##### 



Exhibit 13.1 FIRST SHARES BANCORP, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with our selected
financial statements and the related notes presented elsewhere in this report,
as well as our historical financial statements which appear in this report. Certain statements in this section constitute forward-looking statements
within the meaning of Section 27A of the Securities Act and Section 21E of the
Exchange Act. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause actual results, performance or
achievements of First Shares to differ materially from any future results,
performance or achievements expressed or implied by such forward-looking
statements. Overview First Shares Bancorp, Inc., an Indiana corporation formed in 1991, is a bank
holding company that owns all of the common shares of First Bank, an
Indiana-chartered bank with deposit accounts insured by the FDIC. After years
of slow growth, we implemented an aggressive new growth strategy in 1999 with
the goal of capturing a significant portion of the market for banking services
in the Central Indiana counties, south of Indianapolis. To help fund our
growth, we conducted an initial public offering of our common shares in 2000,
raising net proceeds of approximately $2.7 million, and an offering in 2002 of
redeemable subordinated debentures and mandatory stock purchase contracts,
raising net proceeds of approximately 4.7 million. On March 10, 2004, First Shares Bancorp signed a definitive agreement to merge
into Lincoln Bancorp, headquartered in Plainfield, Indiana. Our subsidiary
bank, First Bank, will also be merged into Lincoln Bancorps subsidiary,
Lincoln Bank. Under the terms of the agreement, shareholders of First Shares
would have the right to elect to receive either .75 shares of Lincoln common
stock or $14.80 in cash for each share of First Shares common stock owned by
them. However, 50% of the aggregate consideration must be paid in shares of
Lincoln Bancorp stock, and there may be pro rata allocations of cash or stock
made to shareholders to ensure that this requirement is satisfied. The merger
is subject to approval by the shareholders of Lincoln Bancorp and First
Shares as well as regulatory authorities and other customary conditions for
transactions of this nature. We expect the merger to close in the third
quarter of 2004. In March 2004 we also announced that First Shares Bancorp
would redeem its outstanding 8% redeemable subordinated debentures and cancel
the associated equity contracts, effective May 7, 2004. See   Financial
Condition for additional information. We offer a broad range of commercial banking products and services to small and
medium-sized businesses and retail customers from our eight locations in
Central Indiana. Our products include commercial, consumer and real estate
loans, credit cards, a broad range of deposit products and other non-deposit
banking services. Net interest income is the most significant component of our earnings. Net
interest income is the difference between interest and fees realized on earning
assets, primarily loans, securities and short-term investments and interest
paid on deposits and other borrowings. Net interest income is determined by
several factors, including the volume of earning assets and liabilities, the
mix of earning assets and liabilities, and interest rates. The cost of funds
varies with the amount of funds necessary to support total assets, the rates
paid to attract and hold deposits, the rates paid on borrowed funds, and the
levels of interest-free funds. Our success is significantly dependent on our ability to manage interest rate
risk, which is defined as the exposure of net interest income, net earnings,
and equity to changes in interest rates. We manage risk from changes in market
interest rates, in part, by controlling the mix of interest rate-sensitive
assets and interest rate-sensitive liabilities. Net income is also affected by the provision for loan losses. Making loans is
an essential element of our business, and there is a risk that loans will not
be repaid. The risk of loss on a loan is affected by a number of factors,
including the duration of the loan, credit risks of a particular borrower,
changes in economic or industry conditions, 1




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##### 



and in the case of a collateralized loan, uncertainties about the future value
of the collateral. A further economic downturn could contribute to the
deterioration in the quality of the loan portfolio. Loans made up approximately
76% of First Banks assets at December 31, 2003. If a further economic downturn
occurs in the economy as a whole, or in Indiana where First Bank has the
majority of its loans, borrowers may be unable to repay their loans as
scheduled and the value of real estate or other collateral that may secure the
loans could be adversely affected. The risks and challenges that management sees to continued profitability in
2004 are slow growth in loan demand resulting from delays in the expected
economic recovery, increased competition for loans and deposits in our markets
as large Indianapolis-area banks seek to expand their territory, continued low
interest rates and increased non-interest expense needed to fund growth.
Opportunities in 2004 apart from the proposed merger include increased loan
demand resulting from economic recovery, continued growth in our primary market
areas as the Indianapolis population and business community expand to outlying
counties, the possibility of interest rate increases, and increased response to
our customer-focused strategy in the face of large bank consolidations
impacting our market area. Critical Accounting Policies Our accounting and reporting policies conform to accounting principles
generally accepted in the United States of America and general practices within
the financial services industry. A summary of our significant accounting
policies is contained in Note 1 of the Notes to Consolidated Financial
Statements. In fulfilling its responsibilities, the Audit Committee of the
Board of Directors has reviewed our accounting and reporting policies. In
preparing the Consolidated Financial Statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the balance sheet and revenues and expenses for
the period. Actual results could differ significantly from those estimates. Allowance for Loan Losses.The allowance for loan losses is a valuation
allowance for probable incurred credit losses. Management estimates the
allowance balance required based on past loan loss experience, known and
inherent risks in the portfolio, information about specific borrower situations
and estimated collateral values, economic conditions, and other factors.
Allocations of the allowance may be made for specific loans, but the entire
allowance is available for any loan that, in managements judgment, should be
charged-off. While management uses available information to recognize losses
on loans, future additions to the allowance may be necessary based on changes
in economic conditions and historical loss experience. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review this allowance and may require us to recognize additions to
the allowance based on their judgment about information available to them at
the time of their examination. Results of Operations for the Years Ended December 31, 2003, 2002 and 2001 Net Income During 2003, we continued to grow total loans and deposits, and focused on
increasing our market share as outlined in our strategic plan. Net income was
$753,000 or $.48 per basic share and $.43 per diluted share for 2003 compared
to $1.3 million or $.84 per basic share and $.83 per diluted share for 2002.
Net income of $692,000 or $.44 per basic share and $.43 per diluted share was
reported for 2001. Return
on average assets (ROA) for 2003, 2002, and 2001 was .44%, .93%, and .58% while return on average equity (ROE) was 8.50%, 16.85%, and 9.99% for
those same periods. Operating results for 2003 were adversely impacted by the
low interest rate environment, increased provision expense, and increased
non-interest expense incurred to support growth. Net Interest Income Net interest income is the most significant component of our earnings. Net
interest income is the difference between interest and fees realized on earning
assets, primarily loans, securities and short-term investments and interest
paid 2




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##### 



on deposits and other borrowings. The net interest margin is this difference
expressed as a percentage of average earning assets. Net interest income is
determined by several factors, including the volume of earning assets and
liabilities, the mix of earning assets and liabilities, and interest rates.
For 2003, net interest income totaled $6.2 million compared to $5.4 million in
2002, an increase $735,000 or 13.5%. This increase was driven primarily by the
increase in earning assets (most notably loans) as we increased our market
share in existing markets. Net interest income also increased from 2001 to
2002, by $1.1 million or 25.0%, as earning assets also experienced growth. Interest income for 2003 totaled $9.7 million, compared to $9.2 million for
2002, an increase of $484,000 or 5.2%. While the increase in 2003 can be
attributed to some extent to growth in the investment portfolio, growth in the
loan portfolio was the primary contributor to the increase. Average
investments, including securities and federal funds sold, were $35.3 million in
2003, up by $2.4 million from 2002s $32.9 million level, an increase of 7.3%.
Loans demonstrated stronger growth with the average balance increasing from
$101.4 million in 2002 to $124.3 million in 2003, representing a 22.5%
increase. The increased volume of earning assets has been the dominant factor
for growth in interest income. Average yields, on a fully tax equivalent
basis, negatively influenced interest income, declining from 6.91% for 2002 to
6.20% for 2003. During 2002 and 2003, the Federal Reserve Bank rate cut
interest rates several times, resulting in falling rates on the loan portfolio
as loans repriced or customers refinanced loans at market rates. Interest expense declined from 2002 to 2003, decreasing by $251,000 or 6.6%.
The decrease was primarily rate driven, with average deposits increasing, in
all categories, by a total of $18.8 million, or 17.5%, during 2003. Time
deposits increased the most, with the average balance rising by $14.1 million.
With the declining interest rate environment of 2002 and 2003, the average cost
of deposits decreased from 2.97% in 2002 to 2.18% in 2003. Borrowed funds
were utilized during 2003 to support growth. An increase of $184,000 in
interest expense was recorded during 2003 compared to 2002 from these funding
sources. The average cost of all interest bearing liabilities decreased from
3.11% in 2002 to 2.44% in 2003. Interest income totaled $9.2 million for 2002, up $70,000 or .76% compared to
2001. Average earning assets increased $22.7 million or 20.4% during this
period, with the loan portfolio primarily contributing to the increase. The
yield on interest earning assets decreased to 6.91% in 2002 from 8.23% in 2001. Interest expense from 2001 to 2002 decreased $1.0 million or 21.1%, as average
deposit balances increased $13.5 million or 14.4%. Growth occurred in all
deposit categories, but was led by increases in time deposits. The total cost
of all interest bearing liabilities decreased, from 4.75% in 2001 to 3.11% in
2002, as interest rates declined. The following tables set forth an analysis of our net interest income (on a
tax-equivalent basis) for 2003, 2002, and 2001. 3




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##### 



Average Balance Sheets and Interest Rates ASSETS Years ended December 31,2003
    
    2002
    
    2001Average
    
    
    
    
    
    Average
    
    Average
    
    
    
    
    
    Average
    
    Average
    
    
    
    
    
    AverageBalance
    
    Interest
    
    Rate
    
    Balance
    
    Interest
    
    Rate
    
    Balance
    
    Interest
    
    Rate(Dollars in Thousands)Interest earning assetsSecuritiesTaxable
    
    $
    24,378
    
    
    $
    1,033
    
    
    
    4.24
    %
    
    $
    28,848
    
    
    $
    1,553
    
    
    
    5.38
    %
    
    $
    20,323
    
    
    $
    1,313
    
    
    
    6.46
    %Non-taxable (1)
    
    
    9,739
    
    
    
    530
    
    
    
    5.45
    
    
    
    2,584
    
    
    
    165
    
    
    
    6.39
    
    
    
    883
    
    
    
    62
    
    
    
    7.02Federal funds sold
    
    
    1,422
    
    
    
    16
    
    
    
    1.13
    
    
    
    1,473
    
    
    
    25
    
    
    
    1.70
    
    
    
    1,231
    
    
    
    48
    
    
    
    3.90Interest bearing balances
With banks
    
    
    106
    
    
    
    1
    
    
    
    0.94
    
    
    
    32
    
    
    
    
    
    
    
    0.00
    
    
    
    123
    
    
    
    7
    
    
    
    5.69Unrealized gain/loss on
AFS securities
    
    
    (353
    )
    
    
    
    
    
    
    0.00
    
    
    
    (35
    )
    
    
    
    
    
    
    0.00
    
    
    
    182
    
    
    
    
    
    
    
    0.00Total securities
    
    
    35,292
    
    
    
    1,580
    
    
    
    4.48
    
    
    
    32,902
    
    
    
    1,743
    
    
    
    5.30
    
    
    
    22,742
    
    
    
    1,430
    
    
    
    6.29LoansCommercial
    
    
    30,339
    
    
    
    1,968
    
    
    
    6.49
    
    
    
    26,163
    
    
    
    1,817
    
    
    
    6.94
    
    
    
    12,494
    
    
    
    1,409
    
    
    
    8.50Real estate
    
    
    66,193
    
    
    
    4,370
    
    
    
    6.60
    
    
    
    49,356
    
    
    
    3,674
    
    
    
    7.44
    
    
    
    33,886
    
    
    
    3,221
    
    
    
    8.89Installment and other
Consumer
    
    
    27,753
    
    
    
    1,980
    
    
    
    7.13
    
    
    
    25,930
    
    
    
    2,056
    
    
    
    7.93
    
    
    
    24,305
    
    
    
    2,093
    
    
    
    8.61Total loans
    
    
    124,285
    
    
    
    8,318
    
    
    
    6.69
    
    
    
    101,449
    
    
    
    7,547
    
    
    
    7.44
    
    
    
    88,874
    
    
    
    7,755
    
    
    
    8.73Total earning assets
    
    $
    159,577
    
    
    $
    9,898
    
    
    
    6.20
    %
    
    $
    134,351
    
    
    $
    9,290
    
    
    
    6.91
    %
    
    $
    111,616
    
    
    $
    9,185
    
    
    
    8.23
    %Noninterest earning assetsAllowance for loan losses
    
    
    (1,647
    )
    
    
    
    
    
    
    
    
    
    
    (1,228
    )
    
    
    
    
    
    
    
    
    
    
    (1,009
    )Premises and equipment
    
    
    2,606
    
    
    
    
    
    
    
    
    
    
    
    2,060
    
    
    
    
    
    
    
    
    
    
    
    1,941Cash and due from banks
    
    
    5,496
    
    
    
    
    
    
    
    
    
    
    
    4,393
    
    
    
    
    
    
    
    
    
    
    
    3,797Accrued interest and
other Assets
    
    
    4,661
    
    
    
    
    
    
    
    
    
    
    
    3,892
    
    
    
    
    
    
    
    
    
    
    
    3,410Total assets
    
    $
    170,693
    
    
    
    
    
    
    
    
    
    
    $
    143,468
    
    
    
    
    
    
    
    
    
    
    $
    119,755
 4




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##### 



LIABILITIES AND SHAREHOLDERS EQUITY Years ended December 31,2003
    
    2002
    
    2001Average
    
    
    
    
    
    Average
    
    Average
    
    
    
    
    
    Average
    
    Average
    
    
    
    
    
    AverageBalance
    
    Interest
    
    Rate
    
    Balance
    
    Interest
    
    Rate
    
    Balance
    
    Interest
    
    Rate(Dollars in Thousands)Interest-bearing liabilitiesDepositsInterest-bearing demand
deposits
    
    $
    31,742
    
    
    $
    246
    
    
    
    0.77
    %
    
    $
    28,073
    
    
    $
    378
    
    
    
    1.35
    %
    
    $
    26,006
    
    
    $
    800
    
    
    
    3.08
    %Savings deposits
    
    
    8,688
    
    
    
    51
    
    
    
    0.59
    
    
    
    7,599
    
    
    
    91
    
    
    
    1.20
    
    
    
    5,565
    
    
    
    104
    
    
    
    1.87Time deposits
    
    
    86,033
    
    
    
    2,461
    
    
    
    2.86
    
    
    
    71,955
    
    
    
    2.,724
    
    
    
    3.79
    
    
    
    62,540
    
    
    
    3,552
    
    
    
    5.68Total interest-bearing
Deposits
    
    
    126,463
    
    
    
    2,758
    
    
    
    2.18
    
    
    
    107,627
    
    
    
    3,193
    
    
    
    2.97
    
    
    
    94,111
    
    
    
    4,456
    
    
    
    4.73Borrowed fundsFHLB advances
    
    
    6,863
    
    
    
    210
    
    
    
    3.06
    
    
    
    3,464
    
    
    
    155
    
    
    
    4.47
    
    
    
    4,129
    
    
    
    204
    
    
    
    4.94Repurchase agreements
    
    
    5,037
    
    
    
    34
    
    
    
    0.68
    
    
    
    4,840
    
    
    
    47
    
    
    
    0.97
    
    
    
    737
    
    
    
    9
    
    
    
    1.22Federal funds purchase
    
    
    637
    
    
    
    9
    
    
    
    1.41
    
    
    
    606
    
    
    
    11
    
    
    
    1.82
    
    
    
    382
    
    
    
    22
    
    
    
    5.76Notes payable
    
    
    1,350
    
    
    
    47
    
    
    
    3.48
    
    
    
    1,715
    
    
    
    73
    
    
    
    4.26
    
    
    
    1,755
    
    
    
    113
    
    
    
    6.44Debentures
    
    
    5,000
    
    
    
    482
    
    
    
    9.64
    
    
    
    3,461
    
    
    
    312
    
    
    
    9.01
    
    
    
    
    
    
    
    
    
    
    
    0.00Total borrowed funds
    
    
    18,887
    
    
    
    782
    
    
    
    4.14
    
    
    
    14,086
    
    
    
    598
    
    
    
    4.25
    
    
    
    7,003
    
    
    
    348
    
    
    
    4.97Total interest-bearing
Liabilities
    
    $
    145,350
    
    
    $
    3,540
    
    
    
    2.44
    %
    
    $
    121,713
    
    
    $
    3,791
    
    
    
    3.11
    %
    
    $
    101,114
    
    
    $
    4,804
    
    
    
    4.75
    %Noninterest-bearing liabilitiesNoninterest-bearing demand
Deposits
    
    
    15,964
    
    
    
    
    
    
    
    
    
    
    
    13,385
    
    
    
    
    
    
    
    
    
    
    
    11,128Accrued interest and other
Liabilities
    
    
    517
    
    
    
    
    
    
    
    
    
    
    
    451
    
    
    
    
    
    
    
    
    
    
    
    588Shareholders equity
    
    
    8,862
    
    
    
    
    
    
    
    
    
    
    
    7,919
    
    
    
    
    
    
    
    
    
    
    
    6,925Total liabilities and
Shareholders equity
    
    $
    170,693
    
    
    
    
    
    
    
    
    
    
    $
    143,468
    
    
    
    
    
    
    
    
    
    
    $
    119,755Interest margin recapNet interest income and
interest rate spread
    
    
    
    
    
    $
    6,358
    
    
    
    3.77
    %
    
    
    
    
    
    $
    5,499
    
    
    
    3.80
    %
    
    
    
    
    
    $
    4,381
    
    
    
    3.48
    %Net interest margin
    
    
    
    
    
    
    
    
    
    
    3.98
    %
    
    
    
    
    
    
    
    
    
    
    4.09
    %
    
    
    
    
    
    
    
    
    
    
    3.93
    %
 (1) Interest income on tax-exempt securities and loans has been adjusted to a tax equivalent basis using a marginal federal income tax rate of 34% for all years. 5




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##### 



Volume/Rate Analysis 2003-2002
    
    2002-2001Change
    
    Change
    
    
    
    
    
    Change
    
    ChangeTotal
    
    Due To
    
    Due To
    
    Total
    
    Due To
    
    Due ToChange
    
    Volume
    
    Rate
    
    Change
    
    Volume
    
    Rate(Dollars in thousands)INTEREST INCOMELoans
    
    $
    771
    
    
    $
    1,581
    
    
    $
    810
    
    
    $
    (208
    )
    
    $
    1,018
    
    
    $
    (1,226
    )SecuritiesTaxable
    
    
    (520
    )
    
    
    (219
    )
    
    
    (301
    )
    
    
    240
    
    
    
    485
    
    
    
    (245
    )Tax-exempt
    
    
    365
    
    
    
    393
    
    
    
    (28
    )
    
    
    103
    
    
    
    109
    
    
    
    (6
    )Interest-bearing balances with banks
    
    
    1
    
    
    
    1
    
    
    
    
    
    
    
    7
    
    
    
    7
    
    
    
    Federal funds sold
    
    
    (9
    )
    
    
    (1
    )
    
    
    (8
    )
    
    
    (23
    )
    
    
    8
    
    
    
    (31
    )Total interest income
    
    $
    608
    
    
    $
    1,755
    
    
    $
    (1,147
    )
    
    $
    105
    
    
    $
    1,613
    
    
    $
    (1,508
    )INTEREST EXPENSEInterest-bearing DDAs
    
    $
    (132
    )
    
    $
    44
    
    
    $
    (176
    )
    
    $
    (422
    )
    
    $
    59
    
    
    $
    (481
    )Savings deposits
    
    
    (40
    )
    
    
    12
    
    
    
    (52
    )
    
    
    (13
    )
    
    
    31
    
    
    
    (44
    )Time deposits
    
    
    (263
    )
    
    
    475
    
    
    
    (738
    )
    
    
    (828
    )
    
    
    479
    
    
    
    (1,307
    )FHLB Advances
    
    
    55
    
    
    
    116
    
    
    
    (61
    )
    
    
    (49
    )
    
    
    (31
    )
    
    
    (18
    )Federal funds purchased
    
    
    (13
    )
    
    
    
    
    
    
    (13
    )
    
    
    38
    
    
    
    
    
    
    
    38Repurchase agreements
    
    
    (2
    )
    
    
    
    
    
    
    (2
    )
    
    
    (11
    )
    
    
    
    
    
    
    (11
    )Notes payable
    
    
    (26
    )
    
    
    
    
    
    
    (26
    )
    
    
    (40
    )
    
    
    
    
    
    
    (40
    )Debentures
    
    
    170
    
    
    
    147
    
    
    
    23
    
    
    
    312
    
    
    
    312
    
    
    
    Total interest expense
    
    $
    (251
    )
    
    $
    794
    
    
    $
    (1,045
    )
    
    $
    (1,013
    )
    
    $
    850
    
    
    $
    (1,863
    )Net Interest income
    
    $
    859
    
    
    $
    961
    
    
    $
    (102
    )
    
    $
    1,118
    
    
    $
    763
    
    
    $
    355
 The effect of the yield on earnings assets declining faster than the cost on
interest bearing liabilities was a narrowing of the net interest margin. Net
interest income, on a tax equivalent basis, for 2003 was $6.4 million, 15.6%
higher than in 2002. Net interest income increased $1.1 million or 25.5% from
2001 to 2002. The net interest margin, on a tax equivalent basis for 2003,
2002, and 2001 was 3.98%, 4.09%, and 3.93%. During 2003, average noninterest
bearing liabilities and equity supported 14.8% of average total assets,
compared to 15.2% and 15.6% in 2002 and 2001. Average time deposits comprised
68.0% of total average deposits in 2003, compared to 66.9% and 66.5% in 2002
and 2001, respectively. Interest expense on borrowed funds, including FHLB
advances, repurchase agreements, federal funds purchased, notes payable, and
debentures increased slightly in 2003 due to a full year of interest expense on
the debentures. The cost of borrowed funds declined from 2002 to 2003 due to
the lower interest rate environment; the average balance of borrowed funds
increased $4.8 million as these funds were required to support growth. Provision for Loan Losses and Asset Quality The provision for loan losses represents charges made to earnings to maintain
an adequate allowance for loan losses. The allowance is maintained at an
amount that we believe to be sufficient to absorb losses inherent in the loan
portfolio. We conduct, on a quarterly basis, a detailed evaluation of the
adequacy of the allowance. The tables below set forth a summary of the activity in and the composition of
the allowance for loan losses. 6




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##### 



Analysis of Allowance for Loan Losses For years ended December 31,2003
    
    2002
    
    2001(Dollars in thousands)Balance at beginning of year
    
    $
    1,386
    
    
    $
    1,148
    
    
    $
    910Loans charged-offCommercial
    
    
    (445
    )
    
    
    (104
    )
    
    
    (9
    )Real estate-commercial
    
    
    (429
    )
    
    
    (31
    )
    
    
    (49
    )Real estate-residential
    
    
    (34
    )
    
    
    (28
    )
    
    
    (33
    )Consumer
    
    
    (157
    )
    
    
    (74
    )
    
    
    (76
    )Total charge-offs
    
    
    (1,065
    )
    
    
    (237
    )
    
    
    (167
    )Charge-offs recoveredCommercial
    
    
    
    
    
    
    
    
    
    
    Real estate-commercial
    
    
    286
    
    
    
    1
    
    
    
    1Real estate-residential
    
    
    13
    
    
    
    7
    
    
    
    14Consumer
    
    
    18
    
    
    
    19
    
    
    
    59Total recoveries
    
    
    317
    
    
    
    27
    
    
    
    74Net loans charged-off
    
    
    (748
    )
    
    
    (210
    )
    
    
    (93
    )Current year provision
    
    
    875
    
    
    
    448
    
    
    
    331Balance at end of year
    
    $
    1,513
    
    
    $
    1,386
    
    
    $
    1,148Loans at year end, including held for sale
    
    $
    133,668
    
    
    $
    117,607
    
    
    $
    93,715Ratio of allowance to loans at year end
    
    
    1.13
    %
    
    
    1.18
    %
    
    
    1.22
    %Average loans
    
    $
    124,285
    
    
    $
    101,449
    
    
    $
    88,874Ratio of net loans charged-off to average loans
    
    
    0.60
    %
    
    
    0.21
    %
    
    
    0.10
    %
 Allocation of Allowance for Loan Losses December 31,2003
    
    2002
    
    2001(Dollars in thousands)Commercial
    
    $
    650
    
    
    $
    642
    
    
    $
    510Real estate-residential
    
    
    102
    
    
    
    122
    
    
    
    110Consumer
    
    
    494
    
    
    
    537
    
    
    
    498Unallocated
    
    
    267
    
    
    
    85
    
    
    
    30Total
    
    $
    1,513
    
    
    $
    1,386
    
    
    $
    1,148
 The provision for loan losses was $875,000, $448,000, and $331,000 for 2003,
2002, and 2001, respectively. Total charge-offs in 2003 showed a considerable
increase as compared to 2002 and 2001 but still remained relatively low as a
percentage of average loans. The provision for all three years and related
increase in the allowance were impacted by the loan growth realized during all
three years. The level of provision expense in 2003 was impacted by two large
commercial loans that were charged off during the year. The loans totaled $1.5
million with $576,000 charged off. One of the charge-offs was the result of
misrepresentation made by the borrower. The other loan was identified as
exhibiting increased risk of loss to the Bank by management through its normal
review procedures. Some recoveries have been made and collection efforts
continue on both loans. Over the past few years, there has 7




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##### 



also been a change in the risk complexion of the portfolio as we have increased
our commercial, commercial real estate and construction loans. Additionally,
a significant portion of the consumer loan portfolio consists of indirect
loans, which tend to carry a higher level of risk than direct loans. The allowance for loan losses at year end 2003 was $1.5 million, or 1.13% of
total loans, compared to $1.4 million, or 1.18% of total loans, at year end
2002 and $1.1 million or 1.22% at year end 2001. We maintain the reserve at a level believed appropriate based on our ongoing
analysis of the risk in the portfolio. Individual loans identified as problems
are analyzed and portions of the allowance allocated to those loans, as needed.
Portions of the allowance are also allocated to pools of loans, primarily
consumer and residential real estate loans, based upon our historical loss
averages, which management adjusts in its judgment based on considerations of
growth, trends in delinquent and non-performing loans, the local economy and
other factors. Non-performing loans include nonaccrual loans, restructured loans, and loans
delinquent 90 days or more. Loans are classified as nonaccrual when we believe
the collection of interest is doubtful, typically when payments are past due 90
days, unless the loans are well secured and in the process of collection. The table below sets forth a summary of non-performing loans. Nonperforming Assets December 31,2003
    
    2002
    
    2001(Dollars in thousands)Principal balanceNonaccrual
    
    $
    694
    
    
    $
    254
    
    
    $
    31290 days or more past due
    
    
    2
    
    
    
    1
    
    
    
    Total nonperforming loans
    
    $
    696
    
    
    $
    255
    
    
    $
    312Nonperforming loans as a percent of loans
    
    
    0.52
    %
    
    
    0.22
    %
    
    
    0.33
    %Other real estate owned
    
    $
    467
    
    
    $
    
    
    
    $
    39OREO as a percent of loans
    
    
    0.35
    %
    
    
    
    %
    
    
    0.04
    %Allowance as a percent of nonperforming loans
    
    
    217.39
    %
    
    
    543.53
    %
    
    
    367.95
    %
 Non-performing loans reflect an increase over the past year, rising from
$255,000 at year-end 2002 to $696,000 at December 31, 2003, or from .22% of
total loans in 2002 to .52% of total loans in 2003. While the percent of
non-performing loans increased, it remains modest relative to the total
portfolio and management considered this change in evaluating the allowance for
loan losses and provision expense. Impaired loans are those loans for which full payment in accordance with the
contractual terms is not expected. The average balance for impaired loans was
$590,000, $213,000, and $211,000 for 2003, 2002, and 2001, respectively. We designate certain loans for internal monitoring purposes on a watch list.
Loans may be placed on the watch list as a result of delinquent status, concern
about the borrowers financial condition or the value of the collateral
securing the loan, substandard classification during regulatory examinations,
or simply as a result of our desire to monitor more closely a borrowers
financial condition and performance. Watch category loans may include loans
with loss potential that are still performing and accruing interest and may be
current under the terms of the loan agreement; however, we may have a
significant degree of concern about the borrowers ability to continue
performing according to the terms of the loan. Loss exposure on these loans is
typically evaluated based primarily upon the estimated liquidation value of the
collateral securing the loan. Also, watch list loans may include credits
which, although adequately secured and performing, reflect a past delinquency
problem or unfavorable financial trends exhibited by the borrower. 8




---



##### 



At December 31, 2003, there were loans totaling $1.4 million graded
substandard, doubtful or loss included on the watch list. This compares to
$2.1 million graded substandard or doubtful at December 31, 2002. The
decrease in substandard loans was primarily due to charge-offs recorded during
2003. Of the watch list credits, $359,000 and $648,000 were classified as
impaired at the year-end 2003 and 2002, respectively. Noninterest Income and Expense The table below sets forth an analysis of changes in noninterest income and
expense. Noninterest Income and Expense Percent
    
    
    
    
    
    Percentchange
    
    
    
    
    
    change2003
    
    from 2002
    
    2002
    
    from 2001
    
    2001(Dollars in Thousands)Noninterest IncomeService charges on deposit accounts
    
    $
    453
    
    
    
    12.69
    %
    
    $
    402
    
    
    
    26.81
    %
    
    $
    317Mortgage banking activities
    
    
    1,315
    
    
    
    49.26
    
    
    
    881
    
    
    
    95.34
    
    
    
    451Increase in cash surrender value of insurance
    
    
    118
    
    
    
    (20.81
    )
    
    
    149
    
    
    
    27.35
    
    
    
    117Net gain on sale of securities
    
    
    298
    
    
    
    34.23
    
    
    
    222
    
    
    
    252.38
    
    
    
    63Other
    
    
    183
    
    
    
    (9.85
    )
    
    
    203
    
    
    
    31.82
    
    
    
    154Total noninterest income
    
    $
    2,367
    
    
    
    27.46
    %
    
    $
    1,857
    
    
    
    68.51
    %
    
    $
    1,102Noninterest ExpenseSalaries and employee benefits
    
    $
    4,152
    
    
    
    31.06
    %
    
    $
    3,168
    
    
    
    23.80
    %
    
    $
    2,559Occupancy
    
    
    479
    
    
    
    5.51
    
    
    
    454
    
    
    
    27.89
    
    
    
    355Equipment and data processing
    
    
    479
    
    
    
    12.44
    
    
    
    426
    
    
    
    12.70
    
    
    
    378Advertising
    
    
    111
    
    
    
    (1.77
    )
    
    
    113
    
    
    
    (29.89
    )
    
    
    87Telephone
    
    
    149
    
    
    
    8.76
    
    
    
    137
    
    
    
    17.09
    
    
    
    117Professional services
    
    
    142
    
    
    
    118.46
    
    
    
    65
    
    
    
    (2.99
    )
    
    
    67Other
    
    
    1,165
    
    
    
    8.68
    
    
    
    1,072
    
    
    
    22.37
    
    
    
    876Total noninterest expense
    
    $
    6,677
    
    
    
    22.85
    %
    
    $
    5,435
    
    
    
    22.44
    %
    
    $
    4,439
 Noninterest income increased $510,000, or 27.5% to $2.4 million for 2003
compared to $1.9 million in 2002. The increase is partially attributed to the
larger number of deposit accounts which increased service charge income by
12.7%. Mortgage banking activities generated $1.3 million in noninterest
income in 2003 compared to $881,000 in 2002. This is the result of increased
volume due to continued low interest rates. A net gain on the sale of
securities also contributed significantly to the increase in noninterest
income. The net gain on sale of securities was $298,000 for 2003 compared to
$222,000 for 2002. Noninterest income also rose from 2001 to 2002, increasing by $755,000 or
68.5%. Gains from mortgage banking activity provided a substantial portion of
the increase as well as net gains from the sale of securities. Increases in
service charges due to a higher number of deposit accounts and increases in
earnings on cash surrender value also contributed to the increase. During 2003, our Franklin office, which was established in 2002 as a loan
production office, was relocated to a full service branch. With the
expansion in the branch network, the number of employees increased from 70 in
2001 to 85 in 2002 to 92 in 2003. Salary and employee benefits expense
increased accordingly, increasing from $2.6 million 9




---



##### 



in 2001 to $3.2 million in 2002, an increase of 23.8%. Salary expense
increased $984,000 or 31.1% from 2002 to 2003. Occupancy and equipment expenses increased during 2003 in connection with the
additional branch that was added. Occupancy and equipment expense was $958,000
for 2003 compared to $880,000 in 2002, an increase of $78,000 or 8.9%.
Advertising expense remained stable at $111,000 in 2003 compared to $113,000 in
2002 or (1.8%). We expect to maintain current expenditure levels in the
future, as near term growth goals have been obtained and as our past marketing
efforts have effectively established our institution in the market place. In 2002, as compared to 2001, total noninterest expense increased $996,000 or
22.4%. This increase resulted primarily from annual salary increases and
related employee benefits. Occupancy, equipment and advertising expenses
increased due to the expansion in branching operations during 2002. Income Taxes The year 2003 was the first fully taxable year as during 2002, we utilized the
remaining balance of a net operating loss carryforward of approximately
$599,000. Income tax expense for 2003 was $240,000 as compared to $83,000 for
2002. While 2001 was a profitable year, we did not recognize tax expense as
tax net operating losses generated in 1999 and 2000 offset tax expense. FINANCIAL CONDITION Total assets were $175.8 million at year-end 2003 compared to $155.3 million at
year-end 2002, an increase of $20.5 million or 13.2%. The increase in total
assets was driven by growth in the loan portfolio, with net loans increasing
$21.0 million during this period. Increased loan totals were funded by
increased deposits and other borrowings. During July 2002, we completed a $5.0 million offering of redeemable
subordinated debentures and mandatory stock purchase contracts. The debentures
are unsecured and subordinated, have a term of approximately 9 years, and
accrue interest at 8% per annum payable quarterly in arrears. The debentures
mature on July 1, 2011, but are redeemable at any time prior to their maturity.
The stock purchase contracts require a purchaser to buy First Shares Bancorp
common shares at approximately $6.67 per share on January 1, 2011. A purchaser
may elect to purchase the common shares at any time prior to that date at the
same price per share. The stock purchase contracts will be cancelled in the
event the debentures are redeemed. Proceeds of $3.0 million were contributed
to the Bank to support growth. On March 11, 2004, we announced our intention
to redeem the debentures and cancel the stock purchase contracts on May 7,
2004. Under the terms of the agreement, the holders of the stock purchase
contracts will have until May 7, 2004 to exercise the contracts by surrendering
the related debentures as payment of the exercise price. To the extent stock
purchase contracts are not exercised, we will redeem the related debentures,
which will reduce our regulatory capital. Debentures we redeem will be subject
to a redemption premium of 7%, with a 1% cancellation fee for the related stock
purchase contract, and unamortized debt issuance costs related to any
debentures redeemed will be expensed upon redemption (these costs totaled $538
at December 31, 2003). However, we expect the majority of the stock purchase
contracts to be exercised, as the exercise price of approximately $6.67 per
share is well below the merger price per share. Securities The following table sets forth information about securities. 10




---



##### 



Securities Maturity Schedule At December 31, 20031 Year and Less
    
    1 to 5 Years
    
    5 to 10 Years
    
    Over 10 Years
    
    TotalBalance
    
    Rate
    
    Balance
    
    Rate
    
    Balance
    
    Rate
    
    Balance
    
    Rate
    
    Balance(Dollars in thousands)Available-For-SaleU.S. government & agencies
    
    $
    495
    
    
    
    3.38
    %
    
    $
    3,178
    
    
    
    3.17
    %
    
    $
    3,868
    
    
    
    4.23
    %
    
    $
    9,795
    
    
    
    5.49
    %
    
    $
    17,336States & political subdivisions (1)
    
    
    12
    
    
    
    9.09
    
    
    
    3,408
    
    
    
    3.72
    
    
    
    3,129
    
    
    
    5.26
    
    
    
    3,116
    
    
    
    6.97
    
    
    
    9,665Other securities
    
    
    533
    
    
    
    3.86
    
    
    
    
    
    
    
    
    
    
    
    100
    
    
    
    8.00
    
    
    
    1,703
    
    
    
    3.88
    
    
    
    2,336Mortgage backed securities
    
    
    20
    
    
    
    3.31
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20Total available for sale
    
    $
    1,060
    
    
    
    
    
    
    $
    6,586
    
    
    
    
    
    
    $
    7,097
    
    
    
    
    
    
    $
    14,614
    
    
    
    
    
    
    $
    29,357
   (1)
    
    Average rates were calculated on a tax equivalent basis using a marginal federal income tax rate of 34%. To provide flexibility securities are primarily designated as available for
sale. The portfolio consists largely of U.S. government agency holdings.
While the portfolio was in a net unrealized loss position at year end, we
believe that this is a temporary position attributable to interest rate factors
and not credit issues. Loans The following table sets forth information about the loan portfolio. Loan Portfolio December 31, 2003
    
    December 31, 2002
    
    December 31, 2001Balance
    
    Percent
    
    Balance
    
    Percent
    
    Balance
    
    Percent(Dollars in thousands)Loan Portfolio
Composition (including
loans held for sale)Commercial
    
    $
    29,073
    
    
    
    21.8
    %
    
    $
    25,461
    
    
    
    21.6
    %
    
    $
    19,606
    
    
    
    20.9
    %Commercial real estate
    
    
    22,518
    
    
    
    16.8
    
    
    
    15,797
    
    
    
    13.4
    
    
    
    12,725
    
    
    
    13.6Residential real estate
    
    
    38,927
    
    
    
    29.1
    
    
    
    32,897
    
    
    
    28.0
    
    
    
    27,296
    
    
    
    29.1Construction
    
    
    16,799
    
    
    
    12.6
    
    
    
    15,595
    
    
    
    13.3
    
    
    
    10,292
    
    
    
    11.0Consumer
    
    
    26,351
    
    
    
    19.7
    
    
    
    27,857
    
    
    
    23.7
    
    
    
    23,796
    
    
    
    25.4Total
loans
    
    $
    133,668
    
    
    
    100.0
    %
    
    $
    117,607
    
    
    
    100.0
    %
    
    $
    93,715
    
    
    
    100.0
    %
 Loan Maturities at December 31, 20031 Year
    
    1 - 5
    
    Over 5and Less
    
    Years
    
    Years
    
    Total(Dollars in Thousands)Commercial
    
    $
    17,866
    
    
    $
    10,930
    
    
    $
    277
    
    
    $
    29,073Commercial real
estate
    
    
    6,281
    
    
    
    15,865
    
    
    
    327
    
    
    
    22,518Real
estate-residential
    
    
    24,586
    
    
    
    7,797
    
    
    
    6,544
    
    
    
    38,927Construction
    
    
    14,393
    
    
    
    2,292
    
    
    
    114
    
    
    
    16,799Consumer
    
    
    2,035
    
    
    
    12,650
    
    
    
    11,666
    
    
    
    26,351Total
loans
    
    $
    65,161
    
    
    $
    49,534
    
    
    $
    18,973
    
    
    $
    133,668
 11




---



##### 



Sensitivity to Changes in InterestRates at December 31, 20031 Year
    
    Overand Less
    
    1 Year
    
    Total(Dollars in Thousands)Fixed
rates
    
    $
    7,114
    
    
    $
    34,868
    
    
    $
    41,982Variable
rates
    
    
    57,843
    
    
    
    33,843
    
    
    
    91,686Total
loans
    
    $
    64,957
    
    
    $
    68,711
    
    
    $
    133,668
 Total loans, including loans held for sale, increased $16.1 million or 13.6%
from year-end 2002 to year-end 2003 as we continued to increase market share in
existing markets, principally in the Johnson County area. Loan growth occurred
in all categories except consumer. Commercial loans, including commercial real estate grew by 25.0% or $10.3
million from 2002 to 2003 and comprised 38.6% of our portfolio at December 31,
2003. Growth in this segment was attributed to our continued focus in the
communities we serve, which includes the Greenwood area. Residential mortgages
increased $6.0 million or 18.3% to $38.9 million. Included in residential real
estate loans are loans held for sale totaling $699,000 at December 31, 2003.
Contributing to this growth was the refinancing market from the continued low
interest rate environment of 2002 and 2003. With the significant growth
obtained in other sectors of the loan portfolio, mortgage loans now comprise
the second largest segment of the portfolio at 29.1%. Nonetheless, our
portfolio remains largely secured by real estate, with residential, commercial
and construction real estate loans comprising 58.5% of the portfolio at year
end 2003. Consumer loans experienced a decline, decreasing $1.5 million from 2002 to
2003. Total consumer loans were $26.3 million and comprised 19.7% of the
portfolio at year-end 2003. Although we continue to maintain relationships
with several local auto and recreational vehicle dealers, auto manufactures
incentives and zero percent financing have caused reductions in our indirect
loan portfolio. Underwriting standards for indirect loans are consistent with
the standards applied to direct loans in an effort to maintain strong asset
quality. Deposits Year-end total deposits increased $19.7 million or 16.0%, from 2002 to 2003,
with growth again achieved by further penetration of existing markets and
active advertising campaigns. Noninterest-bearing deposits declined to $14.9
million from $15.8 million. At December 31, 2003, $41.4 million or 47.8% of
our time deposits had balances of greater than $100,000. The average balance
of time deposits issued in amounts greater than $100,000 totaled $42.6 million
in 2003 and $34.8 million in 2002 representing 49.5% and 48.4% of total average
time deposits in each period. The following table sets forth more information about deposits. Maturity Ranges of Time Deposits with Balances of $100,000 or More at
December 31, 2003 (In thousands)3 months or less
    
    $
    16,1013 through 6 months
    
    
    11,0076 through 12 months
    
    
    3,454Over 12 months
    
    
    10,808Total
    
    $
    41,370
 12




---



##### 



Capital First Shares Bancorp and our subsidiary, First Bank, are subject to various
regulatory capital guidelines as required by federal banking agencies. These
guidelines define the various components of core capital and assign risk
weights to various categories of assets. Tier 1 capital consists of shareholders equity net of intangible assets and
excluding unrealized gains and losses on securities available or sale, as
defined by bank regulators. The definition of Tier 2 capital includes the
amount of allowance for loan losses which does not exceed 1.25% of gross risk
weighted assets. Total capital is the sum of Tier 1 and Tier 2 capital. The minimum requirements under the capital guidelines are generally at least a
4.00% leverage ratio (Tier 1 capital divided by average assets excluding
unrealized gains/losses), a 4.00% Tier 1 risk-based capital ratio (Tier 1
capital divided by risk-weighted assets), and a 8.00% total capital ratio (Tier
1 capital plus Tier 2 capital divided by risk-weighted assets). The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA)
requires federal regulatory agencies to define capital tiers. These are
well-capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized. Under these regulations, a
well-capitalized institution must achieve a Tier 1 risk-based capital ratio
of at least 6.00%, and a total capital ratio of at least 10.00%, and a leverage
ratio of at least 5.00% and not be under a capital directive order. Failure to
meet capital requirements can initiate regulatory action that could have a
direct material effect on our financial statements. If an institution is only
adequately capitalized, regulatory approval is required to accept brokered
deposits. If an institution is undercapitalized, capital distributions, asset
growth, and expansion are limited, in addition to the institution being
required to submit a capital restoration plan. At December 31, 2003, we were not aware of any current recommendations by
banking regulatory authorities which, if they were to be implemented, would
have, or are reasonably likely to have, a material effect on our consolidated
liquidity, capital resources or operations. During March 2004, we announced the intention to redeem our debentures, which
qualify as Tier 2 capital, on May 7, 2004. The redemption of debentures will
reduce regulatory capital. However, holders of stock purchase contracts have
until May 7, 2004 to exercise the contracts by surrendering their debentures.
The exercise of stock purchase contracts will not reduce capital. While we
expect most of the debenture holders to exercise their equity purchase
contracts, any redemptions could cause our capital ratios to fall under the
well capitalized levels. The following table sets forth our actual capital amounts and ratios. Capital Ratios BankDecember 31,2003
    
    2002
    
    2001(Dollars in thousands)Tier 1 capitalShareholders equity
    
    $
    14,336
    
    
    $
    13,567
    
    
    $
    9,014Add/less: Unrealized loss/gain on securities
    
    
    406
    
    
    
    40
    
    
    
    5Less: intangible assets
    
    
    (32
    )
    
    
    (75
    )
    
    
    (119
    )Total Tier 1 capital
    
    $
    14,710
    
    
    $
    13,532
    
    
    $
    8,900
 13




---



##### 



BankDecember 31,2003
    
    2002
    
    2001(Dollars in thousands)Total risk-based capitalTier 1 capital
    
    $
    14,710
    
    
    $
    13,532
    
    
    $
    8,900Allowable allowance for loan losses
    
    
    1,513
    
    
    
    1,386
    
    
    
    1,148Total risk-based capital
    
    $
    16,223
    
    
    $
    14,918
    
    
    $
    10,048Risk weighted assets
    
    $
    149,797
    
    
    $
    129,399
    
    
    $
    98,656Average assets
    
    $
    174,561
    
    
    $
    158,807
    
    
    $
    128,015Risk-based ratiosTier 1
    
    
    9.82
    %
    
    
    10.46
    %
    
    
    9.02
    %Total risk-based capital
    
    
    10.83
    %
    
    
    11.53
    %
    
    
    10.18
    %Leverage Ratio
    
    
    8.43
    %
    
    
    8.52
    %
    
    
    6.95
    %
 Liquidity and Rate Sensitivity Liquidity refers to the availability of funds to meet deposit withdrawals and
borrowing repayments, fund loan commitments and pay expenses. We have many
sources of liquid funds, including cash and cash equivalents, payments and
maturities of loans and securities, and growth in deposits. In addition, we
have the ability to sell securities available for sale, and may borrow from the
Federal Reserve and the Federal Home Loan Bank. We believe we have sufficient liquidity to meet reasonable borrower, depositor,
and creditor needs in the present economic environment. We have not received
any recommendations from regulatory authorities which would materially affect
liquidity, capital resources or operations. Our interest rate sensitivity position is influenced by the timing of the
maturity or repricing of interest earning assets and interest-bearing
liabilities. One method of gauging sensitivity is by a static gap analysis, as
presented in the table below. Rate sensitivity gap is defined as the difference between the repricing of
interest earning assets and the repricing of interest bearing liabilities
within certain defined time frames. Rising interest rates are likely to
increase net interest income in a positive gap position, while declining rates
are likely to be beneficial in a negative gap position. As of December 31, 2003, our rate sensitive liabilities exceeded rate sensitive
assets through the one year horizon. This would indicate that when rates
increase, net interest income may decline. In order to accurately determine
the effect of changes in interest rates, the repricing effect of each type of
interest-earning asset and interest-bearing liability must be measured. Assets
and liabilities have different characteristics and the magnitude of change
differs for each. Management continually monitors the changes to net interest
income which may result from changing interest rates. 14




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##### 



Liquidity and Interest Rate Sensitivity At December 31, 20031 to 90
    
    91 to 365
    
    1 to 5
    
    Over 5Days
    
    Days
    
    Years
    
    Years
    
    Total(Dollars in thousands)Interest earning assetsLoans
    
    $
    20,899
    
    
    $
    33,480
    
    
    $
    53,631
    
    
    $
    25,658
    
    
    $
    133,668FHLB CMS account
    
    
    8
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8Securities
    
    
    7,019
    
    
    
    3,535
    
    
    
    7,425
    
    
    
    11,378
    
    
    
    29,357Restricted stock
    
    
    670
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    670Total earning assets
    
    $
    28,596
    
    
    $
    37,015
    
    
    $
    61,056
    
    
    $
    37,036
    
    
    $
    163,703Interest bearing liabilitiesInterest-bearing demand deposits
    
    $
    32,102
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    32,102Savings deposits
    
    
    9,295
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,295Time deposits
    
    
    22,796
    
    
    
    31,627
    
    
    
    31,942
    
    
    
    111
    
    
    
    86,476Federal funds purchase
    
    
    516
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    516Repurchase agreements
    
    
    6,508
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,508FHLB advances
    
    
    5,000
    
    
    
    
    
    
    
    3,000
    
    
    
    2,000
    
    
    
    10,000Note payable
    
    
    75
    
    
    
    225
    
    
    
    900
    
    
    
    
    
    
    
    1,200Debentures
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,000
    
    
    
    5,000Total interest bearing liabilities
    
    $
    76,292
    
    
    $
    31,852
    
    
    $
    35,842
    
    
    $
    7,111
    
    
    $
    151,097Rate sensitive gap
    
    $
    (47,696
    )
    
    $
    5,163
    
    
    $
    25,214
    
    
    $
    29,925
    
    
    $
    12,606Rate sensitive cumulative gap
    
    $
    (47,696
    )
    
    $
    (42,533
    )
    
    $
    (17,319
    )
    
    $
    12,606
    
    
    
    N/ACumulative gap as a percentage of earning assets
    
    
    (29.26
    )%
    
    
    (26.09
    )%
    
    
    (10.63
    )%
    
    
    7.73
    %
    
    
    N/A
 A significant assumption that creates the large negative gap in the 0 to 3
month category is that all interest-bearing demand deposits and savings
accounts are subject to immediate repricing. While it is true that,
contractually, those accounts are subject to immediate repricing, the rates
paid on those accounts are generally not tied to specific indices and are
influenced by market conditions and other factors. Accordingly, a general
movement in interest rates, either up or down, may not have any immediate
effect on the rates paid on these deposit accounts. The foregoing table
illustrates only one source of information about sensitivity to interest rate
movements. Our asset liability management process also uses simulations that
take into account the time that various assets and liabilities may reprice and
the degree to which various categories of such assets and liabilities will
respond to general interest rate movements. Interest rate risk can only be
represented by a measurement of the effects of changing interest rates given
the capacity and magnitude of change on specific assets and liabilities. Off-Balance Sheet Arrangements In the ordinary course of business, the Bank has guarantees and commitments to
extend credit which are not reflected on the balance sheet. See Note 11 to the
Consolidated Financial Statements for details concerning these arrangements. 15