepayment speeds ranging from 8.8% to 23.9%, 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 in the following tables:

				September 30, 2015
	Carrying Value			Quoted Prices in Active Markets  for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
	(Dollars in thousands)
Financial Assets:
Investment securities available-for-sale:
U.S. federal agency obligations	$	8,126		$	—	$	8,126		$	—
State and municipal	54,147			—		54,147			—
Mortgage-backed securities – residential	17,768			—		17,768			—
Government agency sponsored collateralized mortgage obligations	43,873			—		43,873			—
Corporate debt securities	943			—		943			—
Total investment securities available-for-sale	$	124,857		$	—	$	124,857		$	—
Loans held for sale	$	1,356		$	—	$	1,356		$	—
Derivatives – residential mortgage loan commitments	$	51		$	—	$	51		$	—
Financial Liabilities:
Derivatives – interest rate swaps	$	(1,731	)	$	—	$	(1,731	)	$	—

25

LAPORTE BANCORP, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

				December 31, 2014
	Carrying Value			Quoted Prices in Active Markets  for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
	(Dollars in thousands)
Financial Assets:
Investment securities available-for-sale:
U.S. federal agency obligations	$	7,395		$	—	$	7,395		$	—
State and municipal	56,847			—		56,847			—
Mortgage-backed securities – residential	27,488			—		27,488			—
Government agency sponsored collateralized mortgage obligations	62,530			—		62,530			—
Corporate debt securities	963			—		963			—
Total investment securities available-for-sale	$	155,223		$	—	$	155,223		$	—
Loans held for sale	$	763		$	—	$	763		$	—
Derivatives – residential mortgage loan commitments	$	53		$	—	$	53		$	—
Financial Liabilities:
Derivatives – interest rate swaps	$	(1,156	)	$	—	$	(1,156	)	$	—

There were no transfers between Level 1, Level 2, and Level 3 during the periods indicated above.

The difference between the aggregate fair value and the aggregate remaining contractual principal balance outstanding for loans held for sale was:

	September 30, 2015						December 31, 2014
	Aggregate Fair Value		Difference		Contractual Principal		Aggregate Fair Value		Difference		Contractual Principal
	(Dollars in thousands)
Loans held for sale	$	1,356	$	39	$	1,317	$	763	$	24	$	739

The following table presents the amount of gains and losses from fair value changes included in income before income taxes for financial assets carried at fair value for the three and nine months ended September 30, 2015 and 2014:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
	(Dollars in thousands)
Loans held for sale:
Other gains (losses)	$	(16	)	$	(38	)	$	(27	)	$	40
Interest income	10			9			27			22
Interest expense	—			—			—			—
Total changes in fair values included in current period earnings	$	(6	)	$	(29	)	$	—		$	62

For items for which the fair value option has been elected, interest income is recorded within the consolidated statements of income and comprehensive income (loss) based on the contractual amount of interest income earned on financial assets (none were delinquent or in nonaccrual status).

26

LAPORTE BANCORP, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

			September 30, 2015
	Carrying Value		Quoted Prices in Active  Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(Dollars in thousands)
Impaired loans:
Commercial:
Real estate	$	445	$	—	$	—	$	445
Land	591		—		—		591
Residential mortgage	277		—		—		277
Mortgage servicing rights	180		—		180		—

			December 31, 2014
	Carrying Value		Quoted Prices in Active  Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(Dollars in thousands)
Impaired loans:
Commercial:
Real estate	$	488	$	—	$	—	$	488
Land	971		—		—		971
Residential mortgage	981		—		—		981
Other real estate owned, net:
Commercial:
Real estate	67		—		—		67
Land	512		—		—		512
Residential construction – land	45		—		—		45
Mortgage servicing rights	173		—		173		—

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a gross carrying amount of $2.1 million, with a valuation allowance of $807,000 at September 30, 2015, resulting in reversal of provision of $24,000 and additional provision of $269,000 for the three and nine months ended September 30, 2015, respectively. At September 30, 2014, impaired loans had a carrying amount of $3.1 million, with a valuation allowance of $867,000, resulting in an additional provision for loan losses of $10,000 and $9,000 for the three and nine months ended September 30, 2014, respectively.

During the nine months ended September 30, 2015, no write-downs were recorded on the carrying amount of other real estate owned, which is measured at the lower of cost or fair value less costs to sell. At September 30, 2014, other real estate owned had a carrying amount of $318,000, which resulted in write-downs of $17,000 and $108,000 for the three and nine months ended September 30, 2014, respectively.

Mortgage servicing rights, which are carried at lower of cost or fair value, were carried at their fair value of $180,000 at September 30, 2015, which was made up of the outstanding balance of $270,000, net of a valuation allowance of $90,000, resulting in a charge of $3,000 for the three months ended September 30, 2015 and a reversal of $1,000 for the nine months ended September 30, 2015, respectively. At September 30, 2014, mortgage servicing rights were carried at their fair value of $166,000, which was made up of the outstanding balance of $253,000, net of a valuation allowance of $87,000, resulting in reversals of $14,000 and $11,000 for the three and nine months ended September 30, 2014, respectively.

27

LAPORTE BANCORP, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The carrying amounts and estimated fair values of financial instruments for the periods presented are as follows:

				September 30, 2015
	Carrying Value			Quoted Prices in Active  Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
	(Dollars in thousands)
Financial assets:
Cash and due from financial institutions	$	11,458		$	11,458	$	—		$	—
Interest-earning time deposits at other financial institutions	13,356			—		13,142			—
Securities available-for-sale	124,857			—		124,857			—
Loans held for sale	1,356			—		1,356			—
Loans, net	352,650			—		—			356,291
Federal Home Loan Bank stock	4,029			—		4,029			—
Accrued interest receivable	1,343			—		696			647
Financial liabilities:
Deposits	$	(340,127	)	$	—	$	(340,661	)	$	—
Federal Home Loan Bank advances	(88,992		)	—		(89,416		)	—
Subordinated debentures	(5,155		)	—		—			(5,145		)
Short-term borrowings	(19,908		)	—		(19,908		)	—
Accrued interest payable	(171		)			(169		)	(2		)
Derivatives – interest rate swaps	(1,731		)	—		(1,731		)	—

				December 31, 2014
	Carrying Value			Quoted Prices in Active  Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
	(Dollars in thousands)
Financial assets:
Cash and due from financial institutions	$	8,698		$	8,698	$	—		$	—
Interest-earning time deposits at other financial institutions	6,615			—		6,636			—
Securities available-for-sale	155,223			—		155,223			—
Loans held for sale	763			—		763			—
Loans, net	306,131			—		—			309,903
Federal Home Loan Bank stock	4,275			—		4,275			—
Accrued interest receivable	1,485			—		857			628
Financial liabilities:
Deposits	$	(340,768	)	$	—	$	(340,830	)	$	—
Federal Home Loan Bank advances	(84,919		)	—		(85,078		)	—
Subordinated debentures	(5,155		)	—		—			(5,149		)
Accrued interest payable	(155		)	—		(152		)	(3		)
Derivatives – interest rate swaps	(1,156		)	—		(1,156		)	—

28

LAPORTE BANCORP, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

Cash and due from financial institutions: The carrying amounts of cash and due from financial institutions approximate fair values and are classified as Level 1.

Interest-earning time deposits at other financial institutions: The fair values of the Company’s interest-earning time deposits at other financial institutions are estimated using discounted cash flow analyses based on current rates for similar types of interest-earning time deposits and are classified as Level 2.

Loans held for sale: The fair value of loans held for sale is estimated based upon binding contracts and quotes from third-party investors resulting in Level 2 classification.

Loans: The fair values of loans are based on discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality resulting in a Level 3 classification. Impaired loans are valued at the lower of cost or fair value as described previously. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price.

Federal Home Loan Bank stock: The fair value of Federal Home Loan Bank stock is based on the price at which it may be resold to the Federal Home Loan Bank.

Deposits: The carrying amounts of demand deposits approximate their fair values and are classified as Level 2. Fair values of fixed rate certificates of deposit are estimated using a cash flow calculation reduced by known maturities, estimated principal payments, and estimated early withdrawal amounts. These cash flows are discounted to the current market rate. This method results in a Level 2 calculation.

Federal Home Loan Bank Advances: The fair values of the Company’s Federal Home Loan Bank advances are estimated using discounted cash flow analyses based on current borrowing rates for similar types of borrowing arrangements resulting in a Level 2 classification.

Subordinated Debentures: The fair value of the Company’s subordinated debentures are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 3 classification.

Short-term borrowings: The carrying amounts of short-term borrowings approximate fair values and are classified as Level 2.

Accrued Interest Receivable/Payable: The carrying amounts of accrued interest approximate fair value resulting in a Level 1, Level 2, or Level 3 classification based on the underlying asset or liability.

NOTE 8 – 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.

The counterparties to the Company’s derivatives are exposed to credit risk whenever the derivative is in a liability position. As a result, the Company has collateralized these liabilities with securities held in safekeeping by The Bank of New York and PNC Bank. At September 30, 2015 and December 31, 2014, the Company had securities with a fair value of $3.5 million and $2.6 million, respectively, posted as collateral for these derivatives.

Interest Rate Swaps Designated as Cash Flow Hedges: Interest rate swaps with notional amounts of $40.0 million as of September 30, 2015 and $45.0 millionDecember 31, 2014, respectively, were designated as cash flow hedges of FHLB advances. In August 2014, the Company executed three forward starting interest rate swaps with notional amounts totaling $30.0 million of maturing FHLB advances. The notional amount of each of these interest rate swaps was $10.0 million and were against one-month fixed rate FHLB advances. The first interest rate swap began in March 2015 for five years with an effective fixed rate of 2.085%. The second interest rate swap began in June 2015 for five years with an effective fixed rate of 2.228%. The third interest rate swap will begin in March 2016 for five years with an effective fixed rate of 2.618%.

29

LAPORTE BANCORP, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

All interest rate swaps were determined to be fully effective during the 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 assets (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 reclassified from other comprehensive income (loss) over the next 12 months.

Information related to the interest-rate swaps designated as cash flow hedges as of September 30, 2015 and December 31, 2014 were as follows:

	September 30, 2015			December 31, 2014
	(Dollars in thousands)
FHLB advance:
Notional amount	$	—		$	5,000
Unrealized losses	—			(109		)
Fixed interest rate payable	—		%	3.54		%
Variable interest rate receivable (Three month LIBOR plus 0.22%)	—			0.47
Maturity date	September 20, 2015
FHLB advance:
Notional amount	$	10,000		$	10,000
Unrealized losses	(243		)	(434		)
Fixed interest rate payable	3.69		%	3.69		%
Variable interest rate receivable (Three month LIBOR plus 0.25%)	0.54			0.48
Maturity date	July 19, 2016
FHLB advance:
Notional amount	$	10,000		$	10,000
Unrealized losses	(416		)	(186		)
Fixed interest rate payable	2.09		%	2.09		%
Variable interest rate receivable (One month LIBOR)	0.21			—
Maturity date	March 15, 2020
FHLB advance:
Notional amount	$	10,000		$	10,000
Unrealized losses	(483		)	(197		)
Fixed interest rate payable	2.23		%	2.23		%
Variable interest rate receivable (One month LIBOR)	0.21			—
Maturity date	June 15, 2020

	September 30, 2015			December 31, 2014
	(Dollars in thousands)
Forward Starting:
FHLB advance:
Notional amount	$	10,000		$	10,000
Unrealized losses	(589		)	(230		)
Fixed interest rate payable	2.62		%	2.62		%
Variable interest rate receivable (One month LIBOR)	—			—
Start date	March 15, 2016
Maturity date	March 15, 2021

30

LAPORTE BANCORP, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Interest expense recorded on these swap transactions is reported as a component of interest expense on subordinated debentures, deposits, and FHLB advances, as appropriate. Interest expense recorded on these swap transactions totaled $216,000 and $186,000 during the three months ended September 30, 2015 and 2014, respectively. Interest expense recorded on these swap transactions totaled $517,000 and $576,000 during the nine months ended September 30, 2015 and 2014, respectively.

The following table presents the net gains (losses) recorded in accumulated other comprehensive income (loss) and the Consolidated Statements of Income relating to the Company’s cash flow derivative instruments for the periods indicated:

	Three Months Ended September 30,					Nine Months Ended September 30,
	2015			2014		2015			2014
	(Dollars in thousands)
Interest rate contracts:
Net amount of gain (loss):
Recognized in OCI (Effective Portion)	$	(326	)	$	88	$	(379	)	$	309
Reclassified from OCI to interest income	—			—		—			—
Recognized in other non-interest income (Ineffective Portion)	—			—		—			—

The following table reflects the cash flow hedges included in the Consolidated Balance Sheets as of the dates indicated:

	September 30, 2015						December 31, 2014
	Notional Amount			Fair Value			Notional Amount			Fair Value
	(Dollars in thousands)
Included in other liabilities:
Interest rate swaps related to FHLB advances	$	(40,000	)	$	(1,731	)	$	(45,000	)	$	(1,156	)

NOTE 9 – STOCK-BASED COMPENSATION

During the month of September 2011, the Company implemented the 2011 Equity Incentive Plan (the “2011 Plan”) which was approved by shareholders on May 10, 2011. The 2011 Plan provided for the issuance of stock options or restricted share awards to directors and employees. Total shares authorized for issuance under the 2011 Plan were 417,543.

On May 13, 2014, the Company’s shareholders approved the 2014 Equity Incentive Plan (the “2014 Plan”) which provides for the issuance of stock options or restricted share awards to directors and employees and effectively terminated the 2011 Plan. The total shares authorized for issuance under the 2014 Plan are 473,845 shares of the Company’s common stock plus, at the date the 2014 Plan was approved, there were 14,471 shares of stock that were rolled over from the terminated 2011 Plan and added to the shares available for awards under the 2014 Plan. In addition, any stock awards that had been granted under the 2011 Plan and subsequently forfeited were also included for issuance under the 2014 Plan.

On October, 14, 2014, the Company implemented the 2014 Plan and granted 332,250 shares of stock as stock options and 126,800 shares of stock as restricted share awards to directors and employees. Compensation costs related to these grants will be amortized over a five year period on a straight-line basis. The options and restricted share awards vest 20% annually.

Compensation expense related to the Plans totaled $173,000 and $62,000 for the three months ended September 30, 2015 and 2014, respectively. Compensation expense related to the Plans totaled $525,000 and $186,000 for the nine months ended September 30, 2015 and 2014, respectively.

Stock-Based Compensation

Compensation expense is recognized for stock options and restricted stock awards issued to employees or directors based on their grant date fair value. A Black-Scholes model is utilized to estimate the fair value of stock options. The market price of the Company’s common stock at the grant date is used for restricted stock awards.

31

LAPORTE BANCORP, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Compensation expense is recognized over the required service period, generally defined as the vesting period. For awards with graded vesting, compensation expense is recognized on a straight-line basis over the requisite service period for the entire award.

Stock Options

The 2011 Plan permitted the stock option grants to employees or directors for up to 298,245 shares of common stock. The 2014 Plan permits stock option grants to directors and employees for up to 352,544 shares of common stock. Option awards are generally granted with an exercise price equal to the market price of the Company’s common stock on the grant date. Option awards have vesting periods of five years and ten-year contractual terms. Options granted generally vest 20% annually.

The fair value of each option award is estimated on the grant date using a closed form option valuation (Black-Scholes) model. Expected volatilities are based on historical volatilities of companies within the Company’s peer group. The expected term of options granted represents the period of time that options granted are expected to be outstanding, which takes into account that the options are not transferable. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of the grant.

The table below presents information related to stock options granted during the period presented.

	Nine Months Ended September 30, 2015
Options granted:
Number of options	3,500
Risk-free interest rate	2.04	%
Expected term	7.5 years
Expected stock price volatility	19.24	%
Dividend yield	1.17	%
Weighted average fair value of options granted	$2.94

32

LAPORTE BANCORP, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Below is the summary of the activity in the stock option plan for the period presented:

	Nine Months Ended September 30, 2015
	Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
	(Dollars in thousands, except per share data)
Outstanding at January 1, 2015	598,972		$	9.30	8.4 years	$	1,911
Granted	3,500		13.71		9.4 years
Exercised	(4,472	)	6.44
Forfeited or expired	—		—
Outstanding at September 30, 2015	598,000		$	9.35	7.7 years	$	3,232
Exercisable at end of period	202,540		$	6.50	6.0 years	$	1,670

During the nine months ended September 30, 2015, 4,472 options were exercised which had an intrinsic value of $27,000. The Company received $29,000 in cash and realized $10,000 in tax benefits related to the exercise of these options. The weighted average fair value of options granted was $2.16. At September 30, 2015, there was $718,000 of total unrecognized compensation cost related to nonvested stock options granted, which is expected to be expensed over a weighted-average period of 3.7 years. The 2014 Plan had 16,794 shares available for future grant at September 30, 2015.

Restricted Share Awards

The 2011 Plan provided for the issuance of up to 119,298 restricted shares to directors and employees. The 2014 Plan provides for the issuance of up to 135,772 of restricted shares to directors and employees. Compensation expense is recognized over the vesting period of the awards based on the grant date fair value of the Company’s common stock at issue date as determined by the listing price on the respective date. Shares vest 20% annually over five years. The 2014 Plan had 8,972 shares available for future grant at September 30, 2015.

A summary of changes in the Company’s nonvested restricted shares the was as follows for the period presented:

	Nine Months Ended September 30, 2015
	Shares		Weighted-Average Grant-Date Fair Value
Nonvested at January 1, 2015	175,164		$	10.14
Granted	—		—
Vested	(23,754	)	6.51
Forfeited	—		—
Nonvested at September 30, 2015	151,410		$	10.71

At September 30, 2015, there was $1.3 million of total unrecognized compensation expense related to nonvested shares granted, which is expected to be recognized over a weighted-average period of 3.7 years. At September 30, 2015, the nonvested shares had an intrinsic value of $612,000.

33

LAPORTE BANCORP, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 10 – ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

A summary of the changes in accumulated other comprehensive income (loss) by component for the periods indicated is as follows:

	Three Months Ended September 30,
	2015									2014
	Gains (Losses) on Cash Flow Hedges			Unrealized  Gains (Losses) on Available- for-Sale Securities			Total			Gains (Losses) on Cash Flow Hedges			Unrealized  Gains (Losses) on Available- for-Sale Securities			Total
	(Dollars in thousands)
Beginning balance	$	(816	)	$	1,084		$	268		$	(558	)	$	947		$	389
Other comprehensive income (loss) before reclassification	(326		)	519			193			88			(81		)	7
Amounts reclassified from accumulated other comprehensive income (loss)	—			(12		)	(12		)	—			(5		)	(5		)
Net current period other comprehensive income (loss)	(326		)	507			181			88			(86		)	2
Ending balance	$	(1,142	)	$	1,591		$	449		$	(470	)	$	861		$	391

A summary of the reclassifications out of accumulated other comprehensive income (loss) for the periods indicated is as follows:

	Three Months Ended September 30,
	2015			2014
	Amount Reclassified from Accumulated Other Comprehensive  Income (Loss)			Amount Reclassified from Accumulated Other Comprehensive  Income (Loss)
	(Dollars in thousands)
Unrealized gains and losses on available-for-sale securities:
Net gains on securities	$	18		$	8
Income tax expense	(6		)	(3		)
Net of tax	$	12		$	5

A summary of the reclassifications out of accumulated other comprehensive income (loss) for the periods indicated is as follows:

	Nine Months Ended September 30,
	2015									2014
	Gains (Losses) on Cash Flow Hedges			Unrealized  Gains (Losses) on Available- for-Sale Securities			Total			Gains (Losses) on Cash Flow Hedges			Unrealized  Gains (Losses) on Available- for-Sale Securities			Total
	(Dollars in thousands)
Beginning balance	$	(763	)	$	1,285		$	522		$	(779	)	$	(1,059	)	$	(1,838	)
Other comprehensive income (loss) before reclassification	(379		)	371			(8		)	309			1,991			2,300
Amounts reclassified from accumulated other comprehensive income (loss)	—			(65		)	(65		)	—			(71		)	(71		)
Net current period other comprehensive income (loss)	(379		)	306			(73		)	309			1,920			2,229
Ending balance	$	(1,142	)	$	1,591		$	449		$	(470	)	$	861		$	391

34

LAPORTE BANCORP, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

A summary of the changes in accumulated other comprehensive income (loss) by component for the periods indicated is as follows:

	Nine Months Ended September 30,
	2015			2014
	Amount Reclassified from Accumulated Other Comprehensive  Income (Loss)			Amount Reclassified from Accumulated Other Comprehensive  Income (Loss)
	(Dollars in thousands)
Unrealized gains and losses on available-for-sale securities:
Net gains on securities	$	99		$	108
Income tax expense	(34		)	(37		)
Net of tax	$	65		$	71

NOTE 11 – OFFSETTING FINANCIAL ASSETS AND LIABILITIES

The following tables summarize gross and net information about financial instruments and derivative instruments that are offset in the Company’s statement of Consolidated Balance Sheets or that are subject to an enforceable master netting arrangement at September 30, 2015 and December 31, 2014.

	September 30, 2015
	Gross Amounts of Recognized Liabilities		Gross  Amounts Offset in the Consolidated Balance Sheet		Net Amounts of Liabilities Presented in the Consolidated Balance Sheet		Gross Amounts Not Offset in the Consolidated Balance Sheet
							Financial Instruments			Cash  Collateral Pledged		Net Amount
	(Dollars in thousands)
Derivatives	$	1,731	$	—	$	1,731	$	(3,472	)	$	—	$	(1,741	)

	December 31, 2014
	Gross Amounts of Recognized Liabilities		Gross  Amounts Offset in the Consolidated Balance Sheet		Net Amounts of Liabilities Presented in the Consolidated Balance Sheet		Gross Amounts Not Offset in the Consolidated Balance Sheet
							Financial Instruments			Cash  Collateral Pledged		Net Amount
	(Dollars in thousands)
Derivatives	$	1,156	$	—	$	1,156	$	(2,606	)	$	—	$	(1,450	)
Repurchase agreements	755		—		755		(755		)	—		—
Total	$	1,911	$	—	$	1,911	$	(3,361	)	$	—	$	(1,450	)

If an event of default occurs causing an early termination of an interest rate swap derivative, an early termination amount payable to one party by the other party may be reduced by set-off against any other amount payable by the one party to the other party. If a default in performance of any obligation of a repurchase agreement occurs, each party will set-off property held in respect of transactions against obligations owing in respect of any other transactions.

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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 future oral and written statements of LaPorte Bancorp, Inc. (the “Company”) and its management and 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, 2014. 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;

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

• our ability to manage the impact of changes in interest rates, spreads on interest earning assets and interest-bearing liabilities, and interest rate sensitivity;

• rising interest rates and their impact on mortgage loan volumes;

• 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 new capital rules effective on January 1, 2015;

• 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; 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.

Critical Accounting Policies

We consider accounting policies that require management to exercise significant judgment or discretion or make significant assumptions that have, or could have, a material impact on the carrying value of certain assets or on income, to be critical accounting policies. These policies are detailed in our Annual Report on Form 10-K for the year ended December 31, 2014 and have not materially changed during the nine months ended September 30, 2015.

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Comparison of Financial Condition at September 30, 2015 and December 31, 2014

General: Total assets at September 30, 2015increased $26.1 million, or 5.0%, to $544.7 million compared to $518.6 million at December 31, 2014 primarily due to a $46.6 million, or 15.0%, increase in loans, a $6.7 millionincrease in interest-earning time deposits in other financial institutions, and a $2.8 million, or 31.7%, increase in cash and due from financial institutions and fed funds sold partially offset by a $30.4 million, or 19.6%, decrease in securities available-for-sale. Our loan growth was primarily related to new commercial loans originated and participations purchased which was funded by utilizing proceeds from the sales and maturities of lower-yielding investment securities available-for-sale during 2015.

Investment Securities: Total securities available-for-sale decreased $30.4 million, or 19.6%, to $124.9 million at September 30, 2015 from $155.2 million at December 31, 2014. During the nine months ended September 30, 2015, proceeds from the sales of investment securities totaling $21.5 million and paydowns and maturities totaling $20.2 million were utilized to fund the majority of the 2015 loan growth and to repay Federal Home Loan Bank (“FHLB”) advances.

At September 30, 2015, management reviewed the securities portfolio for possible other-than-temporary impairment and determined there were no impairment charges to be recorded. The net unrealized gains on the available-for-sale securities portfolio totaled $2.4 million at September 30, 2015, an increase of $464,000 from net unrealized gains totaling $1.9 million at December 31, 2014.

Loans Held for Sale: Loans held for sale increased $593,000, or 77.7%, to $1.4 million at September 30, 2015 compared to $763,000 at December 31, 2014 primarily due to the timing of when residential mortgage loans were originated and subsequently sold to the secondary market.

Loans: Loans increased by $46.6 million, or 15.0%, to $356.3 million at September 30, 2015 compared to $309.7 million at December 31, 2014 primarily due to an increase totaling $33.4 million, or 28.2%, in commercial loans to $151.7 million at September 30, 2015 from $118.3 million at December 31, 2014. The increase was primarily due to new originations and purchased participations as well as fundings of commercial real estate, construction, and land loans during the nine months ended September 30, 2015. The Company originated $19.1 million in commercial real estate loans, of which $5.5 million was to one borrower. The Company also originated $4.6 million in commercial land loans and $20.3 million in commercial construction loans, of which $11.6 million were purchased participations. During the nine months ended September 30, 2015, the Company funded $8.7 million in commercial construction loans originated or purchased during 2015 as well as $2.0 million in previously originated commercial construction loans.

Mortgage warehouse loans increased $8.8 million, or 6.6%, to $141.4 million at September 30, 2015 from $132.6 million at December 31, 2014 primarily due to the increased number of mortgage warehouse lines. Total funding volume for mortgage warehouse has increased 66.3% during the nine months ended September 30, 2015 compared to the prior year period as we continue to add lines and diversify our portfolio geographically. We are able to add these lines and provide the availability to our customers due to the two mortgage warehouse loan participants that began during 2015 which funds additional warehouse activity when customer demand increases, primarily at month end, or when there are backlogs in the secondary markets. The participation program allows us to utilize our liquidity to fund commercial loan growth while retaining processing, servicing, and wire transfer fees related to the mortgage warehouse loans.

Residential mortgage loans increased $2.4 million, or 6.2%, to $41.7 million at September 30, 2015 from $39.3 million at December 31, 2014 due to new mortgage loan originations retained within the portfolio during the nine months ended September 30, 2015.

Allowance for Loan Losses: The allowance for loan losses balance increased $82,000, or 2.3%, to $3.7 million at September 30, 2015 compared to $3.6 million at December 31, 2014. The Company’s analysis for the allowance for loan losses for the third quarter of 2015 reflected continued improvement in several asset quality metrics and trends, including nonperforming loans, classified assets, troubled debt restructurings, delinquencies, and current economic conditions. Primarily due to an increase in total loan balances at September 30, 2015 and charge-offs during the quarter, the Company recorded a provision for loan losses totaling $100,000 during the third quarter of 2015, compared to no provision during the prior year period. Net charge-offs for the three months ended September 30, 2015 totaled $153,000 compared to $15,000 for the prior year period. The Company charged-off $103,000 related to the remaining balance of a consumer loan after the sale of the collateral and $30,000 upon the transfer of a nonaccrual residential mortgage loan to other real estate owned. Both of these charge-offs were reserved for prior to the third quarter of 2015.

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The allowance for loan losses to nonperforming loans ratio increased to 101.3% at September 30, 2015 compared to 81.3% at December 31, 2014 primarily due to the decrease in the Company’s total nonperforming loans and the provision for loan losses during the nine months ended September 30, 2015. The allowance for loan losses to total loans ratio decreased to 1.03% at September 30, 2015 from 1.16% at December 31, 2014 primarily due to the $46.6 million increase in total loans at September 30, 2015 from December 31, 2014.

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

	September 30, 2015			December 31, 2014
	(Dollars in thousands)
Nonaccrual loans:
Commercial:
Real estate	$	1,186		$	825
Land	1,321			1,577
Total commercial	2,507			2,402
Mortgage	993			1,252
Home equity	62			7
Nonaccruing troubled debt restructured loans (1)	66			762
Total nonaccrual loans	3,628			4,423
Loans greater than 90 days delinquent and still accruing:
Home equity	2			—
Total nonperforming loans	3,630			4,423
Foreclosed assets:
Commercial:
Real estate	—			67
Land	512			512
Total commercial	512			579
Mortgage	46			25
Residential construction - land	—			45
Total foreclosed assets	558			649
Total nonperforming assets	$	4,188		$	5,072
Ratios:
Nonperforming loans to total loans	1.02		%	1.43		%
Nonperforming assets to total assets	0.77			0.98

(1) At September 30, 2015, the $66,000 in loans classified as nonaccruing troubled debt restructured loans were commercial real estate loans. At December 31, 2014, $682,000 of residential mortgage loans, $53,000 of commercial real estate loans, and $27,000 of commercial loans were classified as nonaccruing troubled debt restructured loans.

Total nonperforming assets decreased $884,000, or 17.4%, to $4.2 million at September 30, 2015 from $5.1 million at December 31, 2014. Our nonperforming assets to total assets ratio decreased to 0.77% at September 30, 2015 compared to 0.98% at December 31, 2014 as a result of decreases in nonperforming loans and other real estate owned combined with an increase in total assets.

Total nonperforming loans decreased $793,000, or 17.9%, to $3.6 million at September 30, 2015 compared to $4.4 million at December 31, 2014. At September 30, 2015, our nonperforming loans to total loans ratio decreased to 1.02% from 1.43% at December 31, 2014 as a result of the decrease in nonperforming loans and the increase in total loans outstanding at September 30, 2015.

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The primary decrease in nonperforming loans from December 31, 2014 was related to a $239,000 decrease in nonperforming mortgage loans due to the transfer to accruing status of one nonperforming loan totaling $127,000 as the borrower had been making loan payments in accordance with their agreement for a period of at least six months since the loans went to nonaccrual status. In addition, a $76,000 nonperforming loan was transferred to other real estate owned and the Company received payments totaling $23,000 on other nonperforming residential loans. The Company also received payments totaling $125,000 on a $2.0 million nonperforming commercial loan relationship, primarily from the sale of one of the properties securing the loan. Nonperforming commercial loans also decreased from payments received totaling $62,000 and a charge-off totaling $20,000 during the nine months ended September 30, 2015. Partially offsetting these decreases was the transfer to nonaccrual status of one residential loan totaling $148,000 and one commercial loan totaling $135,000. Home equity nonperforming loans increased since December 31, 2014 due to three relationships totaling $56,000 being transferred to nonaccrual status during nine months ended September 30, 2015.

Total nonaccruing TDRs decreased $615,000 during the nine months ended September 30, 2015 as five TDRs totaling $681,000 were transferred back to accrual status as the borrowers have been making loan payments in accordance with their restructured agreements for a period of at least six months and one TDR relationship totaling $80,000 was transferred to other real estate owned during the nine months ended September 30, 2015. During the nine months ended September 30, 2015, one previously performing TDR commercial real estate loan totaling $66,000 was transferred to nonaccrual status.

Other real estate owned decreased $91,000 to $558,000 at September 30, 2015 from $649,000 at December 31, 2014 primarily due to the sale of four properties totaling $217,000 during the nine months ended September 30, 2015 and partially offset by the transfer of a $80,000 TDR commercial and commercial real estate loan relationship and a $46,000 residential mortgage loan to other real estate owned. Subsequent to September 30, 2015, the Company sold one other real estate owned land parcel that had previously been held for future branch development in Valparaiso, Indiana, recognizing a gain on the sale of approximately $43,000.

Goodwill and Other Intangible Assets: Our goodwill totaled $8.4 million at September 30, 2015 and December 31, 2014. 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. Impairment exists when a reporting unit’s carrying value of goodwill exceeds its fair value, which is determined through a two-step impairment test. Step 1 includes the determination of the carrying value of the reporting unit, including the existing goodwill and intangible assets, and estimating the fair value of the reporting unit. If the carrying amount of a reporting unit exceeds its fair value, we are required to perform a second step to the impairment test. The most recent annual impairment review of our goodwill was completed in February 2015 as of October 31, 2014. Based on this evaluation, management determined that the fair value of the reporting unit, which is defined as LaPorte Bancorp, Inc. as a whole, exceeded the book value of the goodwill, based on the opinion of an independent expert in valuations, such that the sales price per common share would exceed our book value per common share. Accordingly, no goodwill impairment was recognized during the nine months ended September 30, 2015.

Our stock price has increased from the previous analysis and the Company continues to be profitable, therefore, management determined that an updated analysis from an independent third party during the nine months ended September 30, 2015 was not necessary. At September 30, 2015, our market price per common share was greater than our tangible book value per common share. If, in the future, our market price per common share falls below our tangible book value per common share or other factors arise which may lead to a deterioration in the valuation of the Company, management may conclude that the goodwill 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 at September 30, 2015decreased slightly by $641,000, or 0.2%, to $340.1 million from $340.8 million at December 31, 2014 primarily due to a $14.5 million decrease in certificates of deposit and IRAs, which included $9.7 million of matured brokered deposits. Partially offsetting this decrease were increases of $7.6 million in non-interest bearing accounts, $5.0 million in interest bearing demand deposit accounts, and $3.5 million in savings accounts. The Company continues to focus on growing core deposits to provide additional liquidity and is in the process of implementing a new checking rewards program which will pay a higher rate of interest on limited balances within checking and related savings accounts should the customer qualify during each statement cycle. While the Company anticipates that its cost of deposits may increase as these balances grow, it also anticipates an increase in debit card income as one of the qualifications for customers will be to utilize their debit cards at least twelve times in the cycle.

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Borrowed Funds: Total borrowed funds increased $24.0 million, or 26.6%, to $114.1 million at September 30, 2015 compared to $90.1 million at December 31, 2014 primarily due to the utilization of our short-term lines of credit to fund the increase in loan demand, primarily short-term mortgage warehouse loans, at the end of the third quarter of 2015.

The Bank has unsecured lines of credit at First Tennessee Bank totaling $15.0 million and Zions Bank totaling $9.0 million at September 30, 2015. The First Tennessee Bank line was utilized during the third quarter of 2015 with an outstanding balance of $10.9 million at September 30, 2015, which was also the maximum borrowed on this line during the year. The average balance was $40,000 with an average cost of 1.0% for the nine months ended September 30, 2015. The Zions Bank line of credit was utilized during the third quarter of 2015 and had an outstanding and maximum balance of $9.0 million at September 30, 2015 with an average balance totaling $806,000 and an average cost of 39 basis points for the nine months ended September 30, 2015.

Total Shareholders’ Equity: Total shareholders’ equity increased $2.0 million, or 2.4%, to $84.4 million at September 30, 2015 compared to $82.4 million at December 31, 2014 due to net income totaling $3.3 million for the nine months ended September 30, 2015. Partially offsetting the increase in shareholders’ equity was a $1.4 milliondecrease in additional paid-in capital as a result of the Company repurchasing 109,168 shares of its common stock during the nine months ended September 30, 2015 in accordance with its previously announced repurchase plans. During 2014, the Company announced its fourth repurchase plan for 5%, or approximately 280,800 shares, of its then outstanding common stock. At September 30, 2015, the Company had repurchased 181,881 shares under this plan. Cash dividends paid during the nine months ended September 30, 2015 totaled $673,000 and also reduced the Company’s shareholders’ equity from December 31, 2014.

Comparison of Operating Results for Three Month Periods Ended September 30, 2015 and September 30, 2014

Net Income: Net income totaled $1.1 million, or $0.20 per diluted share, for the three months ended September 30, 2015 compared to $1.3 million, or $0.25 per diluted share, for the three months ended September 30, 2014. The decrease in net income was primarily due to a $100,000 provision for loan losses and a $252,000increase in noninterest expense. Partially offsetting these decreases in net income were increases in net interest income and noninterest income totaling $43,000 and $12,000, respectively, and a decrease in income tax expense totaling $27,000.

Net Interest Income: Net interest income was relatively stable at $3.9 million for the three months ended September 30, 2015 and 2014. Net interest margin increased five basis points to 3.29% for the three months ended September 30, 2015 compared to 3.24% for the prior year period. The increase in net interest income was primarily attributable to a $120,000, or 3.2%, increase in interest income on loans as the average balance of loans outstanding increased by 3.6% from the prior year period. In addition, interest expense for the three months ended September 30, 2015decreased $83,000, or 10.6%, due to a six basis point decrease in the average cost of interest-bearing liabilities and a $11.7 million, or 3.1%, decrease in the average balance of interest-bearing liabilities during the third quarter of 2015 compared to the prior year period.

Interest and Dividend Income: Interest and dividend income was also stable at $4.6 million for the three months ended September 30, 2015 and 2014. During the third quarter of 2015, interest income on securities available for sale decreased $187,000, or 21.7%, to $676,000 compared to the same 2014 period primarily due to a decrease of $29.2 million, or 18.5%, in the average balance of these securities to $128.7 million for the third quarter of 2015 from $157.9 million for the third quarter of 2014 combined with a nine basis point decrease in the average yield on these securities. Partially offsetting this decrease in interest income on securities was a $120,000increase in interest income from loans to $3.8 million for the third quarter of 2015 compared to the prior year period primarily due to a 3.6%increase in the average balance of loans outstanding to $309.2 million for the third quarter of 2015 from $298.3 million for the prior year period.

Interest income on commercial construction loans increased $110,000, or 500.0%, during the third quarter of 2015 primarily due to a $9.6 million, or 473.2%, increase in the average balance of these loans from the prior year period as a result of new loan originations and participations purchased in 2015. Interest income on five or more family commercial real estate loans increased $65,000, or 26.0%, during the third quarter of 2015 primarily due to an 18.4% increase in the average balances on these loans for the third quarter of 2015 when compared to the prior year period. Interest income on commercial land loans increased $43,000, or 62.3%, due to a 46.4% increase in the average balance of these loans during the third quarter of 2015 when compared to the prior year period. Interest income on home equity loans and lines of credit increased $17,000, or 12.8%, due to a 17.5% increase in the average balance of these loans during the third quarter of 2015 when compared to the prior year period as a result of focused efforts to generate new consumer loan originations during 2015.

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Partially offsetting the above mentioned increases, interest income on mortgage warehouse loans decreased $90,000, or 6.0%, during the third quarter of 2015 primarily due to an $18.0 million, or 14.9%, decrease in the average balance of these loans when compared to the prior year period. Our outstanding mortgage warehouse balances were impacted by the levels of participations sold during the quarter as two financial institutions were participants in our warehouse lending program for the entire third quarter of 2015. The decrease in the warehouse balances will assist in funding the increase in the commercial loan portfolio. Overall, the number of transactions and activity increased from the prior year period due to an increase in the number and limits of our warehouse lines. We implemented the participation program with other financial institutions to allow us to continue to grow our customer base and provide ample funding for all of our warehouse customers without increasing our outstanding balances. We continue to receive fee income related to all warehouse transactions in addition to servicing income on the participated balances. Interest income on commercial and industrial loans also decreased $35,000, or 19.0%, during the third quarter of 2015 as the average balance and the average yield earned on these loans for the third quarter of 2015 decreased from the comparable prior year quarter.

Interest income on investment securities decreased $187,000 during the third quarter of 2015 compared to the prior year period primarily due to a 18.5%decrease in the average outstanding balance of investment securities and a nine basis point decrease in the average yield earned on these securities. During the third quarter of 2015, the Company sold approximately $3.6 million of investment securities available-for-sale and utilized $9.2 million of proceeds from maturities and principal repayments for liquidity purposes to fund increased loan balances.

Interest income from taxable securities decreased $160,000, or 35.4%, for the three months ended September 30, 2015 compared to the prior year period primarily due to a decrease in the average balance of taxable securities of $26.2 million, or 24.9%, from sales and maturities combined with a 24 basis point decrease in the average yield earned on these securities. The decrease in taxable securities was primarily used to fund the increase in loan balances in addition to shifting a portion of taxable securities to interest earning time deposits, which resulted in shorter durations but lower yields. Management believes this strategy to be prudent given the uncertainty with the current interest rate environment.

Interest Expense: Interest expense decreased $83,000, or 10.6%, to $700,000 for the three months ended September 30, 2015 compared to $783,000 for the prior year period due to decreases in the average cost of interest bearing liabilities of six basis points to 0.77% and a decrease in the average outstanding balance of interest bearing liabilities of $11.7 million during the three months ended September 30, 2015.

Interest expense on certificates of deposit and IRAs decreased $124,000, or 37.8%, to $204,000 for the three months ended September 30, 2015 compared to the prior year period primarily due to a decrease of 43 basis points in the average cost of such deposits combined with a $4.7 milliondecrease in the average outstanding balance of such deposits, primarily in brokered deposits that were utilized for funding mortgage warehouse balances. As higher cost certificates of deposit mature and reprice, the Company has been able to reduce its interest expense and shift some of these balances into lower cost core deposit accounts.

Interest expense on money market deposits decreased $8,000 to $57,000 for the three months ended September 30, 2015 compared to $65,000 for the prior year period due to a decrease of $12.4 million in the average outstanding balance of these accounts. The decrease was primarily due to a decrease in one large public fund money market relationship at the end of 2014.

Interest expense on FHLB advances increased $36,000, or 11.7%, to $343,000 for the three months ended September 30, 2015 compared to $307,000 for the prior year period due to an increase of 60 basis points in the average cost of these borrowings which was partially offset by a decrease in the average outstanding balance of these advances totaling $13.9 million during the three months ended September 30, 2015. The increase in the average cost of these borrowings related to two of the Bank’s $10.0 million notional forward-starting swaps tied to $10.0 million FHLB advances that began in March and June 2015. The fixed interest rates associated with these swaps are 2.09% and 2.23%, respectively, with the Bank receiving one month LIBOR. These swaps mature in five years in March and June 2020.

Interest expense on the Company’s subordinated debt increased $2,000 during the three months ended September 30, 2015 compared to the prior year period due to an increase in the average cost of these borrowings by 15 basis points to 3.41% for the third quarter of 2015 from 3.26% for the prior year period. The subordinated debt has a variable rate of interest tied to the three month LIBOR.

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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, 2015 and 2014. All average balances are daily average balances. The annualized yields set forth below include the effect of deferred fees, discounts, and premiums that are amortized or accreted to interest income or expense. 

	Three Months Ended September 30,
	2015						2014
	Average Outstanding Balance		Interest		Annualized Yield/Cost		Average Outstanding Balance		Interest		Annualized Yield/Cost
	(Dollars in thousands)
Assets:
Loans (1)	$	309,182	$	3,841	4.97	%	$	298,318	$	3,721	4.99	%
Taxable securities	79,088		292		1.48		105,336		452		1.72
Tax exempt securities (2)	49,585		384		3.10		52,537		411		3.13
FHLB stock	4,029		45		4.47		4,322		39		3.61
Federal funds sold and other interest-earning deposits	32,158		42		0.52		16,387		21		0.51
Total interest earning assets	474,042		4,604		3.88		476,900		4,644		3.90
Non-interest earning assets	42,475						43,314
Total assets	$	516,517					$	520,214
Liabilities and equity:
Savings deposits	$	64,614	$	8	0.05	%	$	63,595	$	9	0.06	%
Money market accounts	57,168		57		0.40		69,523		65		0.37
Interest-bearing checking	74,727		43		0.23		56,387		31		0.22
Certificates of deposit and IRAs	102,047		204		0.80		106,721		328		1.23
Total interest-bearing deposits	298,556		312		0.42		296,226		433		0.58
FHLB advances	61,697		343		2.22		75,603		307		1.62
Subordinated debentures	5,155		44		3.41		5,155		42		3.26
Short-term borrowings	465		1		0.86		626		1		0.64
Total borrowings	67,317		388		2.31		81,384		350		1.72
Total interest-bearing liabilities	365,873		700		0.77		377,610		783		0.83
Non-interest bearing deposits	61,143						55,213
Other liabilities	5,906						5,156
Total liabilities	432,922						437,979
Shareholders’ equity	83,595						82,235
Total liabilities & shareholders’ equity	$	516,517					$	520,214
Net interest income			$	3,904					$	3,861
Net interest rate spread					3.11	%					3.07	%
Net interest margin					3.29						3.24

(1) The average balance of loans includes loans held for sale and nonperforming loans, interest on which is recognized on a cash basis.

(2) No tax-equivalent yield adjustments have been made.

Provision for Loan Losses: We recognize 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. We evaluate the level of the allowance for loan losses on a quarterly basis by considering historical loan loss experience, the types of loans and the amount of loans in the portfolio, adverse situations that may affect our borrowers’ ability to repay, the estimated fair value of any underlying collateral, 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.

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The Company’s analysis of the allowance for loan losses for the third quarter of 2015 reflected continued improvement in asset quality metrics and various positive trends, including nonperforming loans, classified assets, troubled debt restructurings, delinquencies, and current economic conditions. Net charge-offs for the three months ended September 30, 2015 totaled $153,000 compared to $15,000 for the prior year period. The increase in the net charge-offs was a result of a $103,000 charge-off on a consumer loan after the partial paydown from the sale of collateral and a $30,000 charge-off on the transfer of a residential mortgage loan to other real estate owned. Both of these charge-offs had been previously reserved for within the allowance. In addition, the Company also recorded charge-offs totaling $18,000 on home equity loans and lines of credit and $6,000 on consumer and other loans during the third quarter of 2015.

Based upon the quarterly analysis of the allowance for loan losses and levels of charge-offs during the quarter, management determined that a $100,000 provision for loan losses was appropriate for the three months ended September 30, 2015. Management did not record a provision for loan losses during the prior year period.

Noninterest Income: Noninterest income increased $12,000, or 1.7%, to $699,000 for the three months ended September 30, 2015 from $687,000 for the prior year period. Gains on mortgage banking activities increased $31,000 as mortgage originations from purchase activity and associated sales were higher during the third quarter of 2015 when compared to the prior year period. Wire transfer fees increased $31,000 during the third quarter of 2015 due to the increase in mortgage warehouse activity when compared to the prior year period. Loan servicing fees also increased by $12,000 due to $32,000 of servicing fees recorded on mortgage warehouse loan participations offset by higher provisions for mortgage servicing rights during the third quarter of 2015 when compared to the prior year period. In addition, net gains on the sales of securities increased $10,000 when compared to the prior year period. Partially offsetting these increases was a $16,000decrease in service charges on deposit accounts due to lower overdraft-related fees and service charges on checking accounts during the third quarter of 2015. Net gains on other assets decreased $4,000 during the third quarter of 2015, primarily due to a $17,000 write-down on our branch property in Rolling Prairie that is held for sale. Other income decreased $53,000 from the prior year period, primarily due to timing differences of reimbursable loan closing expenses and other miscellaneous income items.

Noninterest Expense: Noninterest expense increased $252,000, or 8.6%, to $3.2 million for the three months ended September 30, 2015 when compared to the prior year period. Salaries and employee benefits expense increased $114,000, which included an increase in payroll expense of $34,000 related to annual merit increases, the addition of a commercial lender, and higher mortgage commissions during the third quarter of 2015 when compared to the prior year period. Stock-based compensation expense increased $111,000 during the third quarter of 2015 when compared to the prior year period due to the stock option and restricted stock awards granted during the fourth quarter of 2014. The expense related to the Company’s employee stock ownership plan also increased $15,000 in the third quarter of 2015 due to our increasing stock price. Group insurance costs increased $13,000 due to higher health care costs in 2015. These increases were partially offset by a $72,000 increase in deferred lending costs due to increased commercial and mortgage loan originations during the third quarter of 2015 when compared to the prior year period.

Collection and other real estate owned expenses increased $43,000 due to legal and collection costs during the third quarter of 2015. Bank examination expenses increased $32,000 due to the timing of audits and reviews for the third quarter of 2015 compared to the prior year period. Data processing expense increased $24,000 during the third quarter of 2015 due to higher core processing costs combined with upgrades to our disaster recovery and back up systems. Advertising expenses increased $21,000 during the third quarter of 2015 related to advertising for mortgages and home equity loans and lines of credit and mobile remote deposit capture. Other expenses also increased by $26,000 due to higher loss reserves related to our pooled captive insurance subsidiary and debit card fraud expense.

Income Taxes: Income before income taxes decreased $297,000, or 18.3%, to $1.3 million for the three months ended September 30, 2015 from $1.6 million for the prior year period, which led to a decrease in income tax expense for the three months ended September 30, 2015 to $258,000 from $285,000 for the prior year period. The Company’s effective tax rate for the three months ended September 30, 2015 was 19.4%, an increase from 17.5% for the same 2014 period. The increase in the effective tax rate was primarily due to an increase in taxable income at the Company’s taxable entities combined with increased tax expense in California related to our mortgage warehouse activities.

Comparison of Operating Results for Nine Month Periods Ended September 30, 2015 and September 30, 2014

Net Income: Net income decreased to $3.3 million, or $0.62 per diluted share, for the nine months ended September 30, 2015 from $3.4 million, or $0.62 per diluted share, for the nine months ended September 30, 2014. The decrease was primarily due to increases in the provision for loan losses totaling $255,000, noninterest expense of $602,000, and income tax expense of $169,000. These increases were partially offset by an increase in net interest income of $798,000 and an increase in noninterest income of $170,000.

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Net Interest Income: Net interest income increased $798,000, or 7.2%, to $11.8 million for the nine months ended September 30, 2015 from $11.0 million for the prior year period. Net interest margin increased 21 basis points to 3.35% for the nine months ended September 30, 2015 compared to 3.14% for the prior year period. The increase in net interest income was primarily attributable to a $395,000, or 2.9%, increase in interest income as the average balance of interest earning assets increased by $2.1 million and the average yield earned on these assets increased 10 basis points from the prior year period. In addition, interest expense for the nine months ended September 30, 2015decreased $403,000, or 16.9%, due to a 13 basis point decrease in the average cost of interest-bearing liabilities and a $7.0 million, or 1.9%, decrease in the average balance of interest-bearing liabilities for the nine months ended September 30, 2015 compared to the prior year period.

Interest and Dividend Income: Interest and dividend income increased $395,000, or 2.9%, to $13.8 million for the nine months ended September 30, 2015 compared to $13.4 million for the prior year period. During the first nine months of 2015, interest income on loans increased $886,000 compared to the prior year period primarily due to a 10.0%increase in the average balance of loans outstanding to $308.8 million from $280.6 million for the prior year period. This increase in the average balance of loans outstanding was partially offset by an eight basis point decrease in the average yield earned on loans due to current lower market interest rates and fees earned on loans during the nine months ended September 30, 2015 as compared to the prior year period.

Interest income on mortgage warehouse loans increased $702,000, or 18.3%, during the nine months ended September 30, 2015 due to a $12.2 million, or 11.6%, increase in the average balance of these loans and a 30 basis point increase in the average yield earned on these loans when compared to the prior year period. Our average outstanding mortgage warehouse balances increased during the nine months ended September 30, 2015 primarily due to an increase in the number of our warehouse lines. Our participation program with two other financial institutions has allowed us to continue to grow our customer base and provide ample funding for all of our warehouse customers without increasing our outstanding balances.

Interest income on commercial construction loans also increased $129,000, or 80.1%, during the nine months ended September 30, 2015 primarily due to a $5.9 million, or 218.0%, increase in the average balance of these loans which was partially offset by a decrease in loan fees earned when compared to the prior year period. Interest income on commercial land loans increased $99,000, or 48.3%, during the nine months ended September 30, 2015 primarily due to a $1.7 million, or 21.9%, increase in the average balance of these loans combined with a 78 basis point increase in their average yield earned when compared to the prior year period. Interest income on five or more family commercial real estate loans increased $59,000, or 9.1%, during the nine months ended September 30, 2015 primarily due to a $2.2 million, or 13.3%, increase in the average balance of these loans partially offset by a 19 basis point decrease in the average yield earned on these loans when compared to the prior year period. Interest income on home equity loans and lines of credit increased $51,000, or 13.1%, during the nine months ended September 30, 2015 primarily due to a $1.9 million, or 16.5%, increase in the average balance of these loans from the prior year period.

Partially offsetting the above mentioned increases, interest income on commercial and industrial loans decreased $86,000, or 16.4%, during the nine months ended September 30, 2015, which was primarily due to a $1.2 million, or 6.6%, decrease in the average balance of these loans and a 40 basis point decrease in the average yield earned on these loans. Interest income on commercial real estate loans decreased $85,000, or 2.7%, during the nine months ended September 30, 2015 due to a 20 basis point decrease in the average yield earned on these loans from the comparable prior year period. Interest income on consumer and other loans decreased $33,000, or 21.2%, during the nine months ended September 30, 2015 from the comparable prior year period due to low growth with lower current yields and repayments of higher-yielding automobile dealer loans.

Interest income on investment securities decreased $507,000 for the nine months ended September 30, 2015 compared to the prior year period primarily due to a $27.7 million, or 16.8%, decrease in the average outstanding balance of investment securities and a five basis point decrease in the average yields earned on these securities. During the nine months ended September 30, 2015, the Company sold approximately $21.5 million of investment securities available-for-sale and utilized $20.2 million of proceeds from maturities and principal repayments for liquidity purposes to fund increased loan balances and repay FHLB advances.

Interest income from taxable securities decreased $449,000, or 29.9%, for the nine months ended September 30, 2015 compared to the prior year period primarily due to a decrease in the average balance of taxable securities of $26.1 million, or 23.1%, from sales and maturities combined with a 16 basis point decrease in the average yield earned on these securities.

Interest Expense: Interest expense decreased $403,000, or 16.9%, to $2.0 million for the nine months ended September 30, 2015 compared to $2.4 million for the prior year period due to decreases in the average cost of interest bearing liabilities of 13 basis points to 0.72% and a decrease in the average outstanding balance of interest bearing liabilities of $7.0 million during the nine months ended September 30, 2015.

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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, 2015 and 2014. All average balances are daily average balances. The annualized yields set forth below include the effect of deferred fees, discounts, and premiums that are amortized or accreted to interest income or expense.

	Nine Months Ended September 30,
	2015						2014
	Average Outstanding Balance		Interest		Annualized Yield/Cost		Average Outstanding Balance		Interest		Annualized Yield/Cost
	(Dollars in thousands)
Assets:
Loans (1)	$	308,769	$	11,378	4.91	%	$	280,589	$	10,492	4.99	%
Taxable securities	86,937		1,051		1.61		113,082		1,500		1.77
Tax exempt securities (2)	50,841		1,181		3.10		52,433		1,239		3.15
FHLB stock	4,162		130		4.16		4,357		132		4.04
Federal funds sold and other interest-earning deposits	19,728		81		0.55		17,832		63		0.47
Total interest earning assets	470,437		13,821		3.92		468,293		13,426		3.82
Non-interest earning assets	42,523						43,675
Total assets	$	512,960					$	511,968
Liabilities and equity:
Savings deposits	$	64,423	$	26	0.05	%	$	63,610	$	27	0.06	%
Money market accounts	57,711		167		0.39		68,243		189		0.37
Interest-bearing checking	64,249		109		0.23		54,805		90		0.22
Certificates of deposit and IRAs	104,354		630		0.80		107,863		1,065		1.32
Total interest-bearing deposits	290,737		932		0.43		294,521		1,371		0.62
FHLB advances	68,733		922		1.79		71,996		862		1.60
Subordinated debentures	5,155		128		3.31		5,155		152		3.93
Short-term borrowings	846		3		0.47		821		3		0.49
Total borrowings	74,734		1,053		1.88		77,972		1,017		1.74
Total interest-bearing liabilities	365,471		1,985		0.72		372,493		2,388		0.85
Non-interest bearing deposits	58,061						52,580
Other liabilities	6,262						5,223
Total liabilities	429,794						430,296
Shareholders’ equity	83,166						81,672
Total liabilities & shareholders’ equity	$	512,960					$	511,968
Net interest income			$	11,836					$	11,038
Net interest rate spread					3.20	%					2.97	%
Net interest margin					3.35						3.14

(1) The average balance of loans includes loans held for sale and nonperforming loans, interest on which is recognized on a cash basis.

(2) No tax-equivalent yield adjustments have been made.

Interest expense on certificates of deposit and IRAs decreased $435,000, or 40.8%, to $630,000 for the nine months ended September 30, 2015 compared to the prior year period primarily due to a decrease of 52 basis points in the average cost of such deposits in addition to a decrease in the average outstanding balance of such deposits of $3.5 million. As higher cost certificates of deposit mature and reprice, the Company has been able to reduce its interest expense and shift some of these balances into lower cost core deposit accounts.

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Interest expense on money market deposits decreased $22,000 to $167,000 for the nine months ended September 30, 2015 compared to $189,000 for the prior year period due to a decrease of $10.5 million in the average outstanding balance of these accounts. The decrease was primarily due to a decrease in one large public fund money market relationship at the end of 2014.

Interest expense on FHLB advances increased $60,000, or 7.0%, to $922,000 for the nine months ended September 30, 2015 compared to $862,000 for the prior year period primarily due to a 19 basis point increase in the average cost of these borrowings and was partially offset by a $3.3 milliondecrease in the average balance of FHLB advances when compared to the prior year period. The average cost of these borrowings increased primarily due to the start of two of the Bank’s $10.0 million notional interest rate swaps which are each tied to a $10.0 million FHLB advance with fixed interest rates of 2.09% and 2.23%, respectively, with the Bank receiving one month LIBOR. These swaps mature in five years in March and June 2020, respectively.

Interest expense on the Company’s subordinated debt decreased $24,000 during the nine months ended September 30, 2015 compared to the prior year period due to the March 2014 maturity of an interest rate swap which reduced the average cost of these borrowings by 62 basis points to 3.31% for the nine months ended September 30, 2015 from 3.93% for the same 2014 period. The subordinated debt has a variable rate of interest tied to the three month LIBOR.

Provision for Loan Losses: During the nine months ended September 30, 2015, the Company recorded a $255,000 provision for loan losses primarily due to a $56.9 million increase in total loans at September 30, 2015 compared to September 30, 2014. Management did not record a provision for loan losses during the prior year period. The Company's analysis of the allowance for loan losses for the third quarter of 2015 reflected continued improvement in asset quality metrics and various positive trends, including nonperforming loans, classified assets, troubled debt restructurings, delinquencies, and current economic conditions. Net charge-offs for the nine months ended September 30, 2015 totaled $173,000 compared to $159,000 for the prior year period.

Noninterest Income: Noninterest income increased $170,000, or 8.7%, to $2.1 million for the nine months ended September 30, 2015 from $1.9 million for the prior year period. During the nine months ended September 30, 2015, we realized an increase in net gains on other assets of $126,000 compared to the prior year period due to lower write-downs on other real estate owned and assets held for sale. Wire transfer fees increased $96,000 during the nine months ended September 30, 2015 due to the increase in mortgage warehouse activity when compared to the prior year period. Gains on mortgage banking activities increased $81,000 as mortgage originations from purchase activity and associated sales were higher during the nine months ended September 30, 2015 when compared to the prior year period. Partially offsetting these increases was a $72,000decrease in service charges on deposit accounts due to lower overdraft-related fees and service charges on checking accounts combined with the loss of a large deposit relationship during the first quarter of 2015. Other income decreased $73,000 due to timing differences of reimbursable loan closing expenses and other miscellaneous income items.

Noninterest Expense: Noninterest expense increased $602,000, or 6.7%, to $9.6 million for the nine months ended September 30, 2015 when compared to the prior year period. Salaries and employee benefits expense increased $458,000, which included an increase in payroll expense of $214,000 related to annual merit increases, higher bonuses for mortgage warehouse employees due to the group’s higher profitability, the addition of a commercial lender, and higher mortgage commissions during the nine months ended September 30, 2015 when compared to the prior year period. Stock-based compensation expense increased $338,000 during the nine months ended September 30, 2015 when compared to the prior year period due to the stock option and restricted stock awards granted during the fourth quarter of 2014. The expense related to the Company’s employee stock ownership plan also increased $42,000 during the nine months ended September 30, 2015 when compared to the prior year period due to our increasing stock price. Group insurance costs increased $39,000 due to higher health care costs in 2015. These increases were partially offset by a $215,000 increase in deferred lending costs due to increased commercial and mortgage loan originations during the nine months ended September 30, 2015 when compared to the prior year period.

Bank examination fees increased by $87,000 during the nine months ended September 30, 2015 when compared to the prior year period due to timing of audits and reviews, including $17,500 in consent fees for the 2013 audited financial statements of the Company and its 401(k) employee benefit plan which was paid to our previous independent registered public accounting firm. Advertising expenses increased $56,000 during the nine months ended September 30, 2015 when compared to the prior year period as we increased our advertising for mortgages and home equity loans and lines of credit and mobile remote deposit capture during 2015. Data processing expenses also increased $24,000 primarily due to increased core processing costs combined with an upgrade of our disaster recovery and back up systems. Partially offsetting these increases was a $35,000decrease in FDIC insurance due to our Tier 1 leverage capital ratio and improving asset quality trends for the nine months ended September 30, 2015 compared to the prior year period.

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Income Taxes: Income before income taxes increased $111,000, or 2.8%, to $4.1 million for the nine months ended September 30, 2015 from $4.0 million for the prior year period. Income tax expense increased $169,000 for the nine months ended September 30, 2015 to $739,000 from $570,000 for the prior year period. The Company’s effective tax rate for the nine months ended September 30, 2015 was 18.1%, an increase from 14.3% for the comparable 2014 period. The increases in income tax expense and the effective tax rate were primarily due to increased pre-tax income at the Company’s taxable entities combined with increased tax expense in California related to our mortgage warehouse activities.

Liquidity and Capital Resources

We maintain liquid assets at levels we consider adequate to meet both our short- and long-term liquidity needs. We adjust our liquidity levels to fund loan commitments, repay our borrowings, and fund deposit outflows. We also adjust liquidity to meet asset and liability management objectives. Liquidity levels can significantly fluctuate based upon the demand in the mortgage warehouse lending division.

Our primary sources of liquidity are deposits, amortization and prepayment of loans and mortgage-backed securities, maturities of investment securities and other short-term investments, and earnings and funds provided from operations, as well as access to FHLB advances and other borrowings. While scheduled principal repayments on loans and mortgage-backed securities are a relatively predictable source of funds, deposit flows and loan prepayments are greatly influenced by market interest rates, economic conditions, and rates offered by our competition. We set the interest rates on our deposits to maintain a desired level of total deposits.

Our liquid assets, defined as cash and due from financial institutions, interest earning time deposits in other financial institutions, and the market value of unpledged securities available-for-sale, totaled $112.8 million at September 30, 2015 and constituted 20.7% of total assets at that date, compared to $130.3 million, or 25.1%, of total assets at December 31, 2014.

The Company also maintains lines of credit with the FHLB. Total availability under these lines of credit was $89.0 million at September 30, 2015 and was fully drawn. At September 30, 2015, the Company had borrowed $10.0 million on the overnight line of credit with the FHLB. 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 FHLB. At September 30, 2015, we had $88.0 million in unpledged securities available-for-sale.

The Company actively utilizes its borrowing capacity with the FHLB to manage liquidity and to provide a funding alternative to time deposits, if the FHLB’s rates and terms are more favorable. The advances from the FHLB can have maturities from overnight to multiple years. At September 30, 2015, $64.0 million of these advances were due within one year and $25.0 million had maturities greater than a year. At September 30, 2015, $24.0 million of the FHLB advances were variable rate, of which $10.0 million is part of our interest rate swap strategy. One $10.0 million variable rate advance was swapped for a fixed rate of 3.69% and will mature in July 2016. During 2015, two of the Company’s forward starting swaps began. In March, the Company entered into a $10.0 million advance that was swapped for a fixed rate of 2.09%. In June, the Company entered into a second $10.0 million advance that was swapped for a fixed rate of 2.23%. These advances reprice every month for a five year period, maturing in March and June 2020. The remaining $65.0 million in FHLB advances were at fixed rates.

The Company has an accommodation from First Tennessee Bank National Association (“FTN”) to borrow federal funds up to $15.0 million. This federal funds accommodation is not a confirmed line or loan, and FTN may cancel such accommodation at any time, in whole or in part, without cause or notice, in its sole discretion. At September 30, 2015, the Company borrowed $10.9 million on this line at an average cost of 1.0%. For the nine months ended September 30, 2015, the Company had average borrowings totaling $40,000 with a maximum balance of $10.9 million on September 30, 2015.

The Company also has an agreement with Zions First National Bank (“Zions”) for an unsecured line of credit to borrow federal funds up to $9.0 million. This line of credit was established at the discretion of Zions and may be terminated at any time in its sole discretion. At September 30, 2015, the Company borrowed $9.0 million on this line at an average cost of 0.39%. For the nine months ended September 30, 2015, the Company had average borrowings totaling $806,000 with a maximum balance during the period of $9.0 million on September 30, 2015.

Federal regulations establish guidelines for calculating “risk-adjusted” capital ratios and minimum ratio requirements.In January 2015, the FDIC’s new rule for regulatory risk-based capital applicable to The LaPorte Savings Bank became effective. The rule implements the “Basel III” regulatory capital reforms and changes required by the Dodd-Frank Act.

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The final rule included new minimum risk-based capital and leverage ratios, which became effective for The LaPorte Savings Bank (LaPorte Bancorp, Inc. is exempt by a Federal Reserve Board rule since it has less than $10 billion in assets) on January 1, 2015, and refines the definition of what constitutes “capital” for purposes of calculating these ratios. The new minimum capital requirements include: (i) a new common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 to risk-based assets capital ratio of 6% (increased from 4%); (iii) a total capital ratio of 8% (unchanged from current rules); and (iv) a Tier 1 leverage ratio of 4%. The final rule also established a “capital conservation buffer” of 2.5%, which when fully phased in will result in the following minimum ratios: (i) a common equity Tier 1 capital ratio of 7%, (ii) a Tier 1 to risk-based assets capital ratio of 8.5%, and (iii) a total capital ratio of 10.5%. The new capital conservation buffer requirement will be phased in beginning in January 2016 at 0.625% of risk-weighted assets and will increase each year until fully implemented in January 2019. An institution is subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. These limitations establish a maximum percentage of eligible retained income that can be utilized for such actions.

Upon the adoption of the new rule, the Bank’s capital ratios were not significantly impacted at September 30, 2015 with the Bank considered “well-capitalized”. The table below presents the Bank’s capital ratios at the dates indicated:

	September 30, 2015		December 31, 2014
Common Equity Tier 1 Ratio (1)	16.5	%	n/a
Tier 1 Capital Ratio	16.5		19.2	%
Total Capital Ratio	17.4		18.1
Tier 1 Leverage Ratio	13.3		13.0

(1) Common Equity Tier 1 Ratio was calculated as of September 30, 2015 under Basel III rules, which became effective January 1, 2015.

Off-Balance-Sheet Arrangements: In the normal course of operations, we engage in a variety of financial transactions that, in accordance with generally accepted accounting principles, are not recorded in our financial statements. These transactions involve, to varying degrees, elements of credit, interest rate, and liquidity risk. Such transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments, unused lines of credit, and standby letters of credit. At September 30, 2015, we had commitments to originate loans and unused lines of credit totaling $57.0 million and commercial standby letters of credit totaling $1.1 million. The Company utilizes hedging strategies through interest rate swaps to manage interest rate risk. See Note 8 in the Condensed Notes to the Consolidated Financial Statements for more information.

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.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Management of Interest Rate Risk

Our asset/liability management strategy attempts to manage the impact of changes in interest rates on net interest income, our primary source of earnings.

Historically, we have relied on funding longer term higher interest-earning assets with shorter term lower interest-bearing deposits to earn a favorable net interest rate spread. As a result, we have been vulnerable to adverse changes in interest rates. Over the past several years, management has implemented an asset/liability strategy to manage, subject to our profitability goals, our interest rate risk. Among the techniques we are currently using to manage interest rate risk are: (i) expanding, subject to market conditions, our commercial real estate loans, commercial business loans and mortgage warehouse loans as they generally reprice more quickly than residential mortgage loans; (ii) selling on the secondary market most of our originations of long-term fixed-rate one- to four-family residential mortgage loans; (iii) subject to market conditions and consumer demand, originating residential adjustable rate mortgages for our portfolio; (iv) using interest rate swaps, caps or floors to hedge our assets and/or liabilities; and (v) reducing the amount of long term, fixed rate mortgage-backed and CMO securities, which are vulnerable to an increasing interest rate environment and will extend in duration. We have also used structured rates with redemption features to improve our yield and may consider interest rate swaps and other hedging instruments although we have not done so recently.

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While this strategy has helped manage our interest rate exposure, it does pose risks. For instance, the prepayment options embedded in adjustable rate one- to four-family residential loans and the mortgage-backed securities and CMOs, which allow for early repayment at the borrower’s discretion may result in prepayment before the loan reaches the fully indexed rate. Conversely, in a falling interest rate environment, borrowers may refinance their loans and redeemable securities may be called. In addition, non-residential lending generally presents higher credit risks than residential one- to four-family lending.

Our Board of Directors is responsible for the review and oversight of management’s asset/liability strategies. Our Asset/Liability Committee is charged with developing and implementing an asset/liability management plan. This committee meets monthly to review pricing and liquidity needs and assess our interest rate risk. We currently utilize a third party modeling program, prepared on a quarterly basis, to evaluate our sensitivity to changing interest rates. In addition, on a monthly basis, the committee reviews our current liquidity position, investment activity, deposit and loan repricing and terms, interest rate swap effectiveness testing, and Federal Home Loan Bank and other borrowing strategies.

Depending on market conditions, we often place more emphasis on enhancing net interest margin rather than matching the interest rate sensitivity of our assets and liabilities. In particular, we believe that the increased net interest income resulting from a mismatch in the maturity of our asset and liabilities portfolios can, during periods of stable interest rates, provide high enough returns to justify increased exposure to sudden and unexpected increases in interest rates. As a result of this philosophy, our results of operations will remain vulnerable to increases in interest rates.

Quantitative Analysis

The following table sets forth, as of September 30, 2015, the estimated changes in the net interest margin and the economic value of equity that would result from the designated changes in the United States Treasury yield curve over a 12 month non-parallel ramp for The LaPorte Savings Bank. Computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions including relative levels of market interest rates, loan prepayments and deposit decay, and should not be relied upon as indicative of actual results.

Changes in Interest  Rates (basis points) (1)			Estimated Increase (Decrease) in NIM							Estimated Increase (Decrease) in EVE					EVE as Percentage of  Economic Value of Assets
	Estimated NIM (2)		Amount			Percent		Estimated EVE (3)		Amount			Percent		EVE  Ratio(4)		Changes in Basis Points
(Dollars in thousands)
+300	$	17,257	$	454		2.70	%	$	77,703	$	(7,303	)	(8.59	)%	15.18	%	(0.62	)%
+200	17,152		349			2.08		82,028		(2,978		)	(3.50	)	15.76		(0.04	)
+100	17,009		206			1.23		85,084		78			0.09		16.08		0.28
0	16,803		—			—		85,006		—			—		15.80		—
-100	16,161		(642		)	(3.82	)	79,652		(5,354		)	(6.30	)	14.62		(1.18	)

(1) Assumes changes in interest rates over a 12 month non-parallel ramp.

(2) NIM or Net Interest Margin measures The LaPorte Savings Bank’s exposure to net interest income due to changes in a forecast interest rate environment.

(3) EVE or Economic Value of Equity at Risk measures The LaPorte Savings Bank’s exposure to equity due to changes in a forecast interest rate environment.

(4) EVE Ratio represents Economic Value of Equity divided by the economic value of assets which should translate into built in stability for future earnings.

The table above indicates that at September 30, 2015, in the event of a 100 basis point decrease in interest rates over a 12 month non-parallel ramp, we would experience a 3.82%decrease in net interest income. In the event of a 100 basis point increase in interest rates over a 12 month non-parallel ramp, the net interest income would increase1.23%.

The table above indicates that at September 30, 2015, in the event of a 100 basis point decrease in interest rates over a 12 month non-parallel ramp, we would experience a 6.30%decrease in economic value of equity. In the event of a 100 basis point increase in interest rates over a 12 month non-parallel ramp, the economic value would increase0.09% in economic value of equity.

Certain shortcomings are inherent in the methodology used in the above interest rate risk measurement. Modeling changes in the economic portfolio value of equity and net interest margin require making certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in interest rates. In this regard, the table above assumes that the composition of our interest-sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and assumes that particular changes in interest rates occur at different times and in different amounts in response to a designed change in the yield curve for U.S. Treasuries. Furthermore, although the table provides an indication of our interest rate risk exposure at a particular point in time, such

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measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on our net interest income. Finally, the above table does not take into account the changes in the credit risk of our assets which can occur in connection with changes in interest rates.

The Company has taken steps to address its exposure to rising interest rates with respect to our economic value of equity at risk. In February 2010, the Company executed two interest rate swaps against $15.0 million in maturing FHLB advances. The first interest rate swap was against a $10.0 million adjustable rate advance tied to the three month LIBOR plus 0.25% for six years at an effective fixed rate of 3.69% and began in July 2010. The second interest rate swap was against a $5.0 million adjustable rate advance tied to the three month LIBOR plus 0.22% for five years with an effective fixed rate of 3.54% and began in September 2010. This swap matured in September 2015. In August 2014, the Company executed three $10.0 million forward starting interest rate swaps against $30.0 million in maturing fixed rate FHLB advances that reprice monthly and are tied to the one month LIBOR. The first interest rate swap began in March 2015 for five years with an effective fixed rate of 2.085%. The second interest rate swap began in June 2015 for five years with an effective fixed rate of 2.228%. The third interest rate swap will begin in March 2016 for five years with an effective fixed rate of 2.618%. Management pursued this hedging strategy to address the concern over the impact to the Company’s tangible equity from the price deterioration in the Company’s available-for-sale securities portfolio in a rising rate environment.

We will continue to look for opportunities to address our exposure to rising interest rates and the related impact on our economic value of equity at risk and may utilize hedging strategies in the future. We are also continuing to sell the majority of the fixed rate one- to-four family residential real estate loans originated and retain only variable-rate one- to-four family residential loans and fixed-rate one-to-four family residential loans with maximum terms of 20 years. We continue to originate the majority of commercial real estate loans at a variable rate with interest rate floors attached.

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, Chief Accounting 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, Chief Accounting 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 reasonably likely to materially affect, our internal control over financial reporting.

PART II OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

As of September 30, 2015, 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

As of September 30, 2015, there were no material changes to the “Risk Factors” disclosed in the Company’s Annual Report for the year ended December 31, 2014 on Form 10-K filed on March 12, 2015. However, the risks described in our 2014 Annual Report on Form 10-K are not the only risks that we face. 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.

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

(a) Not applicable

(b) Not applicable

(c) The following table presents information related to purchases made by or on behalf of the Company of shares of the Company’s common stock during the periods indicated:

Period	Total Number of Shares Purchased	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (1)
July 1-31, 2015	20,294	$	13.49	20,294	98,951
August 1-31, 2015	—	—		—	98,951
September 1-30, 2015	—	—		—	98,951
Total	20,294	13.49		20,294	98,951

(1) On September 9, 2014, the Company publicly announced its fourth share repurchase program for 280,832 shares.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable

ITEM 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS

	Description
31.1	Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101	The following materials from LaPorte Bancorp, Inc.’s Form 10-Q Report for the quarterly period ended September 30, 2015, formatted in XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income (Loss), (iv) the Consolidated Statements of Changes in Shareholders’ Equity, (v) the Consolidated Statements of Cash Flows, and (vi) the Notes to Consolidated Financial Statements.

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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.
Date:	November 12, 2015	/s/ Lee A. Brady
		Lee A. Brady
		Chief Executive Officer
Date:	November 12, 2015	/s/ Michele M. Thompson
		Michele M. Thompson
		President and Chief Financial Officer

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