Exhibit 13

Dear Shareholder:

     On behalf of your board of directors and your entire team, it is my privilege to report to you on the progress of your company.

     The NorthWest Indiana Bancorp reported record earnings of $5.9 million for 2003, a significant achievement during uncertain economic times. Income was up 8.1% over the prior year resulting in a 1.20% return on assets (ROA) and a 14.65% return on equity (ROE). At the end of 2003, shareholder equity stood at $41.6 million or 8.2% of total assets.

     The stock market, influenced by changes in the federal taxation of dividends, reacted favorably to the banking sector during the year. Your company’s consistent financial performance, along with our history of cash dividends, gained recognition from market forces. Total investment return to shareholders, as measured by share price appreciation and dividend payments, was 32.5% for 2003.

David A. Bochnowski,
Chairman and
Chief Executive Officer

     As a community bank, we are cognizant of the impact of America’s economic challenges on the local economy and our daily operations. Today our nation is shifting from an industrial base into a technological age and the era of a world economy. The national economy has weathered uncertain times causing considerable stress on employment and the manufacturing sector in our community. We are confident that the proven resilience of Northwest Indiana will overcome the challenges of these times and your company will continue to play a vital role in serving the needs of our community.

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     At your company everything begins with value. We are committed to adding value to our relationships with our customers, our community, and our shareholders. We will continue to differentiate ourselves in the market place by delivering what customers want:

John Wren,
Housing Finance
Yvette Gillis,
Loan Center

•		Friendly, personal service
•		Quick and dependable responses
•		Flexible alternatives
•		Competitive deposit, loan, and investment products

     Our strategic focus continues to be on our core business: lending to consumers and commercial customers while growing our checking, deposit, and investment services. At the same time we are mindful of the bottom line and constantly review opportunities to create operating efficiencies.

     The Bancorp’s solid performance in 2003 resulted from our growth, high asset quality, increased income from banking activities, and active management of operating costs.

     Assets increased to $508.8 million, as we surpassed the banking milestone of $500 million in assets. The average balances in our core accounts, which include checking, saving, money market, and sweep accounts, increased by $29.5 million. These funds were used to fuel loan growth of $29.4 million with increases taking place in construction and development loans, commercial real estate loans, residential loans, and loans to local government agencies.

Left to right,
Michael Cronin,
Michael McIntyre,
Laura Bolger, All located in
Munster Banking
Center

     Despite the historically low interest rate environment, management’s strategic pricing of our assets and liabilities resulted in an increase in our net interest margin, a key measure of profitability. Our net interest margin rose to 4.04% from the 3.99% reported a year ago.

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     Asset quality remained high despite pressure caused by the uncertainty of employment and the local economy. Non-performing loans to total assets stood at .34% of total assets. Remarkably, the Bancorp reported no foreclosed real estate at the end of 2003. Our reserve for loan losses continues to be maintained at an adequate level that was .92% of total loans at year-end.

Todd Scheub,
Commercial Loans
Joe Gonzalez,
Peoples Bank
customer

     Noninterest income from banking activities increased by 11% from the prior year, primarily as a result of gains taken on the sale of home mortgage loans. The interest rate environment during 2003 created the opportunity for homeowners to refinance their existing mortgages and for homebuyers to acquire property at favorable rates. During the year the Bancorp sold over $19 million of long-term mortgage loans into the secondary mortgage market which added to earnings while reducing the company’s exposure to interest rate risk.

     The Bancorp’s continued emphasis on being a low-cost provider of high quality services was reflected in an efficiency ratio of 55.2% for the year. This ratio is the result of dividing operating expenses by all income sources for the year. Financial analysts generally view an efficiency ratio under 60% as a strong sign of a bank’s ability to manage operating costs.

Randall Walker,
Investment and Trust Services

     As we look to the future, your team will focus on growth, asset quality, diversification of income, and operating efficiency —the four pillars of our banking success. We also will continue to seek opportunities to build profitable customer relationships that expand our value in the market. In doing so we deploy the capital entrusted to us to put in place highly trained people, up-to-date delivery systems, and strategic locations.

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     During 2003 two major initiatives were launched that will allow us to build for tomorrow. The first was a branding project undertaken with professional assistance to define who we are and what we do best. Our research included extensive focus groups and polling data of customers and non-customers in our market. The results found that our name was well recognized and that we were viewed favorably when compared to our banking competitors.

Donna Herbeck,
Munster
Banking Center

     Significantly we received the highest marks for friendliness, flexibility, and community involvement. The research showed a high degree of customer loyalty derived from the friendly, professional service offered by our team. Our brand position, the unique space we occupy in our market, is a modern bank offering friendly and personal banking and investment service to our customers. The new marketing slogan, “Friendly People for Today’s Banking,” truly reflects the findings of the branding exercise.

     The branding project also resulted in a revision to our logo. The original design of the “Peoples” was not altered to remain consistent with the way the public identifies the company, by the single word, “Peoples.” The word “Bank” was enhanced to become more consistent with the modern, progressive direction of your company.

     Our second major project was the completion of a $6.0 million state-of-the-art corporate center that houses the administrative offices, loan center, bank operations, information technology, and risk management units of our subsidiary, Peoples Bank.

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     The new facility built adjacent to the Munster Banking Center creates a campus with over 47,000 square feet of office space. The complex includes a training center that affords the opportunity to continue to offer superior customer service along with the personal and professional development of the 157 members of our team. While increasing costs, efficiencies have been garnered through the consolidation of our operation from various locations along with space for future expansion.

The new
Peoples Bank
Corporate and
Loan Center

     The goal of your company is to continue to provide products and services that exceed the banking and investing expectations of our customers. This year your company will invest over $1 million in technology improvements, will allocate capital for future locations, and will put in place even more core competency training for team members. As a result we will have the people and systems in place so that we can carry out our mission: To remain a strong and independent financial services provider through delivery of highly personal and friendly service.

     In early March of 2004, we were saddened to learn of the passing of James J. Crandall, director emeritus of the company. Jim was an outstanding person and a truly professional director who shared his considerable talent and energy with your company. He will long be remembered for his delightful personality, advice, and insights into strategic issues that will continue to make a difference in our success.

     Thank you for your investment and confidence in your company, the NorthWest Indiana Bancorp. Your team will continue to seek new opportunities for growth, meet the diverse needs of our community and provide value to shareholders and customers alike. We encourage you to actively use all of our traditional as well as electronic services and welcome your business at your Bank.

Sincerely,

David A. Bochnowski
Chairman and Chief Executive Officer

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in thousands of dollars, except per share data

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(1) Includes the $1.6 million one-time special assessment on FDIC-assessable deposits to recapitalize SAIF.

Business

     NorthWest Indiana Bancorp (the Bancorp) is a bank holding company registered with the Board of Governors of the Federal Reserve System. Peoples Bank SB (the Bank), an Indiana savings bank, is a wholly owned subsidiary of the Bancorp. The Bancorp has no other business activity other than being the holding company for Peoples Bank SB.

     The Bancorp conducts business from its main office in Munster and its eight full-service offices located in East Chicago, Hammond, Merrillville, Munster, Dyer, Schererville and Hobart, Indiana. The Bancorp is primarily engaged in the business of attracting deposits from the general public and the origination of loans secured by single family residences and commercial real estate, as well as, construction loans and various types of consumer loans and commercial business loans. In addition, the Bancorp’s trust department provides estate administration, estate planning, guardianships, land trusts, retirement planning, self-directed IRA and Keogh accounts, investment agency accounts, and serves as personal representative of estates and acts as trustee for revocable and irrevocable trusts.

     The Bancorp’s common stock is traded in the over-the-counter market and quoted on the OTC Bulletin Board. On February 27, 2004, the Bancorp had 2,757,488 shares of common stock outstanding and 408 stockholders of record. This does not reflect the number of persons or entities who may hold their stock in nominee or “street” name through brokerage firms.

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General

     The Bancorp’s earnings are dependent upon the earnings of the Bank. The Bank’s earnings are primarily dependent upon net interest margin. The net interest margin is the difference between interest income earned on loans and investments and interest expense paid on deposits and borrowings stated as a percentage of average interest earning assets. The net interest margin is perhaps the clearest indicator of a financial institution’s ability to generate core earnings. Fees and service charges, trust department income, gains and losses from the sale of assets, provisions for loan losses, income taxes and operating expenses also affect the Bancorp’s profitability.

     A summary of our significant accounting policies is detailed in Note 1 to the Bancorp’s consolidated financial statements included in this report. The preparation of our financial statements requires management to make estimates and assumptions that affect our financial condition and operating results. Actual results could differ from those estimates. Estimates associated with the allowance for loan losses, fair values of financial instruments and status of contingencies are particularly susceptible to material change in the near term as further information becomes available and future events occur.

     At December 31, 2003, the Bancorp had total assets of $508.8 million and total deposits of $421.6 million. The Bancorp’s deposit accounts are insured up to applicable limits by the Savings Association Insurance Fund (SAIF) that is administered by the Federal Deposit Insurance Corporation (FDIC), an agency of the federal government. At December 31, 2003, stockholders’ equity totaled $41.6 million, with book value per share at $15.09. Net income for 2003 was $5.9 million, or $2.16 basic earnings per common share and $2.13 diluted earnings per common share. The return on average assets (ROA) was 1.20%, while the return on average stockholders’ equity (ROE) was 14.65%.

Asset/Liability Management and Market Risk

     Asset/liability management involves the funding and investment strategies necessary to maintain an appropriate balance between interest sensitive assets and liabilities as well as to assure adequate liquidity. These strategies determine the characteristics and mix of the balance sheet. They affect the interest margins, maturity patterns, interest rate sensitivity and risk, as well as resource allocation. For the Bancorp, the key components of asset/liability management are loans, investments, deposits and borrowed funds. Over the years, the Bancorp has directed its lending efforts toward construction loans, adjustable rate residential loans, equity lines of credit, adjustable rate commercial real estate loans and commercial business loans tied to the prime rate of interest. Consumer loans are generally made for terms of five years or less. Fixed rate residential real estate loans are generally made for contractual terms of twenty years or less. The actual cash flows from these loans generally results in a duration which is less than the contractual maturity, providing protection against possible changes in interest rates.

     The Bancorp is primarily a portfolio lender. Mortgage banking activities are generally limited to the sale of fixed rate mortgage loans with contractual maturities exceeding fifteen years. These loans are identified as held for sale when originated and sold, on a case-by-case basis, in the secondary market as part of the Bancorp’s efforts to manage interest rate risk. The Bancorp retains the servicing on all loans sold in the secondary market.

     The primary objective of the Bancorp’s investment portfolio is to provide for the liquidity needs of the Bancorp and to contribute to profitability by providing a stable flow of dependable earnings. Funds are generally invested in federal funds, interest-bearing balances in financial institutions, U.S. government securities, federal agency securities and obligations of state and local municipalities. Investments are generally for terms ranging from one day to seven years. Interest-bearing balances in financial institutions include overnight deposits at the Federal Home Loan Bank of Indianapolis (FHLB). Securities are classified as either held-to-maturity or available-for-sale. Held-to-maturity securities are those that the Bancorp has the positive intent and ability to hold to maturity. Available-for-sale securities are those the Bancorp may decide to sell if needed for liquidity, asset-liability management or other reasons. The Bancorp does not have a trading portfolio. During 2003, the Bancorp did not have derivative instruments and was not involved in hedging activities as defined by SFAS 133.

     The Bancorp’s cost of funds reacts rapidly to changes in market interest rates due to the relatively short-term nature of its deposit liabilities. Consequently, the levels of short-term interest rates have influenced the Bancorp’s results of operations. In order to reduce exposure to interest-rate risk, core deposits (checking, NOW accounts, savings and money market accounts) have been aggressively marketed and certificate accounts have been competitively priced. Account activity and maturities are monitored in order to guard against the outflow of funds. Borrowed money is used to compensate for reductions in the availability of other sources of funds and is generally accomplished through repurchase agreements, as well as through a line of credit and advances from the FHLB. FHLB advances with maturities ranging from one to five years are used to fund securities and loans of comparable duration, as well as, to reduce the impact that movements in short-term interest rates have on the Bancorp’s overall cost of funds. The Bancorp does not obtain funds through brokers.

     The Bancorp’s primary market risk exposure is interest rate risk. Interest rate risk is the risk that the Bancorp’s earnings and capital will be adversely affected by changes in interest rates. The primary approach to interest rate risk management is one that focuses on adjustments to the Bancorp’s asset/liability mix in order to limit the magnitude of interest rate risk. The Board of Directors has delegated the responsibility for measuring, monitoring and controlling interest rate risk to the Bancorp’s asset/liability management committee (ALCO). The ALCO is responsible for developing and implementing interest rate risk management strategies, establishing and maintaining a system of limits and controls, and establishing and utilizing an interest rate risk measurement system. The ALCO, which is made up of members of senior management, generally meets monthly with board presentations occurring quarterly.

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     Performance from an interest rate risk perspective can be measured in many ways. Methodologies used by the Bancorp focus on net interest income and the net economic value of equity. Net interest income is defined as interest income less interest expense. Variability in net interest income arises because its components - interest income and interest expense - do not change equally as rates vary. This mismatch occurs because individual assets and liabilities reprice differently as rates change. Factors which affect net interest income include changes in the level of interest rates, changes in the relationship between Bancorp yield rates and interest costs, changes in the volume of assets and liabilities outstanding, and changes in the composition or mix of assets and liabilities. Management uses rate shock (i.e., instantaneous and sustained parallel shifts in the yield curve in 1% increments up and down 2%) for stress testing the net interest income under several rate change levels. In order to simulate activity, maturing balances are replaced with new balances at the new rate level and repricing balances are adjusted to the new rate shock level. The results are compared to limits set by the Board of Directors and are monitored to identify unfavorable trends.

     Net economic value of equity is the net present value of the Bancorp’s portfolio of assets and liabilities. By marking-to-market the components of the balance sheet, management can compute the net economic value of equity. As rates change over time, the market values of Bancorp assets and liabilities will change, with longer-term products fluctuating more than short-term products. In most cases, rate-sensitive assets and liabilities will not have the same maturity characteristics. Therefore, as rates vary, the market value of the rate-sensitive assets will not change equally with the market value of rate-sensitive liabilities. This will cause the net economic value of equity to vary. The focus of the net economic value of equity is to determine the percentage decline in the net economic value of equity caused by a 2% increase or decrease in interest rates, whichever produces the larger decline. A large value indicates a large percentage decline in the net economic value of equity due to changes in interest rates and, thus, high interest rate sensitivity. A low value indicates a small percentage decline in the net economic value of equity due to changes in interest rates and, thus, low interest rate sensitivity. As with net interest income, the results are compared to limits set by the Board of Directors and are monitored to identify unfavorable trends.

     Presented in the following tables is forward-looking information about the Bancorp’s sensitivity to changes in interest rates as of December 31, 2003 and 2002. The tables incorporate the Bancorp’s internal system generated data as related to the maturity and repayment/withdrawal of interest-earning assets and interest-bearing liabilities. Residential prepayment assumptions are based on published data. Present value calculations use current published market interest rates. For core deposits that have no contractual maturity, the table presents principal cash flows and, as applicable, related weighted-average interest rates based on the Bancorp’s historical experience, management’s judgment, and statistical analysis, as applicable, concerning their most likely withdrawal behaviors, but not as to when they could be repriced.

Interest Rate Risk at December 31, 2003

Interest Rate Risk at December 31, 2002

     The tables show that the Bancorp has managed interest rate risk within the policy limits set by the Board of Directors. At December 31, 2003, an increase in interest rates of 2% would have resulted in a 5.7% decrease in net interest income and a 17.2% decrease in the net economic value of equity compared to decreases of 2.2% and 10.7% at December 31, 2002. During 2003, the Bancorp managed interest rate risk by generally selling fixed rate loans with contractual maturities exceeding 15 years, investing cash equivalents in higher yielding interest earning assets and implementing net interest income pricing strategies.

Financial Condition

     During the year ended December 31, 2003, total assets increased by $20.8 million (4.3%), with interest-earning assets increasing by $19.1 million (4.2%). At December 31, 2003, interest-earning assets totaled $476.6 million and represented 93.7% of total assets. Loans totaled $409.8 million and represented 86.0% of interest-earning assets, 80.6% of total assets and 97.2% of total deposits. The loan portfolio, which is the Bancorp’s largest asset, is a significant source of both interest and fee income. The Bancorp’s lending strategy stresses quality growth, product diversification, and competitive and profitable pricing. The loan portfolio includes $23.7 million (5.8%) in construction and land development loans, $232.3 million (56.7%) in residential real estate loans, $107.0 million (26.1%) in commercial and multifamily real estate loans, $5.1 million (1.2%) in consumer loans and $41.7 million (10.2%) in commercial business and other loans. During 2003, loans increased by $29.4 million (7.7%), with increases taking place in construction and land development, residential and commercial real estate loans, and commercial business loans. Adjustable rate loans comprised 40.7% of total loans at year-end. Management believes that, despite the current general economic pressures, the positive trend in loan growth will continue during 2004 because of the current interest rate environment and an aggressive marketing and call program effort. Management expects to fund loan growth with retail funds.

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     During 2003, the Bancorp sold $19.3 million in fixed rate mortgages compared to $7.5 million in 2002 and $4.8 million in 2001. Loans sold generally had contractual maturities exceeding fifteen years. Net gains realized from the sales totaled $495 thousand, $176 thousand and $64 thousand for 2003, 2002 and 2001. Net mortgage loan servicing losses totaled $47 thousand for 2003, compared to net serving losses of $7 thousand for 2002 and net servicing income of $4 thousand for 2001. At December 31, 2003, the Bancorp had $75 thousand classified as loans held for sale. During 2004, the Bancorp expects to continue selling fixed rate mortgage loans, with contractual maturities exceeding fifteen years, on a case-by-case basis as part of its efforts to manage interest rate risk.

     At December 31, 2003, non-performing loans, which include those loans that are 90 days or more past due and those loans that have been placed on non-accrual status, totaled $1.7 million, a decrease of $666 thousand from the prior year. The ratio of non-performing loans to total assets was 0.34% at December 31, 2003, compared to 0.49% at December 31, 2002. The December 31, 2003 balance includes $1.3 million in loans accounted for on a non-accrual basis and $370 thousand in accruing loans which were contractually past due 90 days or more. At December 31, 2003, $2.7 million of the Bancorp’s loans were internally classified as substandard compared to $2.8 million reported at December 31, 2002. There were no loans classified as doubtful or loss. Substandard loans include non-performing loans and potential problem loans, where information about possible credit issues or other conditions causes management to question the ability of such borrowers to comply with loan covenants or repayment terms. In addition to identifying and monitoring non-performing and other classified loans, the Bancorp maintains a list of watch loans. Watch loans represent loans management is more closely monitoring due to one or more factors that may cause the loan to become classified. Watch loans were $8.3 million and $7.0 million at December 31, 2003 and 2002.

     The balance for non-performing and substandard loans includes three loans to three borrowers totaling $611 thousand that have been classified as impaired. Impaired loans are loans where full payment under the loan terms is not expected. There were no other loans considered to be impaired loans as of December 31, 2003.

     At December 31, 2003, management of the Bancorp is of the opinion that there are no loans, except those discussed above, where known information about possible credit problems of borrowers causes management to have serious doubts as to the ability of such borrowers to comply with the present loan repayment terms and which may result in disclosure of such loans as nonaccrual, past due or restructured loans. Also, at December 31, 2003, there is no other interest bearing assets that would be required to be disclosed as nonaccrual, past due, restructured or potential problem if such assets were loans. Management does not anticipate that any of the non-performing loans or classified loans would materially impact future operations, liquidity or capital resources.

     Because some loans may not be repaid in accordance with contractual agreements, an allowance for loan losses (ALL) has been maintained. While management may periodically allocate portions of the allowance for specific problem loans, the entire allowance is available to absorb all credit losses that arise from the loan portfolio and is not segregated for, or allocated to, any particular loan or group of loans. During 2003, provisions to the ALL account totaled $420 thousand compared to $720 thousand for 2002 and $230 thousand for 2001. Charge-offs, net of recoveries, totaled $268 thousand during 2003, compared to $241 thousand during 2002 and $396 thousand for 2001. The provision is based on management’s current judgments about the credit quality of the loan portfolio, loan portfolio growth, changes in the portfolio mix and local economic conditions. While the quality of the loan portfolio remains sound, provisions during 2003 were warranted because of the current balance in classified loans, increased average daily loan balances, apparent weaknesses in the local economy, the inherent risk associated with growth in commercial real estate and commercial business loans, and loan charge-offs. The appropriateness of the current year provision and the overall adequacy of the ALL were determined through a disciplined and consistently applied quarterly process that combines a review of the current position with a risk assessment worksheet.

     At December 31, 2003, the ALL to total loans was 0.92% compared to 0.96% at December 31, 2002, while the ALL to non-performing loans (coverage ratio) was 220.3% compared to 152.4% for the same periods. The December 31, 2003 balance in the ALL account of $3.8 million is considered adequate by management after evaluation of the loan portfolio, past experience and current economic and market conditions.

     The allocation of the ALL reflects performance and growth trends within the various loan categories, as well as, consideration of the facts and circumstances that affect the repayment of individual loans, as well as, loans which have been pooled as of the evaluation date, with particular attention given to non-performing loans and loans which have been classified as substandard, doubtful or loss. Management has allocated general reserves to both performing and non-performing loans based on current information available.

     At December 31, 2003, the Bancorp’s investment portfolio totaled $63.7 million and was invested as follows: 70.6% in U.S. government agency debt securities, 5.0% in municipal securities, and 24.4% in U.S. government agency mortgage-backed securities and collateralized mortgage obligations. At December 31, 2003, securities available-for-sale totaled $60.8 million or 95.4% of total securities. Available for sale securities are those the Bancorp may decide to sell if needed for liquidity, asset-liability management or other reasons. In addition, the Bancorp had $182 thousand in federal funds sold, and $2.8 million in FHLB stock. During 2003, securities increased by $7.2 million (12.7%), as proceeds from interest bearing balances in financial institutions were invested in the Bancorp’s securities portfolio.

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     Deposits are a fundamental and cost-effective source of funds for lending and other investment purposes. The Bancorp offers a variety of products designed to attract and retain customers, with the primary focus on building and expanding relationships. At December 31, 2003, deposits totaled $421.6 million. During 2003, deposit growth totaled $15.0 million (3.7%). Checking accounts increased $6.7 million (7.7%), money market deposit accounts (MMDA’s) increased $2.6 million (4.0%), savings accounts increased $6.3 million (9.8%), and certificates of deposit decreased by $625 thousand (0.3%). At December 31, 2003, the deposit base was comprised of 22.1% checking, 16.2% MMDAs, 16.7% savings accounts, and 45.0% certificates of deposit. The growth in deposits was a result of competitive product offerings, an aggressive marketing program, and volatility in the financial markets.

     Borrowings are primarily used to fund asset growth not supported by deposit generation. At December 31, 2003, borrowed funds totaled $40.9 million compared to $36.1 million at December 31, 2002, an increase of $4.8 million (13.4%). Repurchase agreements totaled $11.5 million compared to $12.6 million at December 31, 2002, a decrease of $1.1 million (9.3%). FHLB advances totaled $26.5 million, increasing $5.0 million, as the Bancorp extended the maturity structure of interest-bearing liabilities at cost effective interest rates. In addition, the outstanding balance on the FHLB line of credit was $1.5 million at the end of the current year. Other short-term borrowings totaled $1.4 million compared to $1.9 million at December 31, 2002, a decrease of $527 thousand million as the Bancorp paid down short-term funding.

Liquidity and Capital Resources

     For the Bancorp, liquidity management refers to the ability to generate sufficient cash to fund current loan demand, meet savings deposit withdrawals, and pay dividends and operating expenses. The Bancorp’s primary goal for liquidity management is to ensure that at all times it can meet the cash demands of its depositors and its loan customers. A secondary purpose of liquidity management is profit management. Because profit and liquidity are often conflicting objectives, management attempts to maximize the Bancorp’s net interest margin by making adequate, but not excessive, liquidity provisions. Finally, because the Bancorp is subject to legal reserve requirements under Federal Reserve Regulation D, liquidity is managed to ensure that the Bancorp maintains an adequate level of legal reserves.

     Changes in the liquidity position result from operating, investing and financing activities. Cash flows from operating activities are generally the cash effects of transactions and other events that enter into the determination of net income. The primary investing activities include loan originations, loan repayments, investments in interest bearing balances in financial institutions, and the purchase and maturity of investment securities. Financing activities focus almost entirely on the generation of customer deposits. In addition, the Bancorp utilizes borrowings (i.e., repurchase agreements and advances from the FHLB) as a source of funds.

     During 2003, cash and cash equivalents decreased $19.1 million, compared to an increase of $18.3 million for 2002, and a decrease of $483 thousand for 2001. During 2003, the primary sources of cash and cash equivalents were from the maturities and sales of securities, loan sales and prepayments, deposit growth, FHLB advances and cash from operating activities. The primary uses of cash and cash equivalents were loan originations and loan participations purchased, the purchase of securities, construction disbursements for a new corporate center, and the payment of common stock dividends. During 2003, cash from operating activities remained stable, totaling $7.4 million, compared to $7.6 million for 2002 and $5.6 million for 2001. Cash outflows from investing activities totaled $43.3 million during 2003, compared to $29.0 million during 2002 and $48.9 million for 2001. The increase during 2003 was due primarily to security purchases and construction disbursements for a new corporate center. During 2003, excess liquidity was reinvested into the Bancorp’s securities portfolio. The net change in loans receivable and loan participations purchased totaled $30.3 million during 2003, compared to $38.8 million for 2002 and $17.4 million for 2001. Cash flows from financing activities totaled $16.7 million in 2003, compared to $39.7 million during 2002 and $42.7 million for 2001. The change during 2003 was primarily due to planned deposit withdrawals by a local municipality. Deposit growth during 2003 totaled $15.0 million, compared to $51.5 million for 2002 and $30.9 million for 2001. FHLB advances increased by 5.0 million during 2003, compared to $4.5 million during 2002 and $5.5 million during 2001. During 2003, the Bancorp used low cost advances to extend the maturity structure of interest-bearing liabilities. The Bancorp paid dividends on common stock of $3.2 million during 2003, compared to $3.0 million during 2002 and $2.8 million for 2001.

     During September 2003, the Bancorp completed the construction of a $6.0 million state-of-the-art corporate center in Munster, Indiana. The corporate center affords the Bancorp the opportunity to continue offering superior customer service, while providing for future growth and operating efficiencies. While adding to operating costs, management does not expect the facility to have a material impact on noninterest expense during future periods.

     Management strongly believes that safety and soundness is enhanced by maintaining a high level of capital. During 2003, stockholders’ equity increased by $2.4 million (6.1%). The increase resulted primarily from earnings of $5.9 million for 2003. In addition, $177 thousand represents proceeds from the exercise of 14,939 stock options. The Bancorp

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declared $3.3 million in cash dividends. The net unrealized loss on available-for-sale securities, net of tax, was $410 thousand. At December 31, 2003, book value per share was $15.09 compared to $14.29 at December 31, 2002.

     The Bancorp is subject to risk-based capital guidelines adopted by the Board of Governors of the Federal Reserve System (the FRB), and the Bank is subject to risk-based capital guidelines adopted by the FDIC. As applied to the Bancorp and the Bank, the FRB and FDIC capital requirements are substantially the same. These regulations divide capital into two tiers. The first tier (Tier 1) includes common equity, certain non-cumulative perpetual preferred stock and minority interests in equity accounts of consolidated subsidiaries, less goodwill and certain other intangible assets. Supplementary (Tier 2) capital includes, among other things, cumulative perpetual and long-term limited-life preferred stock, mandatory convertible securities, certain hybrid capital instruments, term subordinated debt and the allowance for loan losses, subject to certain limitations, less required deductions. The Bancorp and the Bank are required to maintain a total risk-based capital ratio of 8%, of which 4% must be Tier 1 capital. In addition, the FRB and FDIC regulations provide for a minimum Tier 1 leverage ratio (Tier 1 capital to adjusted average assets) of 3% for financial institutions that meet certain specified criteria, including that they have the highest regulatory rating and are not experiencing or anticipating significant growth. All other financial institutions are required to maintain a Tier 1 leverage ratio of 3% plus an additional cushion of at least one to two percent.

     The following table shows that, at December 31, 2003, the Bancorp’s capital exceeded all regulatory capital requirements. At December 31, 2003, the Bancorp’s and the Bank’s regulatory capital ratios were substantially the same. The dollar amounts are in millions.

Contractual Obligations, Commitments, Contingent Liabilities, and Off-balance Sheet Arrangements

     The following table presents the Bancorp’s consolidated long term, non-deposit related, contractual obligations as well as commitments to extend credit to our borrowers, in aggregate and by payment due dates at December 31, 2003. Dollar amounts are in thousands.

     At December 31, 2003, outstanding commitments to fund loans totaled $76.2 million. Approximately 86% of the commitments were at variable rates. Management believes that the Bancorp has sufficient cash flow and borrowing capacity to fund all outstanding commitments and to maintain proper levels of liquidity. Except for the items disclosed in the table above, the Bancorp has no other off-balance sheet arrangements, which will have a current or future effect on results of operations, liquidity, capital expenditures or resources.

     At December 31, 2003, management is not aware of any current recommendations by the regulatory authorities, which if they were to be implemented would have a material effect on the Bancorp’s liquidity, capital resources or operations.

Results of Operations - Comparison of 2003 to 2002

     Net income for 2003 was $5.9 million, compared to $5.5 million for 2002, an increase of $443 thousand (8.1%). The earnings represent a return on average assets of 1.20% for 2003 compared to 1.18% for 2002. The return on average equity was 14.65% for 2003 compared to 14.58% for 2002.

     Net interest income for 2003 was $18.8 million, up $1.2 million (6.6%) from $17.7 million for 2002. The increase in net interest income was due to the cost of funds falling more rapidly than the yield on earning assets and the growth in average daily balances for interest earning assets. The low interest rate environment of 2003 resulted in lower yields for investments and loans as maturing securities were reinvested at lower rates of return, while loans either repriced or refinanced at lower rates. During 2003, the cost of funds fell faster than yields on earning assets due to the maturity structure of the Bancorp’s certificates of deposit and growth in core accounts. The weighted-average yield on interest-earning assets was 5.65% for 2003 compared to 6.26% for 2002. The weighted-average cost of funds was 1.67% for 2003 compared to 2.38% for 2002. The impact of the

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5.65% return on interest-earning assets and the 1.67% cost of funds resulted in a net interest spread of 3.98% for 2003 compared to 3.88% for 2002. During 2003, total interest income decreased by $1.4 million (5.1%) while total interest expense decreased by $2.6 million (25.6%). The net interest margin was 4.04% for 2003 compared to 3.99% for 2002.

     During 2003, interest income from loans decreased by $458 thousand (1.9%) compared to 2002. The decrease was due to lower yields on loans outstanding, as the current interest rate environment resulted in new originations at low rates, and continued increases in prepayment and refinance activity. The weighted-average yield on loans outstanding was 6.11% for 2003 compared to 6.73% for 2002. Loan balances averaged $395.0 million for 2003, up $29.4 million (8.0%) from $365.6 million for 2002. During 2003, interest income from securities and other interest earning assets decreased by $966 thousand (30.3%) compared to 2002. The decrease was due to lower portfolio yields and average daily balances. The weighted-average yield on securities and other interest earning assets was 3.13% for 2003 compared to 4.10% for 2002. Securities and other interest earning assets averaged $71.2 million for 2003, down $6.7 million (8.6%) from $77.9 million for 2002.

     Interest expense for deposits decreased by $2.3 million (27.4%) during 2003 compared to 2002. The decrease was due to a lower cost of funds. The weighted-average rate paid on deposits for 2003 was 1.51% compared to 2.23% for 2002. The lower cost of funds was caused by core account growth and maturing certificates of deposit during a low interest rate environment. Total deposit balances averaged $412.2 million for 2003, up $28.9 million (7.5%) from $383.3 million for 2002. Interest expense on borrowed funds decreased by $239 thousand (15.4%) during 2003 due to lower borrowing costs and average daily balances. The weighted-average cost of borrowed funds was 3.47% for 2003 compared to 3.71% for 2002. Borrowed funds averaged $37.7 million during 2003, down $4.1 million (9.8%) from $41.8 million for 2002. Borrowed funds have provided a cost-effective supplement to deposits for funding interest-earning asset growth.

     Noninterest income was $3.0 million for 2003, up $293 thousand (11.0%) from $2.7 million during 2002. During 2003, fees and service charges increased $92 thousand (5.2%). The increase was due to account growth and increased activity. Fees from Trust operations totaled $444 thousand for 2003, compared to $509 thousand for 2002. During 2003, the Bancorp reported $495 thousand in gains on sales of loans compared to $176 thousand for 2002, due to the current low interest rate environment and increase in volume sold. Gains on securities totaled $132 thousand during 2003 compared to $143 thousand for 2002, as securities with higher prepayment speeds were sold and reinvested at higher yields. In addition, the Bancorp reported $4 thousand in losses on the sale of foreclosed real estate during 2003 compared to gains of $57 thousand for 2002.

     Noninterest expense for 2003 was $12.0 million, up $1.2 million (10.8%) from $10.9 million for 2002. The increase in compensation and benefits was due to annual salary increases and additional staffing for current operations. The increase in occupancy expense was due to increased depreciation expense for investment in technology and capital expenditures for the new corporate center. Other expense changes were due to standard increases in operations. The Bancorp’s efficiency ratio for 2003 was 55.2% compared to 53.4% for 2002. The ratio is determined by dividing total noninterest expense by the sum of net interest income and total noninterest income for the period.

     Income tax expenses for 2003 totaled $3.4 million compared to $3.3 million for 2002, an increase of $134 thousand (4.1%). The increase was due to increased earnings. The combined effective federal and state tax rates for the Bancorp were 36.5% for 2003 and 37.4% for 2002. The reduction during 2003 was a result of an increase in tax-exempt investments and loans.

Results of Operations - Comparison of 2002 to 2001

     Net income for 2002 was $5.5 million, compared to $4.7 million for 2001, an increase of $783 thousand (16.6%). The earnings represent a return on average assets of 1.18% for 2002 compared to 1.15% for 2001. The return on average equity was 14.58% for 2002 compared to 13.49% for 2001.

     Net interest income for 2002 was $17.7 million, up $2.5 million (16.3%) from $15.2 million for 2001. The increase in net interest income was due to growth in average daily balances for interest earning assets. The low interest rate environment of 2002 resulted in lower yields for investments and loans as maturing securities were reinvested at lower rates of return, while loans either repriced or refinanced at lower rates. During 2002, the cost of funds fell faster than yields on earning assets due to the maturity structure of the Bancorp’s certificates of deposit and growth in core accounts. The weighted-average yield on interest-earning assets was 6.26% for 2002 compared to 7.29% for 2001. The weighted-average cost of funds was 2.38% for 2002 compared to 3.55% for 2001. The impact of the 6.26% return on interest-earning assets and the 2.38% cost of funds resulted in a net interest spread of 3.88% for 2002 compared to 3.74% for 2001. During 2002, total interest income decreased by $644 thousand (2.3%) while total interest expense decreased by $3.1 million (23.6%). The net interest margin was 3.99% for 2002 compared to 3.90% for 2001.

     During 2002, interest income from loans decreased by $569 thousand (2.3%) compared to 2001. The decrease was due to lower yields on loans outstanding, as the current interest rate environment resulted in new originations at low rates, and continued increases in prepayment and refinance activity. The weighted-average yield on loans outstanding was 6.73% for 2002 compared to 7.72% for 2001. Loan balances averaged $365.6 million for 2002, up $39.7 million (12.2%) from $325.9 million for 2001. During 2002, interest income from securities and other interest earning assets decreased by $75 thousand (2.3%) compared to 2001. The decrease was due to lower portfolio yields. The

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weighted-average yield on securities and other interest earning assets was 4.10% for 2002 compared to 5.12% for 2001. Securities and other interest earning assets averaged $77.9 million for 2002, up $14.1 million (22.1%) from $63.8 million for 2001.

     Interest expense for deposits decreased by $3.2 million (27.2%) during 2002 compared to 2001. The decrease was due to a lower cost of funds. The weighted-average rate paid on deposits for 2002 was 2.23% compared to 3.45% for 2001. The lower cost of funds was caused by core account growth and maturing certificates of deposit during a low interest rate environment. Total deposit balances averaged $383.3 million for 2002, up $42.4 million (12.4%) from $340.9 million for 2001. Interest expense on borrowed funds increased by $76 thousand (5.2%) during 2002 due to increases in average daily balances. The weighted-average cost of borrowed funds was 3.71% for 2002 compared to 4.72% for 2001. Borrowed funds averaged $41.8 million during 2001, up $10.6 million (34.0%) from $31.2 million for 2001, due to favorable interest rates. Borrowed funds have provided a cost-effective supplement to deposits for funding interest-earning asset growth.

     Noninterest income was $2.7 million for 2002, up $273 thousand (11.4%) from $2.4 million during 2001. During 2002, fees and service charges increased $60 thousand (3.5%) and income from Trust operations increased $86 thousand (20.3%) compared to 2001. During 2002, the Bancorp reported $176 thousand in gains on sales of loans compared to $64 thousand for 2001, due to an increase in the amount of loans sold. Gains on securities totaled $143 thousand during 2002 compared to $142 thousand for 2001, as falling interest rates enabled the Bancorp to sell securities with expected calls. In addition, the Bancorp reported $57 thousand in gains on sale of foreclosed real estate during 2002 compared to $12 thousand for 2001.

     Noninterest expense for 2002 was $10.9 million, up $948 thousand (9.6%) from $9.9 million for 2001. The increase in compensation and benefits was due to annual salary increases and additional staffing for current operations. Other expense changes were due to standard increases in operations. The Bancorp’s efficiency ratio for 2002 was 53.4% compared to 56.3% for 2001.

     Income tax expenses for 2002 totaled $3.3 million compared to $2.8 million for 2001, an increase of $523 thousand (19.0%). The increase was due to increased earnings. The combined effective federal and state tax rates for the Bancorp were 37.4% for 2002 and 36.9% for 2001.

Critical Accounting Policies

     Critical accounting policies are those accounting policies that management believes are most important to the portrayal of the Bancorp’s financial condition and that require management’s most difficult, subjective or complex judgments. The Bancorp’s critical accounting policies are summarized below:

     Allowance for Loan Losses – The Bancorp maintains an Allowance for Loan Losses (ALL) to absorb probable credit losses that arise from the loan portfolio. The ALL is increased by the provision for loan losses, and decreased by charge-offs net of recoveries. The determination of the amounts of the ALL and provisions for loan losses is based upon management’s current judgments about the credit quality of the loan portfolio with consideration given to all known relevant internal and external factors that affect loan collectibility. The methodology used to determine the current year provision and the overall adequacy of the ALL includes a disciplined and consistently applied quarterly process that combines a review of the current position with a risk assessment worksheet. Factors that are taken into consideration in the analysis include an assessment of national and local economic trends, a review of current year loan portfolio growth and changes in portfolio mix, and an assessment of trends for loan delinquencies and loan charge-off activity. Particular attention is given to non-accruing loans and accruing loans past due 90 days or more, and loans that have been classified as substandard, doubtful, or loss. Changes in the provision are directionally consistent with changes in observable data.

     Commercial and industrial, and commercial real estate loans that exhibit credit weaknesses and loans that have been classified as impaired are subject to an individual review. Where appropriate, ALL allocations are made to these loans based on management’s assessment of financial position, current cash flows, collateral values, financial strength of guarantors, industry trends, and economic conditions. ALL allocations for homogeneous loans, such as residential mortgage loans and consumer loans, are based on historical charge-off activity and current delinquency trends. Management has allocated general reserves to both performing and non-performing loans based on historical data and current information available. Risk factors are applied to these types of loans to determine the appropriate level for the ALL. Risk factors are based on an evaluation of the Bancorp’s own historical information, economic factors, and subjective assessment and interpretation. Adjustments may be made to these allocations that reflect management’s judgment on current conditions, delinquency trends, and charge-off activity.

     The Bancorp has not made any significant changes to its overall approach in the determination of the ALL for all periods reported. There have been no material changes in assumptions or estimation techniques. Based on the above discussion, management believes that the ALL is currently adequate, but not excessive, given the risk inherent in the loan portfolio.

     Mortgage Servicing Rights – When the Bancorp sells fixed rate mortgage loans into the secondary market, loan servicing rights are generally retained. As a result, mortgage servicing rights are recognized as assets for the allocated fair value of retained servicing rights. Mortgage servicing rights are valued using discounted cash flow modeling techniques that require estimates regarding future net servicing cash flows, mortgage loan prepayment speeds, discount rates, servicing costs, ancillary income and escrow information. The Bancorp’s mortgage servicing rights are amortized in proportion to and over the period of estimated net servicing revenues.

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     Servicing rights are assessed for impairment on a quarterly basis by an independent third-party. Impairment is evaluated based on the fair value of the rights, using groupings of the underlying loans as to interest rates and then, secondly as to prepayment characteristics, weighted average life of the loan and discount rate. Impairment is recognized when the book value of the servicing asset exceeds its fair market value. Any impairment of a grouping is reported as a valuation allowance. Note 4 to the consolidated financial statements contains data relating to the Bancorp’s servicing rights.

Impact of Inflation and Changing Prices

     The financial statements and related data presented herein have been prepared in accordance with accounting principles generally accepted in the United States of America, which require the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative purchasing power of money over time due to inflation. The primary assets and liabilities of the Bancorp are monetary in nature. As a result, interest rates have a more significant impact on the Bancorp’s performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or magnitude as the prices of goods and services.

Forward-Looking Statements

     Statements contained in this document that are not historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The words or phrases “would be,” “will allow,” “intends to,” “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project,” or similar expressions are also intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act. The Bancorp cautions readers that forward-looking statements, including without limitation those relating to the Bancorp’s future business prospects, interest income and expense, net income, liquidity, and capital needs are subject to certain risks and uncertainties that could cause actual results to differ materially from those indicated in the forward-looking statements, due to, among other things, factors identified in this filing, including the following:

     Regulatory Risk. The banking industry is heavily regulated. As discussed above, the Bank and Bancorp are subject to regulation and supervision by the DFI, FDIC, FRB, and SEC (Securities and Exchange Commission). The burden imposed by federal and state regulations puts banks at a competitive disadvantage compared to less regulated competitors such as finance companies, mortgage banking companies and leasing companies. The banking industry continues to lose market share to competitors.

     Legislation. Because of concerns relating to the competitiveness and the safety and soundness of the industry, Congress continues to consider a number of wide-ranging proposals for altering the structure, regulation, and competitive relationships of the nation’s financial institutions. Among such bills are proposals to combine banks and thrifts under a unified charter, to combine regulatory agencies, and to further expand the powers of depository institutions, bank holding companies, and competitors of depository institutions. Management cannot predict whether or in what form any of these proposals will be adopted or the extent to which the business of the Bancorp or the Bank may be affected thereby.

     Credit Risk. One of the greatest risks facing lenders is credit risk, that is, the risk of losing principal and interest due to a borrower’s failure to perform according to the terms of a loan agreement. While management attempts to provide an allowance for loan losses at a level adequate to cover probable incurred losses based on loan portfolio growth, past loss experience, general economic conditions, information about specific borrower situations, and other factors, future adjustments to reserves may become necessary, and net income could be significantly affected, if circumstances differ substantially from assumptions used with respect to such factors.

     Exposure to Local Economic Conditions. The Bank’s primary market area for deposits and loans encompasses Lake County, in northwest Indiana, where all of its offices are located. Ninety-five percent of the Bank’s business activities are within this area. This concentration exposes the Bank to risks resulting from changes in the local economy. A dramatic drop in local real estate values would, for example, adversely affect the quality of the Bank’s loan portfolio.

     Interest Rate Risk. The Bancorp’s earnings depend to a great extent upon the level of net interest income, which is the difference between interest income earned on loans and investments and the interest expense paid on deposits and other borrowings. Interest rate risk (IRR) is the risk that the earnings and capital will be adversely affected by changes in interest rates. Further discussion of interest rate risk can be found under the caption “Asset/Liability Management and Market Risk” in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of this document.

     Competition. The activities of the Bancorp and the Bank in the geographic market served involve competition with other banks as well as with other financial institutions and enterprises, many of which have substantially greater resources than those available to the Bancorp. In addition, non-bank competitors are generally not subject to the extensive regulation applicable to the Bancorp and the Bank.

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Board of Directors and Stockholders
NorthWest Indiana Bancorp
Munster, Indiana

We have audited the accompanying consolidated balance sheets of NorthWest Indiana Bancorp (the Bancorp) as of December 31, 2003 and 2002 and the related consolidated statements of income, changes in stockholders’ 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 Bancorp’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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of NorthWest Indiana Bancorp 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.

		Crowe Chizek and Company LLC
South Bend, Indiana
January 8, 2004

17

(Dollars in thousands)

See accompanying notes to consolidated financial statements.

18

(Dollars in thousands, except per share data)

See accompanying notes to consolidated financial statements.

19

(Dollars in thousands, except per share data)

See accompanying notes to consolidated financial statements.

20

(Dollars in thousands)

See accompanying notes to consolidated financial statements.

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Years ended December 31, 2003, 2002 and 2001

NOTE 1 - Summary of Significant Accounting Policies

     Principles of Consolidation - The consolidated financial statements include NorthWest Indiana Bancorp (the Bancorp), its wholly owned subsidiary, Peoples Bank SB (the Bank), and the Bank’s wholly owned subsidiaries, Peoples Service Corporation and NWIN, LLC. The Bancorp has no other business activity other than being a holding company for the Bank. The Bancorp’s earnings are dependent upon the earnings of the Bank. Peoples Service Corporation provides insurance and annuity investments to the Bank’s trust customers. NWIN, LLC began operations on July 25, 2003, as an investment subsidiary based in Las Vegas, Nevada. All significant inter-company accounts and transactions have been eliminated in consolidation.

     Use of Estimates - Preparing financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period, as well as the disclosures provided. Actual results could differ from those estimates. Estimates associated with the allowance for loan losses, fair values of financial instruments and status of contingencies are particularly susceptible to material change in the near term.

     Concentrations of Credit Risk - The Bancorp grants residential, commercial real estate, commercial business and installment loans to customers primarily of Lake County, in northwest Indiana. Substantially all loans are secured by specific items of collateral including residences, commercial real estate, business assets and consumer assets.

     Cash Flow Reporting - For purposes of the statement of cash flows, the Bancorp considers cash on hand, noninterest bearing balances in financial institutions, all interest-bearing balances in financial institutions with original maturities of ninety days or less and federal funds sold to be cash and cash equivalents. The Bancorp reports net cash flows for customer loan and deposit transactions and short-term borrowings with maturities of 90 days or less.

     Securities - The Bancorp classifies securities into held to maturity, available for sale, or trading categories. Held to maturity securities are those, which the Bancorp has the positive intent and ability to hold to maturity, and are reported at amortized cost. Available for sale securities are those the Bancorp may decide to sell if needed for liquidity, asset-liability management or other reasons. Available for sale securities are reported at fair value, with unrealized gains and losses reported in other comprehensive income. The Bancorp does not have a trading portfolio. Realized gains and losses resulting from the sale of securities are computed by the specific identification method. Interest and dividend income, adjusted by amortization of premium or discount, are included in earnings. Securities are written down to fair value when a decline in fair value is not temporary.

     Loans Held for Sale - Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated market value in the aggregate. Net unrealized losses are recognized in a valuation allowance by charges to income.

     Loans and Loan Income - Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated net of loans in process, deferred loan fees and costs, and unearned income. Discounts on consumer loans are recognized over the lives of the loans using the interest method. Interest income on other loans is accrued over the term of the loans based upon the principal outstanding except where serious doubt exists as to the collectibility of a loan, in which case the accrual of interest is discontinued. Income is subsequently recognized only to the extent that cash payments are received until, in management’s judgment, the borrower has the ability to make contractual interest and principal payments, in which case the loan is returned to accrual status. Net deferred loan fees and costs are amortized on the interest method over the loan term.

     Allowance for Loan Losses - The allowance for loan losses is a valuation allowance for probable incurred credit losses, increased by the provision for loan losses, and decreased by charge-offs less recoveries. Estimating the risk of loss and the amount of loss on any loan is necessarily subjective. Accordingly, the allowance is maintained by management at a level considered adequate based on past loss experience, general economic conditions, information about specific borrower situations including their financial position and collateral values, and other factors and estimates which are subject to change over time. While management may periodically allocate portions of the allowance for specific problem loans, the whole allowance is available for any loan charge-offs that occur. Loan losses are charged against the allowance when management believes that uncollectibility of a loan a balance is confirmed.

     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. Loans considered to be impaired are reduced to the present value of expected future cash flows or to the fair value of collateral, by allocating a portion of the allowance for loan losses to such loans. If these allocations cause the allowance for loan losses to require increase, such increase is reported in the provision for loan losses. Smaller-balance homogeneous loans are evaluated for impairment in total. Such loans include residential first mortgage loans secured by one-to-four family residences, residential construction loans, automobile, home equity and second mortgage loans. Commercial loans and mortgage loans secured by other properties are evaluated individually for impairment. When analysis of borrower operating results

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and financial condition indicates that underlying cash flows of the borrower’s business are not adequate to meet its debt service requirements, the loan is evaluated for impairment.

     Federal Home Loan Bank Stock – The Bank is a member of the Federal Home Loan Bank system and is required to invest in capital stock of the Federal Home Loan Bank (FHLB). The amount of the required investment is based upon the balance of the Bank’s outstanding home mortgage loans and advances from the FHLB and is carried at cost.

     Premises and Equipment - Premises and equipment are stated at cost less accumulated depreciation. Premises and related components are depreciated using the straight-line method with useful lives ranging from 26 to 39 years. Furniture and equipment are depreciated using the straight-line method with useful lives ranging from 3 to 10 years. Maintenance and repairs are charged to expense and improvements are capitalized. The cost and accumulated depreciation applicable to assets retired or otherwise disposed of are eliminated from the accounts and the gain or loss on disposition is credited or charged to operations.

     Foreclosed Real Estate - Real estate properties acquired through, or in lieu of, loan foreclosure are recorded at fair value at the date of foreclosure. Costs relating to improvement of property are capitalized, whereas holding costs are expensed. Valuations are periodically performed by management, and an allowance for losses is established by a charge to operations if the carrying value of a property exceeds its estimated fair value less selling costs.

     Mortgage Servicing Rights – Mortgage servicing rights are recognized as assets for the allocated value of retained servicing rights on loans sold. Mortgage servicing rights are expensed in proportion to, and over the period of, estimated net servicing revenues. Impairment is evaluated based on the fair value of the rights, using groupings of the underlying loans as to interest rates and then, secondly as to prepayment characteristics. Any impairment of a grouping is reported as a valuation allowance.

     Investment in Real Estate Limited Partnerships - Investment in real estate limited partnerships represent the Bancorp’s investments in affordable housing projects for the primary purpose of available tax benefits. One investment is accounted for using the cost method of accounting. The excess of the carrying amount of the investment over its estimated residual value is amortized during the periods in which associated tax credits are allocated to the investor. The annual amortization of the investment is based on the proportion of tax credits received in the current year to total estimated tax credits to be allocated to the Bancorp. The other investment is accounted for using the equity method of accounting. Under the equity method of accounting, the Bancorp records its share of the partnership’s earnings or losses in its income statement and adjusts the carrying amount of the investments on the balance sheet. These investments are reviewed for impairment when events indicate their carrying amounts may not be recoverable from future undiscounted cash flows. If impaired, the investments are reported at fair value. The Bancorp’s involvement in these types of investments is for tax planning purposes only and as such, the Bancorp is not involved in the management or operation of such investments.

     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.

     Repurchase Agreements - Substantially all repurchase agreement liabilities represent amounts advanced by various customers that are not covered by federal deposit insurance and are secured by securities owned by the Bancorp.

     Postretirement Benefits Other Than Pensions - The Bancorp sponsors a defined benefit postretirement plan that provides comprehensive major medical benefits to all eligible retirees. Postretirement benefits are accrued based on the expected cost of providing postretirement benefits to employees during the years the employees have rendered service to the Bancorp.

     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 common share if expense was measured using the fair value recognition provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation.

The pro forma effects are computed using option pricing models, using the following weighted-average assumptions as of grant date.

     The expected life for options granted in 2003, 2002 and 2001 is 6 to 7 years.

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     Income Taxes - The Bancorp records income tax expense based on the amount of taxes due on its tax return, plus deferred taxes computed based on the expected future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities, using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized.

     Off-Balance Sheet Financial Instruments – Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and standby 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.

     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.

     Earnings Per Common Share – Basic earnings per common share is net income divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per common share, includes the dilutive effect of additional potential common shares issuable under stock options.

     Comprehensive Income – Comprehensive income consists of net income and other comprehensive income. Other comprehensive income for the Bancorp includes unrealized gains and losses on securities available-for-sale, which is also recognized as a separate component of equity.

     Newly Issued But Not Yet Effective Accounting Standards - During 2003, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” This statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” This statement is effective for contracts entered into or modified after June 30, 2003, except for hedging relationships designated after June 30, 2003. As the Bancorp does not have these instruments this statement is not anticipated to materially affect the Bancorp’s operating results or financial condition.

     In 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” This statement establishes standards for how certain financial instruments with characteristics of both liabilities and equity should be classified. All financial instruments that are within the scope of this statement should now be classified as liabilities. This statement is effective for financial statements entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 13, 2003. As the Bancorp does not have these instruments this statement is not anticipated to materially affect the Bancorp’s operating results or financial condition.

     In addition, during the current year, the Bancorp adopted FASB Statement 132 (revised 2003), “Employers’ Disclosures about Pensions and Other Postretirement Benefits”, FASB Interpretation 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees”, and FASB Interpretation 46, “Consolidation of Variable Interest Entities”. Adoption of the new standards did not materially affect the Company’s operating results or financial condition.

     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.

     Industry Segments – While the Bancorp’s chief decision-maker monitors the revenue streams of the various 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 Bancorp’s financial service operations are considered by management to be aggregated in one reportable operating segment.

     Reclassification - Certain amounts appearing in the consolidated financial statements and notes thereto for the years ended December 31, 2001 and 2002, have been reclassified to conform to the December 31, 2003 presentation.

NOTE 2 - Securities

     Year end securities available-for-sale were as follows: