##### 



Exhibit 13.2




---



##### 



FIRST SHARES BANCORP, INC.
Greenwood, Indiana CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001 CONTENTS REPORT OF INDEPENDENT AUDITORS
    
    
    1CONSOLIDATED FINANCIAL STATEMENTSCONSOLIDATED BALANCE SHEETS
    
    
    2CONSOLIDATED STATEMENTS OF INCOME
    
    
    3CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
    
    
    4CONSOLIDATED STATEMENTS OF CASH FLOWS
    
    
    5NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    
    
    6




---



##### 



REPORT OF INDEPENDENT AUDITORS Board of Directors and Shareholders
First Shares Bancorp, Inc.
Greenwood, Indiana We have audited the accompanying consolidated balance sheets of First Shares
Bancorp, Inc. as of December 31, 2003 and 2002, and the related consolidated
statements of income, changes in shareholders equity, and cash flows for each
of the three years in the period ended December 31, 2003. These financial
statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of First Shares Bancorp, Inc. as
of December 31, 2003 and 2002, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2003 in
conformity with accounting principles generally accepted in the United States
of America. /s/ Crowe Chizek and Company LLC
Crowe Chizek and Company LLC Indianapolis, Indiana
February 6, 2004, except for Note 18   
with respect to the subsequent events, as   
to which the date is March 10, 2004 1.




---



##### 



FIRST SHARES BANCORP, INC. 
 
 2003
    
    2002ASSETSCash and due from banks
    
    $
    2,983
    
    
    $
    5,348Securities available for sale
    
    
    29,357
    
    
    
    26,810Federal Home Loan Bank stock
    
    
    670
    
    
    
    670Loans held for sale
    
    
    699
    
    
    
    5,778Loans, net of allowance ($1,513 and $1,386)
    
    
    131,456
    
    
    
    110,443Premises and equipment, net
    
    
    3,238
    
    
    
    2,057Intangible assets, net
    
    
    32
    
    
    
    75Cash surrender value of life insurance
    
    
    4,544
    
    
    
    2,427Accrued interest receivable and other assets
    
    
    2,809
    
    
    
    1,704$
    175,788
    
    
    $
    155,312LIABILITIES AND SHAREHOLDERS EQUITYLiabilitiesNoninterest-bearing deposits
    
    $
    14,920
    
    
    $
    15,750Interest-bearing deposits
    
    
    127,873
    
    
    
    107,313Total deposits
    
    
    142,793
    
    
    
    123,063Federal funds purchased
    
    
    516
    
    
    
    2,245Repurchase agreements
    
    
    6,508
    
    
    
    5,684Federal Home Loan Bank advances
    
    
    10,000
    
    
    
    8,700Note payable
    
    
    1,200
    
    
    
    1,475Debentures
    
    
    5,000
    
    
    
    5,000Accrued interest payable and other liabilities
    
    
    738
    
    
    
    583166,755
    
    
    
    146,750Shareholders equityPreferred stock, 2,000,000 shares authorized; none outstanding
    
    
    
    
    
    
    Common stock, $.01 par value: 10,000,000 shares authorized,
1,592,662 and 1,579,162 shares issued
    
    
    16
    
    
    
    16Additional paid in capital
    
    
    4,758
    
    
    
    4,674Retained earnings
    
    
    4,665
    
    
    
    3,912Accumulated other comprehensive loss
    
    
    (406
    )
    
    
    (40
    )9,033
    
    
    
    8,562$
    175,788
    
    
    $
    155,312
 See accompanying notes. 2.




---



##### 



FIRST SHARES BANCORP, INC. 
 
 2003
    
    2002
    
    2001Interest incomeLoans, including related fees
    
    $
    8,318
    
    
    $
    7,547
    
    
    $
    7,755Taxable securities
    
    
    1,033
    
    
    
    1,553
    
    
    
    1,313Nontaxable securities
    
    
    350
    
    
    
    109
    
    
    
    41Other
    
    
    17
    
    
    
    25
    
    
    
    559,718
    
    
    
    9,234
    
    
    
    9,164Interest expenseDeposits
    
    
    2,758
    
    
    
    3,193
    
    
    
    4,456Other
    
    
    782
    
    
    
    598
    
    
    
    3483,540
    
    
    
    3,791
    
    
    
    4,804Net interest income
    
    
    6,178
    
    
    
    5,443
    
    
    
    4,360Provision for loan losses
    
    
    875
    
    
    
    448
    
    
    
    331Net interest income after provision for loan losses
    
    
    5,303
    
    
    
    4,995
    
    
    
    4,029Noninterest incomeService charges on deposit accounts
    
    
    453
    
    
    
    402
    
    
    
    317Gain on sale of loans
    
    
    1,315
    
    
    
    881
    
    
    
    451Earnings on cash surrender value of life insurance
    
    
    118
    
    
    
    149
    
    
    
    117Net gain on sale of securities
    
    
    298
    
    
    
    222
    
    
    
    63Other
    
    
    183
    
    
    
    203
    
    
    
    1542,367
    
    
    
    1,857
    
    
    
    1,102Noninterest expensesSalaries and employee benefits
    
    
    4,152
    
    
    
    3,168
    
    
    
    2,559Occupancy
    
    
    479
    
    
    
    454
    
    
    
    355Equipment and data processing
    
    
    479
    
    
    
    426
    
    
    
    378Telephone
    
    
    149
    
    
    
    137
    
    
    
    117Advertising
    
    
    111
    
    
    
    113
    
    
    
    87Professional services
    
    
    142
    
    
    
    65
    
    
    
    67Other
    
    
    1,165
    
    
    
    1,072
    
    
    
    8766,677
    
    
    
    5,435
    
    
    
    4,439Income before income taxes
    
    
    993
    
    
    
    1,417
    
    
    
    692Income tax expense
    
    
    240
    
    
    
    83
    
    
    
    Net income
    
    $
    753
    
    
    $
    1,334
    
    
    $
    692Earnings per share:Basic
    
    $
    .48
    
    
    $
    .84
    
    
    $
    .44Diluted
    
    
    .43
    
    
    
    .83
    
    
    
    .43
 See accompanying notes. 3.




---



##### 



FIRST SHARES BANCORP, INC. 
  
 AccumulatedAdditional
    
    
    
    
    
    Other
    
    TotalCommon
    
    Paid-in
    
    Retained
    
    Comprehensive
    
    ShareholdersStock
    
    Capital
    
    Earnings
    
    Income (Loss)
    
    EquityBalance at January 1, 2001
    
    $
    11
    
    
    $
    4,674
    
    
    $
    1,891
    
    
    $
    23
    
    
    $
    6,599Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    692
    
    
    
    
    
    
    
    692Change in unrealized
gain/(loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (28
    )
    
    
    (28
    )Total comprehensive
income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    664Balance at December 31, 2001
    
    
    11
    
    
    
    4,674
    
    
    
    2,583
    
    
    
    (5
    )
    
    
    7,263Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    1,334
    
    
    
    
    
    
    
    1,334Change in unrealized
gain/(loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (35
    )
    
    
    (35
    )Total comprehensive
income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,299Shares issued in 3:2 stock
split (526,381)
    
    
    5
    
    
    
    
    
    
    
    (5
    )
    
    
    
    
    
    
    Balance at December 31, 2002
    
    
    16
    
    
    
    4,674
    
    
    
    3,912
    
    
    
    (40
    )
    
    
    8,562Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    753
    
    
    
    
    
    
    
    753Change in unrealized
gain/(loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (366
    )
    
    
    (366
    )Total comprehensive
income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    387Stock options exercised
(13,500 shares)
    
    
    
    
    
    
    84
    
    
    
    
    
    
    
    
    
    
    
    84Balance at December 31, 2003
    
    $
    16
    
    
    $
    4,758
    
    
    $
    4,665
    
    
    $
    (406
    )
    
    $
    9,033
 See accompanying notes. 4.




---



##### 



FIRST SHARES BANCORP, INC. 
  
 2003
    
    2002
    
    2001Cash flows from operating activitiesNet income (loss)
    
    $
    753
    
    
    $
    1,334
    
    
    $
    692Adjustments to reconcile net income (loss)
to net cash from operating activities:Depreciation and amortization
    
    
    346
    
    
    
    326
    
    
    
    295Provision for loan losses
    
    
    875
    
    
    
    448
    
    
    
    331Discount (accretion) and premium amortization
    
    
    262
    
    
    
    210
    
    
    
    4(Gain) loss on sale of securities
    
    
    (298
    )
    
    
    (222
    )
    
    
    (63
    )(Gain) loss on sale of other real estate owned
    
    
    
    
    
    
    (16
    )
    
    
    Amortization of intangibles and debt issuance costs
    
    
    135
    
    
    
    86
    
    
    
    44Earnings on cash surrender value of life insurance
    
    
    (117
    )
    
    
    (134
    )
    
    
    (104
    )Changes in assets and liabilities:Loans held for sale
    
    
    5,079
    
    
    
    (3,019
    )
    
    
    (2,265
    )Interest receivable and other assets
    
    
    (466
    )
    
    
    (259
    )
    
    
    (40
    )Interest payable and other liabilities
    
    
    155
    
    
    
    122
    
    
    
    24Net cash from operating activities
    
    
    6,724
    
    
    
    (1,124
    )
    
    
    (1,082
    )Cash flows from investing activitiesProceeds from maturities, calls and paydowns of securities
available for sale
    
    
    19,270
    
    
    
    18,741
    
    
    
    17,621Proceeds from sales of securities available for sale
    
    
    30,399
    
    
    
    25,750
    
    
    
    6,113Proceeds from maturities of securities held to maturity
    
    
    
    
    
    
    275
    
    
    
    Purchases of securities available for sale
    
    
    (52,786
    )
    
    
    (48,466
    )
    
    
    (30,830
    )Loans made to customers net of payments received
    
    
    (22,355
    )
    
    
    (21,051
    )
    
    
    (9,640
    )Premises and equipment purchases
    
    
    (1,527
    )
    
    
    (311
    )
    
    
    (276
    )Purchase of life insurance
    
    
    (2,000
    )
    
    
    
    
    
    
    Proceeds from sale of other real estate
    
    
    
    
    
    
    86
    
    
    
    Net cash from investing activities
    
    
    (28,999
    )
    
    
    (24,976
    )
    
    
    (17,012
    )Cash flows from financing activitiesChange in deposit accounts
    
    
    19,730
    
    
    
    11,688
    
    
    
    20,667Change in repurchase agreements
    
    
    824
    
    
    
    1,473
    
    
    
    4,211Proceeds from Federal Home Loan Bank advances
    
    
    13,000
    
    
    
    5,700
    
    
    
    2,000Payments on Federal Home Loan Bank advance
    
    
    (11,700
    )
    
    
    
    
    
    
    (3,300
    )Stock options exercised
    
    
    60
    
    
    
    
    
    
    
    Change in federal funds purchased
    
    
    (1,729
    )
    
    
    2,245
    
    
    
    (2,600
    )Proceeds from debentures
    
    
    
    
    
    
    5,000
    
    
    
    Debt issuance costs
    
    
    
    
    
    
    (661
    )
    
    
    Proceeds from note payable
    
    
    1,425
    
    
    
    90
    
    
    
    30Payments on note payable
    
    
    (1,700
    )
    
    
    (395
    )
    
    
    Net cash from financing activities
    
    
    19,910
    
    
    
    25,140
    
    
    
    21,008Net change in cash and cash equivalents
    
    
    (2,365
    )
    
    
    (960
    )
    
    
    2,914Cash and cash equivalents at beginning of year
    
    
    5,348
    
    
    
    6,308
    
    
    
    3,394Cash and cash equivalents at end of year
    
    $
    2,983
    
    
    $
    5,348
    
    
    $
    6,308Supplemental disclosures of cash flow informationCash paid during the year for:Interest
    
    $
    3,551
    
    
    $
    3,726
    
    
    $
    4,814Income taxes paid
    
    
    601
    
    
    
    171
    
    
    
    
 See accompanying notes. 5.




---



##### 



FIRST SHARES BANCORP, INC. 
 
 NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Operations and Principles of Consolidation: The accompanying
consolidated financial statements include the accounts of First Shares Bancorp,
Inc. (the Company) and its wholly owned subsidiary, First Bank (the Bank).
Intercompany balances and transactions are eliminated in consolidation. The
Bank operates from eight locations which generate commercial, mortgage and
installment loans, and receives deposits from customers located primarily in
Johnson, Morgan and Brown Counties of Indiana. The majority of the Companys
income is derived from commercial and retail lending activities and
investments. The majority of the Banks loans are secured by specific items of
collateral including business assets, real property and consumer assets. Use of Estimates: To prepare financial statements in conformity with
accounting principles generally accepted in the United States of America,
management makes estimates and assumptions based on available information.
These estimates and assumptions affect the amounts reported and disclosed in
the financial statements, and actual results could differ from these estimates.
The allowance for loan losses and the fair values of financial instruments are
particularly subject to change. Cash Flows: Cash and cash equivalents include cash, deposits with other
financial institutions under 90 days, and federal funds sold. Net cash flows
are reported for customer loan and deposit transactions. Securities: Securities are classified as available for sale when they might be
sold before maturity. Securities available for sale are carried at fair value,
with unrealized holding gains and losses reported in accumulated other
comprehensive income (loss). Federal Home Loan Bank stock is carried at cost.
Interest includes amortization of purchase premium or discount. Gains and
losses on sales are based on the amortized cost of the security sold.
Securities are written down to fair value when a decline in fair value is not
temporary. Loans: Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are reported at the principal
balance outstanding, net of unearned interest, deferred loan fees and costs,
and an allowance for loan losses. Interest income is reported on the interest
method and includes amortization of net deferred loan fees and costs over the
loan term. Interest income is not reported when full loan repayment is in doubt, typically
when payments are past due over 90 days. In all cases loans are placed on
nonaccrual or charged off at an earlier date if collection of principal or
interest is considered doubtful. All interest accrued but not received for loans placed on nonaccrual is
reversed against interest income. Interest received on such loans is accounted
for on the cash-basis or cost-recovery method, until qualifying for return to
accrual. Loans are returned to accrual status when all the principal and the
interest amounts contractually due are brought current and future payments are
reasonably assured. (Continued) 6.




---



##### 



FIRST SHARES BANCORP, INC. 
 NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued) Loans Held for Sale: Loans held for sale are reported at the lower of cost or
fair value, on an aggregate basis. Net unrealized losses, if any, are recorded
as a valuation allowance and charged to earnings. Allowance for Loan Losses: The allowance for loan losses is a valuation
allowance for probable incurred credit losses. Loan losses are charged against
the allowance when management believes the collectibility of the loan is
confirmed. Subsequent recoveries, if any, are credited to the allowance.
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. The allowance consists of specific and general components. The specific
component relates to loans that are individually classified as impaired or
loans otherwise classified as substandard or doubtful. The general component
covers non-classified loans and is based on historical loss experience adjusted
for current factors. A loan is impaired when full payment under the loan terms is not expected.
Impairment is evaluated in total for smaller-balance loans of similar nature
such as residential mortgage, consumer, and credit card loans, and on an
individual loan basis for other loans. If a loan is impaired, a portion of the
allowance is allocated so that the loan is reported, net, at the present value
of estimated future cash flows using the loans existing rate or at the fair
value of collateral if repayment is expected solely from collateral. Foreclosed Assets: Assets acquired through or instead of loan foreclosure are
initially recorded at fair value when acquired, establishing a new cost basis.
If fair value declines subsequent to foreclosure, a valuation allowance is
recorded through expense. Costs after acquisition are expensed. Premises and Equipment: Land is carried at cost. Premises and equipment is
reported net of accumulated depreciation. Depreciation expense is calculated
on the straight-line method over asset useful lives, ranging from 3 to 40
years. Intangible Assets: Intangible assets consist entirely of a core deposit
intangible from a 1995 branch acquisition which is being amortized over its
estimated 10 year life. The core deposit intangible has a gross carrying value
of $396, with accumulated amortization totaling $364 and $321 at year end 2003
and 2002. Estimated amortization expense is $32 for 2004, which will fully
amortize the asset. (Continued) 7.




---



##### 



FIRST SHARES BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002
(Dollar amounts in thousands, except per share data) NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued) Long-Term Assets: These assets are reviewed for impairment when events
indicate their carrying amount may not be recoverable from future undiscounted
cash flows. If impaired, the assets are recorded at fair value. Bank Owned Life Insurance: The Company has purchased a life insurance policy
on key executives and other officers. Bank owned life insurance is recorded at
its cash surrender value. Repurchase Agreements: Substantially all repurchase agreement liabilities
represent amounts advanced by various customers. Securities are pledged to
cover these liabilities, which are not covered by federal deposit insurance. Income Taxes: Income tax expense is the sum of the current year income tax due
or refundable and the change in deferred tax assets and liabilities. Deferred
tax assets and liabilities are the expected future tax consequences of
temporary differences between the carrying amounts and tax bases of assets and
liabilities, computed using enacted tax rates. A valuation allowance, if
needed, reduces deferred tax assets to the amount expected to be realized. Loss Contingencies: Loss contingencies, including claims and legal actions
arising in the ordinary course of business, are recorded as liabilities when
the likelihood of loss is probable and an amount or range of loss can be
reasonably estimated. Management does not believe there now are such matters
that will have a material effect on the financial statements. Stock Compensation: Employee compensation expense under stock options is
reported using the intrinsic value method. No stock-based compensation cost is
reflected in net income, as all options granted had an exercise price equal to
or greater than the market price of the underlying common stock at date of
grant. The following table illustrates the effect on net income and earnings
per share if expense was measured using the fair value recognition provisions
of FASB Statement No. 123, Accounting for Stock-Based Compensation. (Continued) 8.




---



##### 



FIRST SHARES BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002
(Dollar amounts in thousands, except per share data) NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued) 2003
    
    2002
    
    2001Net income as reported
    
    $
    753
    
    
    $
    1,334
    
    
    $
    692Deduct: Stock-based compensation expense
determined under fair value based method
    
    
    (17
    )
    
    
    (24
    )
    
    
    (45
    )Pro forma net income
    
    
    736
    
    
    
    1,310
    
    
    
    647Basic earnings per share as reported
    
    
    .48
    
    
    
    .84
    
    
    
    .44Pro forma basic earnings per share
    
    
    .47
    
    
    
    .83
    
    
    
    .41Diluted earnings per share as reported
    
    
    .43
    
    
    
    .83
    
    
    
    .43Pro forma diluted earnings per share
    
    
    .43
    
    
    
    .81
    
    
    
    .41
 The Pro forma effects are computed using option pricing models, using the
following weighted-average assumptions as of grant date. There were no options
granted in 2002. 2003
    
    2001Risk-free interest rate
    
    
    3.56
    %
    
    
    5.11
    %Expected option life
    
    7 years
    
    7 yearsExpected stock price volatility
    
    
    .10
    
    
    
    Dividend yield
    
    
    
    %
    
    
    
    %
 Earnings Per Share: Earnings per share is based on weighted-average common
shares outstanding. Diluted earnings per share includes the dilutive effect of
additional potential shares issuable under outstanding options and stock
purchase contracts. Earnings and dividends per share, and other financial
information, are restated for all stock splits and dividends through the date
of issue of the financial statements. Comprehensive Income (Loss): Comprehensive income (loss) consists of net
income and other comprehensive income (loss). Other comprehensive income
(loss) includes unrealized gains and losses on securities available for sale
and is recognized as a separate component of equity. Fair Value of Financial Instruments: Fair values of financial instruments are
estimated using relevant market information and other assumptions, as more
fully disclosed in a separate note. Fair value estimates involve uncertainties
and matters of significant judgment regarding interest rates, credit risk,
prepayments, and other factors, especially in the absence of broad markets for
particular items. Changes in assumptions or in market conditions could
significantly affect the estimates. (Continued) 9.




---



##### 



FIRST SHARES BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002
(Dollar amounts in thousands, except per share data) NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued) Dividend Restriction: Banking regulations require the maintenance of certain
capital levels that may limit the amount of dividends which may be paid by the
Bank to the Company or by the Company to its shareholders. Operating Segment: While the Companys chief decision-makers monitor the
revenue streams of the various Company products and services, the identifiable
segments are not material and operations are managed and financial performance
is evaluated on a Company-wide basis. Accordingly, all of the Companys
financial service operations are considered by management to be aggregated in
one reportable operating segment. Loan Commitments and Related Financial Instruments: Financial instruments
include off-balance sheet credit instruments, such as commitments to make loans
and letters of credit, issued to meet customer financing needs. The face
amount for these items represents the exposure to loss, before considering
customer collateral or ability to repay. Such financial instruments are
recorded when they are funded. Instruments that are considered financial
guarantees under FASB Interpretation No. 45 are not significant. Adoption of New Accounting Standards: During 2003, the Company adopted FASB
Statement 143, Accounting for Asset Retirement Obligations, FASB Statement 145,
Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No.
13, and Technical Corrections, FASB Statement 146, Accounting for Costs of Exit
or Disposal Activities, FASB Statement 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities,FASB Statement 150, Accounting
for Certain Financial Instruments with Characteristics of Both Liabilities and
Equities, FASB Interpretation 45, Guarantors Accounting and Disclosure
Requirements for Guarantees,and FASB Interpretation 46, Consolidation of
Variable Interest Entities.Adoption of new standards did not materially
affect the Companys operating results or financial condition. (Continued) 10.




---



##### 



FIRST SHARES BANCORP, INC. 
 NOTE 2  SECURITIES The fair values of securities available for sale and the related gross
unrealized gains and losses recognized in accumulated other comprehensive
income (loss) were as follows at December 31: Gross
    
    GrossFair
    
    Unrealized
    
    UnrealizedValue
    
    Gains
    
    Losses2003U.S. Treasury and government
agency securities
    
    $
    17,336
    
    
    $
    37
    
    
    $
    (434
    )Obligations of states and
political subdivisions
    
    
    9,665
    
    
    
    68
    
    
    
    (229
    )Other securities
    
    
    2,336
    
    
    
    6
    
    
    
    (121
    )Mortgage backed securities
    
    
    20
    
    
    
    
    
    
    
    $
    29,357
    
    
    $
    111
    
    
    $
    (784
    )2002U.S. Treasury and government
agency securities
    
    $
    5,195
    
    
    $
    94
    
    
    $
    (11
    )Obligations of states and
political subdivisions
    
    
    7,892
    
    
    
    33
    
    
    
    (121
    )Other securities
    
    
    6,842
    
    
    
    56
    
    
    
    (111
    )Mortgage backed securities
    
    
    6,881
    
    
    
    27
    
    
    
    (33
    )$
    26,810
    
    
    $
    210
    
    
    $
    (276
    )
 The fair value of securities at year end 2003, by contractual maturity, is
shown below. Securities not due at a single maturity date or with no maturity
are shown separately. Available
for SaleFairValueDue after one year through five years
    
    
    6,586Due after five years through ten years
    
    
    7,097Due after ten years
    
    
    13,015Mortgage backed securities
    
    
    20Equity securities
    
    
    1,599$
    29,357
 (Continued) 11.




---



##### 



FIRST SHARES BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002
(Dollar amounts in thousands, except per share data) NOTE 2  SECURITIES(Continued) Information about the sales of securities available for sale follows: 2003
    
    2002
    
    2001Proceeds
    
    $
    30,399
    
    
    $
    25,750
    
    
    $
    6,113Gross realized gains
    
    
    345
    
    
    
    230
    
    
    
    65Gross realized losses
    
    
    47
    
    
    
    8
    
    
    
    2
 Securities pledged at year-end 2003 and 2002 had a carrying value of $18,015
and $6,013 and were pledged to secure repurchase agreements and other
borrowings. Below is a summary of securities with unrealized losses as of year end 2003,
presented by length of time the securities have been in an unrealized loss
position: Less than 12 months
    
    12 months or more
    
    TotalFair
    
    Unrealized
    
    Fair
    
    Unrealized
    
    Fair
    
    UnrealizedValue
    
    Loss
    
    Value
    
    Loss
    
    Value
    
    LossDescription of securitiesU.S Treasury and government
agency securities
    
    $
    14,506
    
    
    $
    (434
    )
    
    $
    
    
    
    $
    
    
    
    $
    14,506
    
    
    $
    (434
    )Obligations of states and
political subdivisions
    
    
    7,455
    
    
    
    (229
    )
    
    
    
    
    
    
    
    
    
    
    7,455
    
    
    
    (229
    )Equity security
    
    
    849
    
    
    
    (121
    )
    
    
    
    
    
    
    
    
    
    
    849
    
    
    
    (121
    )$
    22,810
    
    
    $
    (784
    )
    
    $
    
    
    
    $
    
    
    
    $
    22,810
    
    
    $
    (784
    )
 Unrealized losses on securities have not been recognized into income because
the securities are of high credit quality, management has the intent and
ability to hold for the foreseeable future, and the decline in fair value is
largely due to changes in market interest rates. The equity security is
preferred stock of a government sponsored entity and carries a variable rate of
interest. The fair value is expected to recover as the securities approach
their maturity date and/or market rates change. (Continued) 12.




---



##### 



FIRST SHARES BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002
(Dollar amounts in thousands, except per share data) NOTE 3  LOANS Total loans are comprised of the following at December 31: 2003
    
    2002Commercial
    
    $
    29,073
    
    
    $
    25,461Commercial real estate
    
    
    22,518
    
    
    
    15,797Residential real estate
    
    
    38,228
    
    
    
    27,119Construction
    
    
    16,799
    
    
    
    15,595Consumer
    
    
    26,351
    
    
    
    27,857Subtotal
    
    
    132,969
    
    
    
    111,829Less: allowance for loan losses
    
    
    (1,513
    )
    
    
    (1,386
    )Loans, net
    
    $
    131,456
    
    
    $
    110,443
 NOTE 4  ALLOWANCE FOR LOAN LOSSES An analysis of the allowance for loan losses follows: 2003
    
    2002
    
    2001Balance, January 1
    
    $
    1,386
    
    
    $
    1,148
    
    
    $
    910Provision charged to operations
    
    
    875
    
    
    
    448
    
    
    
    331Loans charged off
    
    
    (1,065
    )
    
    
    (237
    )
    
    
    (167
    )Recoveries
    
    
    317
    
    
    
    27
    
    
    
    74Balance, December 31
    
    $
    1,513
    
    
    $
    1,386
    
    
    $
    1,148
 Impaired loans were as follows: 2003
    
    2002Year-end loans with no allowance for
loan losses allocated
    
    $
    359
    
    
    $
    648Year-end loans with allowance for
loan losses allocated
    
    
    
    
    
    
    Amount of the allowance allocated
    
    
    
    
    
    
    Average of impaired loans during the year
    
    
    590
    
    
    
    213Interest income recognized during impairment
    
    
    14
    
    
    
    Cash-basis interest income recognized
    
    
    14
    
    
    
    
 (Continued) 13.




---



##### 



FIRST SHARES BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002
(Dollar amounts in thousands, except per share data) NOTE 4  ALLOWANCE FOR LOAN LOSSES(Continued) Nonperforming loans were as follows: 2003
    
    2002Loans past due over 90 days still on accrual
    
    $
    2
    
    
    $
    1Nonaccrual loans
    
    
    694
    
    
    
    254
 Nonperforming loans include both smaller balance homogeneous loans that are
collectively evaluated for impairment and loans individually classified as
impaired. NOTE 5  PREMISES AND EQUIPMENT Premises and equipment consists of the following at December 31: 2003
    
    2002Land
    
    $
    588
    
    
    $
    40Buildings and improvements
    
    
    1,488
    
    
    
    770Leasehold improvements
    
    
    560
    
    
    
    598Furniture and equipment
    
    
    2,428
    
    
    
    2,193Total
    
    
    5,064
    
    
    
    3,601Accumulated depreciation
    
    
    (1,826
    )
    
    
    (1,544
    )$
    3,238
    
    
    $
    2,057
 Depreciation expense was $346, $326 and $295 for 2003, 2002 and 2001. (Continued) 14.




---



##### 



NOTE 6  DEPOSITS Certificates of deposit in denominations of $100 or more totaled $41,370 and
$28,403 at December 31, 2003 and 2002. At year-end 2003, scheduled maturities of time deposits were as follows: 2004
    
    $
    54,4232005
    
    
    21,2482006
    
    
    5,2332007
    
    
    4,0942008
    
    
    1,367Thereafter
    
    
    111$
    86,476
 Deposits from principal officers, directors, and their affiliates at year end
2003 and 2002 were $3,844 and $3,849. NOTE 7  FEDERAL HOME LOAN BANK ADVANCES AND OTHER DEBT At year-end, advances from the Federal Home Loan Bank were as follows: Maturity Date
    
    Interest Rate
    
    2003
    
    2002June 18, 2003
    
    
    1.51
    %
    
    $
    
    
    
    $
    5,700March 15, 2004
    
    
    1.11
    %
    
    
    5,000
    
    
    
    March 7, 2005
    
    
    1.89
    %
    
    
    2,000
    
    
    
    January 23, 2006
    
    
    4.73
    %
    
    
    1,000
    
    
    
    1,000December 27, 2010
    
    
    5.30
    %
    
    
    1,000
    
    
    
    1,000March 7, 2011
    
    
    4.75
    %
    
    
    1,000
    
    
    
    1,000$
    10,000
    
    
    $
    8,700
 The March 2004 advance is a variable rate advance and may be repaid at any date
prior to maturity without penalty. The remaining advances are due at maturity
and may not be repaid prior to maturity without a penalty. The advances are
collateralized by first mortgage loans under a blanket lien arrangement. The
required principal payments during the next five years are $5,000 in 2004,
$2,000 in 2005, $1,000 in 2006, with the remaining balance of $2,000 due
thereafter. (Continued) 15.




---



##### 



FIRST SHARES BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002
(Dollar amounts in thousands, except per share data) NOTE 7  FEDERAL HOME LOAN BANK ADVANCES AND OTHER DEBT(Continued) The Company maintains a note payable with a financial institution. The balance
outstanding on the note at December 31, 2003 and 2002 was $1,200 and $1,475.
The outstanding balance accrues interest at prime minus .50% (the interest rate
was 3.50% at December 31, 2003). The note requires monthly principal payments
of $25 plus interest. Scheduled annual principal reductions over the next four
years are $300 per year through 2007. The note matures March 1, 2008 and is
secured by Bank stock and other assets of the Company. During the first quarter of 2002, the Company initiated a public offering of
Debentures and Stock Purchase Contracts. The Company raised $5,000 with the
offering closing during the third quarter of 2002. Capitalized costs in
connection with the offering totaled $661. 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 by the Company at any time prior to their maturity. The
stock purchase contracts require a purchaser to buy common shares of the
Company at $6.67 per share on January 1, 2011. A purchaser may elect to
purchase the common shares of the Company 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 $3,000 were contributed from
the Company to the Bank to support growth. The Debentures qualify as part of
total capital for the Companys regulatory capital requirements. See Note 18
regarding subsequent events applicable to the Debentures. NOTE 8  SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE Securities sold under agreements to repurchase are financing arrangements that
mature daily. Information concerning securities sold under agreements to
repurchase is summarized as follows: 2003
    
    2002Average daily balance during the year
    
    $
    5,037
    
    
    $
    4,840Average interest rate during the year
    
    
    .67
    %
    
    
    .98
    %Maximum month-end balance during the year
    
    
    6,508
    
    
    $
    6,051Weighted average interest rate at year-end
    
    
    .85
    %
    
    
    .31
    %
 (Continued) 16.




---



##### 



FIRST SHARES BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002
(Dollar amounts in thousands, except per share data) NOTE 9  EMPLOYMENT BENEFIT PLANS The Bank maintains a 401(k) retirement plan in which substantially all
employees may participate. Employee contributions are limited to a maximum of
15% of their salary. The Plan allows for 50% employer matching contributions
up to 6% of an employees compensation, and employer discretionary
contributions. The Banks contributions to the Plan become 20% vested after
each year of service, and are fully vested after 5 years. Total 401(k)
contributions charged to expense were $77, $49 and $43 in 2003, 2002 and 2001. The Bank has a deferred compensation plan for the benefit of certain directors.
Under the plan, the Bank agrees, in return for the directors deferring the
receipt of a portion of their current compensation, to pay a retirement benefit
computed as the amount of the compensation deferred plus accrued interest at a
variable rate. Accrued benefits payable totaled $233 and $196 at December 31,
2003 and 2002. The Bank purchased life insurance on the directors. The cash
surrender value of that insurance was $520 and $496 at December 31, 2003 and
2002. NOTE 10  INCOME TAXES Income tax expense/(benefit) consists of the following: 2003
    
    2002
    
    2001Current payable/(receivable)
    
    $
    255
    
    
    $
    335
    
    
    $
    Deferred income tax
    
    
    (39
    )
    
    
    152
    
    
    
    208Nonqualified stock option benefit allocated
to additional paid-in capital
    
    
    24
    
    
    
    
    
    
    
    Change in valuation allowance
    
    
    
    
    
    
    (404
    )
    
    
    (208
    )Income tax expense/(benefit)
    
    $
    240
    
    
    $
    83
    
    
    $
    
 (Continued) 17.




---



##### 



FIRST SHARES BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002
(Dollar amounts in thousands, except per share data) NOTE 10  INCOME TAXES(Continued) The following is a reconciliation of income taxes and the amount computed by
applying the statutory federal income tax rate of 34% to income/(loss) before
income taxes for December 31: 2003
    
    2002
    
    2001Statutory rate applied to income/(loss)
before income taxes
    
    $
    338
    
    
    $
    482
    
    
    $
    235Add (deduct)Tax-exempt interest income, net
    
    
    (101
    )
    
    
    (33
    )
    
    
    (12
    )Life insurance
    
    
    (46
    )
    
    
    (46
    )
    
    
    (40
    )State income tax and other
    
    
    49
    
    
    
    84
    
    
    
    27Valuation Allowance
    
    
    
    
    
    
    (404
    )
    
    
    (210
    )Total income tax expense/(benefit)
    
    $
    240
    
    
    $
    83
    
    
    $
    
 Deferred tax assets and liabilities as of December 31, 2003 and 2002 are
comprised of the following components: 2003
    
    2002Deferred tax assets:Allowance for loan losses
    
    $
    438
    
    
    $
    422Core deposit
    
    
    65
    
    
    
    57Net unrealized loss on securities available for sale
    
    
    267
    
    
    
    26Deferred compensation
    
    
    91
    
    
    
    76Deferred loan fees
    
    
    62
    
    
    
    43Other
    
    
    31
    
    
    
    28Total deferred tax assets
    
    
    954
    
    
    
    652Deferred tax liabilities:Depreciation
    
    $
    (343
    )
    
    $
    (269
    )Accrual to cash
    
    
    (53
    )
    
    
    (105
    )Total deferred liabilities
    
    
    (396
    )
    
    
    (374
    )Valuation allowance
    
    
    
    
    
    
    Net deferred tax asset
    
    $
    558
    
    
    $
    278
 (Continued) 18.




---



##### 



FIRST SHARES BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002
(Dollar amounts in thousands, except per share data) NOTE 11  COMMITMENTS AND CONTINGENCIES Some financial instruments, such as loan commitments, credit lines, letters of
credit, and overdraft protection, are issued to meet customer financing needs.
These are agreements to provide credit or to support the credit of others, as
long as conditions established in the contract are met, and usually have
expiration dates. Commitments may expire without being used.
Off-balance-sheet risk to credit loss exists up to the face amount of these
instruments, although material losses are not anticipated. The same credit
policies are used to make such commitments as are used for loans, including
obtaining collateral at exercise of the commitment. At year end 2003 and 2002,
unused lines of credit, commitments to make loans, and standby letters of
credit were as follows: 2003
    
    2002Unused lines of credit and commitments to make loans
    
    $
    20,870
    
    
    $
    15,737Standby letters of credit
    
    
    1,175
    
    
    
    654
 Interest rates on these commitments are primarily variable and generally expire
in less than one year. Since many commitments to make loans expire without
being used, the amount does not necessarily represent future cash commitments.
Collateral obtained upon exercise of the commitment is determined using
managements credit evaluation of the borrower, and may include accounts
receivable, inventory, property, land and other items. At year-end 2003 and 2002, reserves of $593 and $484 were required as deposits
with the Federal Reserve or as cash on hand. These reserves do not earn
interest. The Bank leases branch facilities under operating leases expiring in various
years through 2006. Expense for leased premises was $228, $218 and $139 for
2003, 2002 and 2001. During 2001, the Bank entered into a lease agreement with a director for a
branch facility. The lease terms require annual payments of $56, with the
lease expiring 2006. Amounts paid to related parties under this lease totaled
$56 for 2003. Future minimum lease payments are as follows: 2004
    
    $
    1872005
    
    
    1252006
    
    
    1032007
    
    
    4$
    419
 (Continued) 19.




---



##### 



FIRST SHARES BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002
(Dollar amounts in thousands, except per share data) NOTE 11  COMMITMENTS AND CONTINGENCIES(Continued) During 1999 the company entered into employment contracts with certain
executive officers. The contracts have an initial term of three years, with
the expiration extended an additional year at each annual anniversary date.
The contracts provide for severance payments and other benefits, the amount of
which depends upon the nature of the separation. No amount is accrued at
December 31, 2003 or 2002 under these agreements. NOTE 12  CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED EARNINGS Banks and bank holding companies are subject to regulatory capital requirements
administered by federal banking agencies. Capital adequacy guidelines and
prompt corrective action regulations involve quantitative measures of assets,
liabilities, and certain off-balance sheet items calculated under regulatory
accounting practices. Capital amounts and classifications are also subject to
qualitative judgments by regulators. Failure to meet capital requirements can
initiate regulatory action. The prompt corrective action regulations provide five classifications,
including well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized, although these
terms are not used to represent overall financial condition. If adequately
capitalized, regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and
expansion, and plans for capital restoration are required. At year end 2003
and 2002, the most recent regulatory notifications categorized the bank as well
capitalized under the regulatory framework for prompt corrective action. See
Note 18 regarding subsequent events. The Company has passed a resolution not to declare or pay dividends; incur any
debt; or purchase or redeem any treasury stock without obtaining prior written
consent of the Federal Reserve Board. (Continued) 20.




---



##### 



FIRST SHARES BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002
(Dollar amounts in thousands, except per share data) NOTE 12  CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED EARNINGS
(Continued) Actual and required capital amounts and ratios are presented below as of year end: 2003Minimum RequiredTo Be WellMinimum Required
    
    Capitalized UnderFor Capital
    
    Prompt CorrectiveActual
    
    Adequacy Purposes
    
    Action RegulationsAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    RatioTotal capital (to risk weighted
assets)Consolidated
    
    $
    15,920
    
    
    
    10.57
    %
    
    $
    12,048
    
    
    
    8.00
    %
    
    $
    15,059
    
    
    
    10.00
    %Bank
    
    
    16,223
    
    
    
    10.83
    %
    
    
    11,984
    
    
    
    8.00
    
    
    
    14,980
    
    
    
    10.00Tier 1
capital (to risk weighted assets)Consolidated
    
    $
    9,407
    
    
    
    6.25
    %
    
    $
    6,023
    
    
    
    4.00
    %
    
    $
    9,036
    
    
    
    6.00
    %Bank
    
    
    14,710
    
    
    
    9.82
    %
    
    
    5,992
    
    
    
    4.00
    
    
    
    8,988
    
    
    
    6.00Tier 1 capital (to average assets)Consolidated
    
    $
    9,407
    
    
    
    5.39
    %
    
    $
    6,982
    
    
    
    4.00
    %
    
    $
    8,728
    
    
    
    5.00
    %Bank
    
    
    14,710
    
    
    
    8.43
    %
    
    
    6,982
    
    
    
    4.00
    
    
    
    8,728
    
    
    
    5.00
 2002Minimum RequiredTo Be WellMinimum Required
    
    Capitalized UnderFor Capital
    
    Prompt CorrectiveActual
    
    Adequacy Purposes
    
    Action RegulationsAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    RatioTotal capital (to risk weighted
assets)Consolidated
    
    $
    14,913
    
    
    
    11.48
    %
    
    $
    10,392
    
    
    
    8.00
    %
    
    $
    12,991
    
    
    
    10.00
    %Bank
    
    
    14,918
    
    
    
    11.53
    
    
    
    10,352
    
    
    
    8.00
    
    
    
    12,940
    
    
    
    10.00Tier 1
capital (to risk weighted assets)Consolidated
    
    $
    8,527
    
    
    
    6.56
    %
    
    $
    5,196
    
    
    
    4.00
    %
    
    $
    7,794
    
    
    
    6.00
    %Bank
    
    
    13,532
    
    
    
    10.46
    
    
    
    5,176
    
    
    
    4.00
    
    
    
    7,764
    
    
    
    6.00Tier 1 capital (to average assets)Consolidated
    
    $
    8,527
    
    
    
    5.34
    %
    
    $
    6,387
    
    
    
    4.00
    %
    
    $
    7,984
    
    
    
    5.00
    %Bank
    
    
    13,532
    
    
    
    8.52
    
    
    
    6,349
    
    
    
    4.00
    
    
    
    7,937
    
    
    
    5.00
 (Continued) 21.




---



##### 



FIRST SHARES BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002
(Dollar amounts in thousands, except per share data) NOTE 13  STOCK OPTIONS The Company has established two separate stock option plans, the 1996 plan and
the 1999 plan, which provide for the issue of up to 220,500 total options. The
1996 plan has expired and no further options may be granted under the plan. At
grant date, 25% of the options granted to employees are available for immediate
exercise with the balance vesting at 25% per year over the next three years.
Options granted to directors are fully vested at grant date. The options
expire either seven or ten years from the grant date. A summary of the activity in the plans is as follows. 2003
    
    2002
    
    2001Weighted
    
    
    
    
    
    Weighted
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    Average
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    Exercise
    
    
    
    
    
    ExerciseShares
    
    Price
    
    Shares
    
    Price
    
    Shares
    
    PriceOutstanding at beginning of year
    
    
    159,000
    
    
    $
    4.99
    
    
    
    159,000
    
    
    $
    4.99
    
    
    
    108,000
    
    
    $
    5.31Granted
    
    
    10,750
    
    
    
    8.85
    
    
    
    
    
    
    
    
    
    
    
    55,500
    
    
    
    4.34Exercised
    
    
    (13,500
    )
    
    
    4.45
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Forfeited
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,500
    )
    
    
    4.45Outstanding at end of year
    
    
    156,250
    
    
    $
    5.31
    
    
    
    159,000
    
    
    $
    4.99
    
    
    
    159,000
    
    
    $
    4.99Weighted average fair value per
option granted during the year
    
    
    
    
    
    $
    2.16
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    1.30
 Options outstanding at year-end 2003 were as follows. Outstanding
    
    ExercisableWeighted Average
    
    
    
    
    
    WeightedRemaining
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    Contractual
    
    
    
    
    
    ExercisePrices
    
    Number
    
    Life
    
    Number
    
    Price$
    5.49
    
    
    
    90,000
    
    
    .4 years
    
    
    90,000
    
    
    $
    5.49$
    4.34
    
    
    
    55,500
    
    
    4.3 years
    
    
    49,499
    
    
    
    4.34$
    8.50
    
    
    
    7,000
    
    
    6.2 years
    
    
    1,750
    
    
    
    8.50$
    9.51
    
    
    
    3,750
    
    
    6.6 years
    
    
    937
    
    
    
    9.51Outstanding at year end
    
    
    156,250
    
    
    2.4 years
    
    
    142,186
    
    
    
    5.15
 See Note 18 regarding subsequent events. (Continued) 22.




---



##### 



FIRST SHARES BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002
(Dollar amounts in thousands, except per share data) NOTE 14  EARNINGS (LOSS) PER SHARE A reconciliation of the numerators and denominators used to compute earnings
per share is presented below: 2003
    
    2002
    
    2001Basic earnings (loss) per shareNet income (loss)
    
    $
    753
    
    
    $
    1,334
    
    
    $
    692Weighted average shares
outstanding
    
    
    1,582,528
    
    
    
    1,579,162
    
    
    
    1,579,162Basic earnings (loss) per share
    
    $
    .48
    
    
    $
    0.84
    
    
    $
    .44DilutedNet income (loss)
    
    $
    753
    
    
    $
    1,334
    
    
    $
    692Add: Interest expense, net of tax
assuming conversion of debentures
    
    
    291
    
    
    
    
    
    
    
    $
    1,044
    
    
    $
    1,334
    
    
    $
    692Weighted average common shares
outstanding for basic earnings per
common share
    
    
    1,582,528
    
    
    
    1,579,162
    
    
    
    1,579,162Add: Dilutive effects of assumed
exercises of stock options
    
    
    69,890
    
    
    
    35,769
    
    
    
    13,591Add: Convertible debentures
    
    
    750,000
    
    
    
    
    
    
    
    Average shares and dilutive potential
common shares
    
    
    2,402,418
    
    
    
    1,614,931
    
    
    
    1,592,753Diluted earnings (loss) per common share
    
    $
    .43
    
    
    $
    .83
    
    
    $
    .43
 All stock options were considered in computing dilutive earnings per share in
2003 and 2002. Stock options for 90,000 shares of common stock were not
considered in computing diluted earnings per common share in 2001 because they
were anti-dilutive. Stock purchase contracts issued in 2002 for 750,000 shares
(see Note 7) were not considered in computing diluted earnings per share in
2002 because they were anti-dilutive. (Continued) 23.




---



##### 



FIRST SHARES BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002
(Dollar amounts in thousands, except per share data) NOTE 15  OTHER COMPREHENSIVE INCOME Other comprehensive income components and related taxes were as follows: 2003
    
    2002
    
    2001Unrealized holding gains (losses) on
securities available-for-sale
    
    $
    (309
    )
    
    $
    165
    
    
    $
    15Reclassification adjustments for gains
later recognized in income
    
    
    (298
    )
    
    
    (222
    )
    
    
    (63
    )Net unrealized losses
    
    
    (607
    )
    
    
    (57
    )
    
    
    (48
    )Tax effect
    
    
    241
    
    
    
    22
    
    
    
    20Other comprehensive loss
    
    $
    (366
    )
    
    $
    (35
    )
    
    $
    (28
    )
 NOTE 16  FAIR VALUES OF FINANCIAL INSTRUMENTS Carrying amount and estimated fair values of financial instruments were as
follows at year-end. 2003
    
    2002Carrying
    
    Fair
    
    Carrying
    
    FairAmount
    
    Value
    
    Amount
    
    ValueFinancial assetsCash and cash equivalents
    
    $
    2,983
    
    
    $
    2,983
    
    
    $
    5,348
    
    
    $
    5,348Securities available for sale
    
    
    29,357
    
    
    
    29,357
    
    
    
    26,810
    
    
    
    26,810Loans held for sale
    
    
    699
    
    
    
    710
    
    
    
    6,530
    
    
    
    6,564Loans, net
    
    
    131,456
    
    
    
    132,876
    
    
    
    109,691
    
    
    
    111,712Federal Home Loan Bank stock
    
    
    670
    
    
    
    670
    
    
    
    670
    
    
    
    670Accrued interest receivable
    
    
    891
    
    
    
    891
    
    
    
    799
    
    
    
    799Financial liabilitiesDeposits
    
    
    (142,793
    )
    
    
    (143,800
    )
    
    
    (123,063
    )
    
    
    (124,456
    )Federal Home Loan Bank advances
    
    
    (10,000
    )
    
    
    (10,001
    )
    
    
    (8,700
    )
    
    
    (8,840
    )Federal funds purchased
    
    
    (516
    )
    
    
    (516
    )
    
    
    (2,245
    )
    
    
    (2,245
    )Other borrowings
    
    
    (12,708
    )
    
    
    (13,512
    )
    
    
    (12,159
    )
    
    
    (12,600
    )Accrued interest payable
    
    
    (274
    )
    
    
    (274
    )
    
    
    (285
    )
    
    
    (285
    )
 The methods and assumptions used to estimate fair value are described as
follows: (Continued) 24.




---



##### 



FIRST SHARES BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002
(Dollar amounts in thousands, except per share data) NOTE 16  FAIR VALUES OF FINANCIAL INSTRUMENTS(Continued) Carrying amount is the estimated fair value for cash and cash equivalents,
Federal Home Loan Bank stock, accrued interest receivable and payable, demand
deposits, short-term debt, and variable rate loans or deposits that reprice
frequently and fully. Security fair values are based on market prices or
dealer quotes, and if no such information is available, on the rate and term of
the security and information about the issuer. For fixed rate loans or
deposits and for variable rate loans or deposits with infrequent repricing and
repricing limits, fair value is based on discounted cash flows using current
market rates applied to the estimated life and credit risk. Fair values for
impaired loans are estimated using discounted cash flow analysis or underlying
collateral values. Fair value of loans held for sale is based on market
quotes. Fair value of debt is based on current rates for similar financing.
The fair value of off-balance-sheet items is based on the current fees or cost
that would be charged to enter into or terminate such arrangements, and are not
considered significant. NOTE 17  PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION Condensed financial information of First Shares Bancorp, Inc. follows: CONDENSED BALANCE SHEETS
December 31, 2003 and 2002 2003
    
    2002ASSETSCash and cash equivalents
    
    $
    183
    
    
    $
    565Investment in banking subsidiary
    
    
    14,336
    
    
    
    13,568Securities available for sale
    
    
    205
    
    
    
    362Other assets
    
    
    609
    
    
    
    627Total assets
    
    $
    15,333
    
    
    $
    15,122LIABILITIES AND EQUITYNote payable
    
    $
    1,200
    
    
    $
    1,475Debentures
    
    
    5,000
    
    
    
    5,000Other liabilities
    
    
    100
    
    
    
    85Shareholders equity
    
    
    9,033
    
    
    
    8,562Total liabilities and shareholders equity
    
    $
    15,333
    
    
    $
    15,122
 (Continued) 25.




---



##### 



FIRST SHARES BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002
(Dollar amounts in thousands, except per share data) NOTE 17  PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION(Continued) CONDENSED STATEMENTS OF OPERATIONS
December 31, 2003, 2002 and 2001 2003
    
    2002
    
    2001Dividends from banking subsidiaries
    
    $
    
    
    
    $
    
    
    
    $
    Interest income on securities
    
    
    12
    
    
    
    5
    
    
    
    Interest expense on borrowings
    
    
    529
    
    
    
    385
    
    
    
    113Other income
    
    
    6
    
    
    
    
    
    
    
    3Other expense
    
    
    119
    
    
    
    105
    
    
    
    71Income (loss) before income tax and undistributed
subsidiary income
    
    
    (630
    )
    
    
    (485
    )
    
    
    (181
    )Equity in undistributed subsidiary income
    
    
    1,134
    
    
    
    1,589
    
    
    
    873Income (loss) before taxes
    
    
    504
    
    
    
    1,104
    
    
    
    692Income tax expense (benefit)
    
    
    (249
    )
    
    
    (230
    )
    
    
    Net income (loss) after taxes
    
    $
    753
    
    
    $
    1,334
    
    
    $
    692
 CONDENSED STATEMENTS OF CASH FLOWS
December 31, 2003, 2002 and 2001 2003
    
    2002
    
    2001Cash flows from operating activitiesNet income/(loss)
    
    $
    753
    
    
    $
    1,334
    
    
    $
    692Adjustments:Equity in undistributed subsidiary income
    
    
    (1,134
    )
    
    
    (1,589
    )
    
    
    (873
    )Discount (accretion) and premium amortization
    
    
    4(Gain) loss on sale of security
    
    
    (4
    )Amortization of debt issuance costs
    
    
    92
    
    
    
    43
    
    
    
    Changes in other assets and liabilitiesInterest receivable and other assets
    
    
    (50
    )
    
    
    (3
    )
    
    
    Interest payable and other liabilities
    
    
    15
    
    
    
    84
    
    
    
    Net cash from operating activities
    
    
    (324
    )
    
    
    (131
    )
    
    
    (181
    )
 (Continued) 26.




---



##### 



FIRST SHARES BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002
(Dollar amounts in thousands, except per share data) NOTE 17  PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION(Continued) Cash flows from investing activitiesContribution to subsidiary
    
    
    
    
    
    
    (3,000
    )
    
    
    Proceeds from sale of securities available for sale
    
    
    262Purchases of securities available for sale
    
    
    (105
    )
    
    
    (363
    )
    
    
    157
    
    
    
    (3,363
    )
    
    
    Cash flows from financing activitiesProceeds from note payable
    
    
    1,425
    
    
    
    90
    
    
    
    30Payments on note payable
    
    
    (1,700
    )
    
    
    (395
    )
    
    
    Issuance of debentures
    
    
    
    
    
    
    5,000
    
    
    
    Debt issuance costs
    
    
    
    
    
    
    (661
    )
    
    
    Stock options exercised
    
    
    60
    
    
    
    
    
    
    
    Net cash from financing activities
    
    
    (215
    )
    
    
    4,034
    
    
    
    30Net change in cash and cash equivalents
    
    
    (382
    )
    
    
    540
    
    
    
    (151
    )Beginning cash and cash equivalents
    
    
    565
    
    
    
    25
    
    
    
    176Ending cash and cash equivalents
    
    $
    183
    
    
    $
    565
    
    
    $
    25
 NOTE 18  SUBSEQUENT EVENTS On March 10, 2004, the Company signed a definitive agreement to merge with
Lincoln Bancorp, Plainfield, Indiana. Per the terms of the agreement,
shareholders of the Company will receive .75 shares of Lincoln Bancorp stock or
$14.80 cash per share of Company stock, with at least 50% of the total
consideration paid to be in the form of shares of Lincoln Bancorp stock. The
transaction is subject to shareholder and regulatory approval, and is expected
to close during the third quarter of 2004. In connection with the merger, the Company announced its intention to redeem
its debentures and cancel its stock purchase contracts on May 7, 2004 (see Note
7). 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, the Company will redeem the related
debentures, which will reduce the Companys regulatory capital. Debentures
redeemed by the Company 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, the
Company expects the majority of the stock purchase contracts to be exercised,
as the exercise price of $6.67 per share is well below the merger price per
share. The Board of Directors approved extending the expiration date of 90,000 options
with an exercise price of $5.49 from May 2004 to May 2009. 27.