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FIRST SHARES BANCORP, INC.

U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-QSB

x
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30,
2003.


o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ___ TO ___.


Commission file number 0-29837

FIRST SHARES BANCORP, INC.

(Exact name of small business issuer as specified in its charter)


INDIANA
    
    35-1948962(State or other jurisdiction of
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)996 South State Road 135, Greenwood, IN
(Address of principal executive offices)
    
    46143
(Zip Code)


(317) 882-4790
(Registrants telephone number, including area code)

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

Indicate the number of shares outstanding of each of the issuers classes of
common stock, as of the latest practicable date:

Class
    
    Outstanding at November 10, 2003Common Stock, with $.01 par
    
    1,588,162 shares


Transitional Small Business Format: Yes (   ) No (  ü  )





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TABLE OF CONTENTS



|                                             |                                          |                                                                          |  |  |  |  |  | 
|-------------------------------------------- | ---------------------------------------- | ------------------------------------------------------------------------ |  |  |  |  |  | 
|                                             |                                          | CONSOLIDATED BALANCE SHEETS                                             
|                                             |                                          | CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (LOSS)       
|                                             |                                          | CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS)
|                                             |                                          | CONSOLIDATED STATEMENTS OF CASH FLOWS                                   
|                                             |                                          | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                              
|                                             | ITEM 3. CONTROLS AND PROCEDURES         
|Part II. OTHER INFORMATION                  
|                                             | ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
|SIGNATURES                                  
|302 Certification of Chief Executive Officer
|302 Certification of Chief Financial Officer
|906 Certification of Chief Executive Officer
|906 Certification of Chief Financial Officer



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##### Table of Contents



FIRST SHARES BANCORP, INC.

INDEX

PART I.
    
    FINANCIAL INFORMATIONItem 1.Consolidated Balance Sheets  September 30, 2003 and December 31, 2002Consolidated Statements of Income and Comprehensive Income (Loss)
 Nine
Months Ended September 30, 2003 and 2002Consolidated Statements of Income (Loss) and Comprehensive Income
(Loss)  Three Months Ended September 30, 2003 and 2002Consolidated Statements of Cash Flows  Nine Months Ended September 30,
2003 and 2002Notes to Consolidated Financial Statements  September 30, 2003Item 2.Managements Discussion and Analysis of Financial Condition and Results
of OperationsItem 3.Controls and ProceduresPART II.
    
    OTHER INFORMATIONItem 6.Exhibits and Reports on Form 8-KSIGNATURES






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FIRST SHARES BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands, except per share data)

(unaudited)September 30,
    
    December 31,2003
    
    2002ASSETSCash and due from banks
    
    $
    9,095
    
    
    $
    5,348Securities available for sale
    
    
    34,862
    
    
    
    26,810FHLB stock, at cost
    
    
    670
    
    
    
    670Loans held for sale
    
    
    313
    
    
    
    5,778Loans, net of allowance( $2,388 and $1,386)
    
    
    127,636
    
    
    
    110,443Premises and equipment, net
    
    
    2,988
    
    
    
    2,057Intangible assets, net
    
    
    43
    
    
    
    75Cash surrender value of life insurance
    
    
    2,515
    
    
    
    2,427Accrued interest receivable and other assets
    
    
    3,034
    
    
    
    1,704$
    181,156
    
    
    $
    155,312LIABILITIES AND SHAREHOLDERS EQUITYLiabilitiesNoninterest-bearing deposits
    
    $
    21,494
    
    
    $
    15,750Interest-bearing deposits
    
    
    129,018
    
    
    
    107,313Total deposits
    
    
    150,512
    
    
    
    123,063Federal funds purchased
    
    
    627
    
    
    
    2,245Federal Home Loan Bank advances
    
    
    10,000
    
    
    
    8,700Repurchase agreements
    
    
    4,799
    
    
    
    5,684Note payable
    
    
    1,275
    
    
    
    1,475Debentures
    
    
    5,000
    
    
    
    5,000Accrued interest payable and other liabilities
    
    
    687
    
    
    
    583172,900
    
    
    
    146,750Shareholders equityCommon stock, $.01 par value: 10,000,000 shares authorized,
1,588,162 and 1,579,162 shares issued and outstanding
    
    
    16
    
    
    
    16Additional paid in capital
    
    
    4,731
    
    
    
    4,674Retained earnings
    
    
    4,101
    
    
    
    3,912Accumulated other comprehensive income (loss)
    
    
    (592
    )
    
    
    (40
    )8,256
    
    
    
    8,562$
    181,156
    
    
    $
    155,312


See accompanying notes.

3



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FIRST SHARES BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (LOSS)
Nine months ended September 30, 2003 and 2002
(Unaudited)
(Dollar amounts in thousands, except per share data)

2003
    
    2002Interest incomeLoans, including related fees
    
    $
    6,175
    
    
    $
    5,487Taxable securities
    
    
    800
    
    
    
    1,228Nontaxable securities
    
    
    266
    
    
    
    49Other
    
    
    15
    
    
    
    20Total Interest Income
    
    
    7,256
    
    
    
    6,784Interest expenseDeposits
    
    
    2,137
    
    
    
    2,379Other
    
    
    577
    
    
    
    381Total Interest Expense
    
    
    2,714
    
    
    
    2,760Net interest income
    
    
    4,542
    
    
    
    4,024Provision for loan losses
    
    
    1,260
    
    
    
    248Net interest income after provision for loan losses
    
    
    3,282
    
    
    
    3,776Noninterest incomeService charges on deposit accounts
    
    
    332
    
    
    
    291Gain on sale of loans
    
    
    1,126
    
    
    
    506Increase in cash surrender value of life insurance
    
    
    88
    
    
    
    112Securities gains
    
    
    249
    
    
    
    127Other
    
    
    134
    
    
    
    157Total Noninterest Income
    
    
    1,929
    
    
    
    1,193Noninterest expensesSalaries and employee benefits
    
    
    3,157
    
    
    
    2,272Occupancy
    
    
    375
    
    
    
    340Equipment and data processing
    
    
    358
    
    
    
    318Telephone
    
    
    113
    
    
    
    103Other
    
    
    1,059
    
    
    
    908Total Noninterest Expense
    
    
    5,062
    
    
    
    3,941Income before income taxes
    
    
    149
    
    
    
    1,028Income tax expense (benefit)
    
    
    (40
    )
    
    
    (31
    )Net income
    
    $
    189
    
    
    $
    1,059Comprehensive income (loss)
    
    $
    (363
    )
    
    $
    1,195Per share dataEarnings per share
    
    $
    .12
    
    
    
    .67Earnings per share, assuming dilution
    
    
    .11
    
    
    
    .66


See accompanying notes.

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FIRST SHARES BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS)
Three months ended September 30, 2003 and 2002
(Unaudited)
(Dollar amounts in thousands, except per share data)

2003
    
    2002Interest incomeLoans, including related fees
    
    $
    2,118
    
    
    $
    1,928Taxable securities
    
    
    258
    
    
    
    424Nontaxable securities
    
    
    97
    
    
    
    32Other
    
    
    1
    
    
    
    5Total Interest Income
    
    
    2,474
    
    
    
    2,389Interest expenseDeposits
    
    
    663
    
    
    
    779Other
    
    
    190
    
    
    
    172Total Interest Expense
    
    
    853
    
    
    
    951Net interest income
    
    
    1,621
    
    
    
    1,438Provision for loan losses
    
    
    1,030
    
    
    
    138Net interest income after provision for loan losses
    
    
    591
    
    
    
    1,300Noninterest incomeService charges on deposit accounts
    
    
    113
    
    
    
    102Gain on sale of loans
    
    
    343
    
    
    
    231Increase in cash surrender value of life insurance
    
    
    30
    
    
    
    37Securities gains
    
    
    21
    
    
    
    75Other
    
    
    38
    
    
    
    47Total Noninterest Income
    
    
    545
    
    
    
    492Noninterest expensesSalaries and employee benefits
    
    
    1,121
    
    
    
    824Occupancy
    
    
    138
    
    
    
    130Equipment and data processing
    
    
    124
    
    
    
    104Telephone
    
    
    39
    
    
    
    40Other
    
    
    345
    
    
    
    387Total Noninterest Expense
    
    
    1,767
    
    
    
    1,485Loss before income taxes
    
    
    (631
    )
    
    
    307Income tax expense (benefit)
    
    
    (269
    )
    
    
    94Net income (loss)
    
    $
    (362
    )
    
    $
    213Comprehensive income (loss)
    
    $
    (1,217
    )
    
    $
    379Per share dataEarnings (Loss) per share
    
    $
    (.23
    )
    
    $
    .13Earnings (Loss) per share,
assuming dilution
    
    
    (.23
    )
    
    
    .13


See accompanying notes.

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FIRST SHARES BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended September 30, 2003 and 2002
(Unaudited)
(Dollar amounts in thousands)

2003
    
    2002Cash flows from operating activitiesNet income (loss)
    
    $
    189
    
    
    $
    1,059Adjustments to reconcile net income
to net cash from operating activities:Depreciation and amortization
    
    
    253
    
    
    
    243Provision for loan losses
    
    
    1,260
    
    
    
    248Discount (accretion) and premium amortization
    
    
    235
    
    
    
    92(Gain)/loss on sale of securities
    
    
    (249
    )
    
    
    (127
    )Amortization of intangible asset
    
    
    32
    
    
    
    33Changes in assets and liabilities:Loans held for sale
    
    
    5,465
    
    
    
    177Increase on cash surrender value of life insurance
    
    
    (88
    )
    
    
    (100
    )Interest receivable and other assets
    
    
    (859
    )
    
    
    (878
    )Interest payable and other liabilities
    
    
    466
    
    
    
    233Net cash from operating activities
    
    
    6,704
    
    
    
    980Cash flows from investing activitiesProceeds from sales on securities available for sale
    
    
    22,304
    
    
    
    9,039Proceeds from sales, calls, maturities and principal payments
on securities available for sale
    
    
    19,035
    
    
    
    11,726Proceeds from maturities of securities held to maturity
    
    
    
    
    
    
    275Purchases of securities available for sale
    
    
    (50,291
    )
    
    
    (34,787
    )Loans made to customers net of payments received
    
    
    (18,920
    )
    
    
    (13,716
    )Premises and equipment purchases
    
    
    (1,188
    )
    
    
    (210
    )Proceeds from sale of other real estate
    
    
    
    
    
    
    87Net cash from investing activities
    
    
    (29,060
    )
    
    
    (27,586
    )Cash flows from financing activitiesChange in deposit accounts
    
    
    27,449
    
    
    
    16,398Proceeds from Federal Home Loan Bank advances
    
    
    13,000
    
    
    
    Payments on Federal Home Loan Bank advances
    
    
    (11,700
    )
    
    
    Change in repurchase agreements
    
    
    (885
    )
    
    
    1,098Change in federal funds purchased
    
    
    (1,618
    )
    
    
    2,600Proceeds from note payable
    
    
    1,425
    
    
    
    90Payment on note payable
    
    
    (1,625
    )
    
    
    (370
    )Proceeds from debentures
    
    
    
    
    
    
    5,000Stock options exercised
    
    
    57
    
    
    
    Net cash from financing activities
    
    
    26,103
    
    
    
    24,816Net change in cash and cash equivalents
    
    
    3,747
    
    
    
    (1,790
    )Cash and cash equivalents at beginning of period
    
    
    5,348
    
    
    
    6,308Cash and cash equivalents at end of period
    
    $
    9,095
    
    
    $
    4,518


See accompanying notes.

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FIRST SHARES BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2003
(Dollar amounts in thousands, except per share data)

NOTE 1  BASIS OF PRESENTATION

The accompanying consolidated financial statements include the accounts of
First Shares Bancorp, Inc. (the Company) and its wholly owned subsidiary, First
Bank (the Bank). The significant accounting policies followed for interim
financial reporting are consistent with the policies followed for annual
reporting. The consolidated interim financial statements have been prepared
according to accounting principles generally accepted in the United States of
America and in accordance with the instructions for Form 10-QSB. The interim
statements do not include all information and footnotes normally included in
the annual financial statements. It is the opinion of management that all
adjustments necessary for a fair presentation of the results for the reporting
period have been included in the accompanying consolidated financial statements
and all adjustments are of a normal recurring nature. Certain prior period
information may be reclassified to conform to the 2003 presentation.

Newly Issued Accounting Standards: The Financial Accounting Standards Board
(FASB) recently issued two new accounting standards, Statement 149, Amendment
of Statement 133 on Derivative Instruments and Hedging Activities,and
Statement 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equities,both of which generally
became effective in the quarter beginning July 1, 2003. Interpretation 46,
Consolidation of Variable Interest Entitiesbecame effective October 1, 2003.

The new accounting standards did not materially affect the Companys operating
results or financial condition upon adoption.

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 have 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 were measured using the fair value recognition provisions
of FASB Statement No. 123, Accounting for Stock-Based Compensation.

9 months ended
    
    3 months endedSeptember 30,
    
    September 30,2003
    
    2002
    
    2003
    
    2002Net income as reported
    
    $
    189
    
    
    $
    1,059
    
    
    $
    (362
    )
    
    $
    213Deduct: Stock-based compensation expense
determined under fair value based method
    
    
    (14
    )
    
    
    (18
    )
    
    
    (5
    )
    
    
    (6
    )Pro forma net income
    
    
    175
    
    
    
    1,041
    
    
    
    (367
    )
    
    
    207Basic earnings per share as reported
    
    
    .12
    
    
    
    .67
    
    
    
    (.23
    )
    
    
    .13Pro forma basic earnings per share
    
    
    .11
    
    
    
    .66
    
    
    
    (.23
    )
    
    
    .13Diluted earnings per share as reported
    
    
    .11
    
    
    
    .66
    
    
    
    (.23
    )
    
    
    .13Pro forma diluted earnings per share
    
    
    .11
    
    
    
    .65
    
    
    
    (.23
    )
    
    
    .13


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FIRST SHARES BANCORP, INC.

NOTE 2  SECURITIES

The fair values of securities available for sale and related gains and losses
recognized in accumulated other comprehensive income (loss) were as follows:

Gross
    
    GrossFair
    
    Unrealized
    
    UnrealizedValue
    
    Gains
    
    LossesSeptember 30, 2003U.S. Treasury and government agency securities
    
    $
    14,732
    
    
    $
    33
    
    
    $
    (550
    )Obligations of states and political subdivisions
    
    
    11,740
    
    
    
    33
    
    
    
    (432
    )Other securities
    
    
    6,593
    
    
    
    92
    
    
    
    (143
    )Mortgage backed securities
    
    
    1,797
    
    
    
    3
    
    
    
    (16
    )$
    34,862
    
    
    $
    161
    
    
    $
    (1,141
    )December 31,
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
    )


NOTE 3  LOANS

Total loans, excluding loans held for sale, are comprised of the following:

September 30,
    
    December 31,2003
    
    2002Commercial
    
    $
    30,096
    
    
    $
    25,461Commercial Real Estate
    
    
    18,350
    
    
    
    15,797Residential Real Estate
    
    
    35,985
    
    
    
    27,119Construction
    
    
    18,350
    
    
    
    15,595Consumer
    
    
    27,243
    
    
    
    27,857130,024
    
    
    
    111,829Less: Allowance for loan losses
    
    
    (2,388
    )
    
    
    (1,386
    )$
    127,636
    
    
    $
    110,443


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FIRST SHARES BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2003
(Dollar amounts in thousands, except per share data)

NOTE 4  ALLOWANCE FOR LOAN LOSSES

An analysis of the allowance for loan losses follows:

September 30,
    
    September 30,2003
    
    2002Balance, January 1
    
    $
    1,386
    
    
    $
    1,148Provision charged to operations
    
    
    1,260
    
    
    
    248Loans charged off
    
    
    (566
    )
    
    
    (80
    )Recoveries
    
    
    308
    
    
    
    20Balance, September 30
    
    $
    2,388
    
    
    $
    1,336


NOTE 5  BORROWINGS

The Bank has advances from the Federal Home Loan Bank. Advances at September
30, 2003 and December 31, 2002 were as follows:

Maturity Date
    
    Interest Rate
    
    September 30, 2003
    
    December 31, 2002June 18, 2003
    
    
    1.51
    %
    
    $
    
    
    
    $
    5,700March 15, 2004
    
    
    1.32
    %
    
    
    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 advances are collateralized by first mortgage loans under a blanket lien
arrangement.

The Company maintains a note payable with a financial institution. The
outstanding balance at September 30, 2003 and December 31, 2002 was $1,275 and
$1,475, respectively. The outstanding balance accrues interest at prime minus .50% (the interest rate was 3.50% at September 30, 2003). The note requires
monthly principal payments of $25 plus interest. The note has a maturity date
of March 1, 2008.

The Company also has outstanding Debentures that are unsecured and
subordinated, have a term of approximately 8 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. Stock
Purchase Contracts issued in connection with the Debentures 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.

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FIRST SHARES BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2003
(Dollar amounts in thousands, except per share data)

NOTE 6  EARNINGS (LOSS) PER SHARE

Basic earnings per share is computed by dividing net income by the weighted
average shares outstanding during the period. A reconciliation of the
numerator and denominator used to compute earnings per share is presented
below:

Nine months ended
    
    Three months endedSeptember 30,
    
    September 30,
    
    September 30,
    
    September 30,2003
    
    2002
    
    2003
    
    2002Earnings per shareNet income (loss)
    
    $
    189
    
    
    $
    1,059
    
    
    $
    (362
    )
    
    $
    213Weighted average shares
outstanding
    
    
    1,579,920
    
    
    
    1,579,162
    
    
    
    1,581,412
    
    
    
    1,579,162Earnings per share
    
    $
    .12
    
    
    $
    .67
    
    
    $
    (.23
    )
    
    $
    .13Diluted earnings per shareNet income (loss)
    
    $
    189
    
    
    $
    1,059
    
    
    $
    (362
    )
    
    $
    213Weighted average shares
outstanding
    
    
    1,579,920
    
    
    
    1,579,162
    
    
    
    1,581,412
    
    
    
    1,579,162Add: Dilutive effect of assumed
exercises of stock options
    
    
    71,562
    
    
    
    24,601
    
    
    
    
    
    
    
    23,017Average shares and dilutive
potential common shares
    
    
    1,651,482
    
    
    
    1,603,763
    
    
    
    1,581,412
    
    
    
    1,602,179Diluted earnings per share
    
    $
    .11
    
    
    $
    .66
    
    
    $
    (.23
    )
    
    $
    .13


Shares of 750,000 issuable under the mandatory stock purchase contracts were
not considered in computing diluted earnings per share for 2003 or 2002 because
they were anti-dilutive. Additionally, stock options were anti-dilutive for
the quarter-ended September 30, 2003 due to the loss reported.

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FIRST SHARES BANCORP, INC.

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

Certain statements in this section constitute forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause actual results, performance or achievements of
First Shares to differ materially from any future results, performance or
achievements expressed or implied by such forward-looking statements.

Such risks could include: increases in competitive pressure from other
financial institutions in our markets, unexpected increases in loan losses,
changes in market interest rates, unanticipated changes in our level of growth
or our ability to manage the growth, changes in economic conditions in our
markets, or legislation or regulatory changes.

Results of Operations for the Quarters and Nine-Month Periods Ended September
30, 2003 and 2002

Net Income

During the current year, we have continued to focus on earnings and growth as
outlined in our strategic plan. Banking offices currently total seven. In
addition to our seven branches we also have a mortgage loan production office.

Net income for the nine months ended September 30, 2003 was $189,000 or $.12
per share compared to $1.1 million or $.67 per share for the nine months ended
September 30, 2002. Return on average assets (ROA) for 2003 was .15% compared
to 1.02% for 2002 on an annualized basis, while return on average equity (ROE)
was 2.82% compared to 18.27% for the same period last year, also on an
annualized basis.

During the third quarter of 2003, net income includes a specific provision to
the allowance for loan losses of $885,000 attributable to one loan, in addition
the normal provision. As discussed below, this specific provision is related
to a potentially fraudulent loan we became aware of during the third quarter of
2003, and the provision represents the high end of the estimated range of loss,
though several recovery alternatives are being pursued. This specific
provision was the primary reason for the decrease of earnings and earnings per
share from 2002 to 2003.

Net Interest Income

Net interest income is the difference between interest and fees realized on
interest earning assets and interest paid on interest bearing liabilities. The
net interest margin is this difference expressed as a percentage of average
earning assets. For the nine months ended September 30, 2003, net interest
income totaled $4.5 million, representing a $518,000 or 12.9% increase over the
same period for 2002.

Interest income through September 30, 2003 was $7.3 million, compared to $6.8
million in 2002, an increase of $472,000 or 6.9% from last year. The increase
in interest income is attributed to volume increases on loans offset by rate
declines in the loan portfolio. The average loan balance showed growth,
increasing from $97.4 million in 2002 to $121.8 million in 2003, an


11Table of ContentsFIRST SHARES BANCORP, INC.increase of $24.4 million or 25.1%. Average investments, including securities
and federal funds sold, were $36.4 million in 2003, compared to $31.5 million
in 2002. The increased volume of earning assets has been the key contributor
in maintaining interest income levels, as average yields, on a fully tax
equivalent basis, declined to 6.23% in 2003 from 7.04% in 2002. This
represents a slight decrease over second quarter 2003 results, when the tax
equivalent average yield was 6.28%, illustrating the impact of decreases in
interest rates by the Federal Reserve Bank.Year to date interest expense decreased slightly by $46,000, or 1.7%, compared
to 2002. The decrease is rate driven, as average deposits increased, in all
categories, by a total of $22.3 million, or 21.4%, compared to 2002. Time
deposits comprised most of the increase, with the average balance increasing by
$17.4 million. Average other interest-bearing liabilities increased from $12.8
million for the first nine months of 2002 to $17.8 million for 2003. The
average cost of interest bearing liabilities declined due to deposit products
repricing to lower rates. The average cost on interest-bearing liabilities was
2.51% in 2003 compared to 3.14% in 2002.The effect of a decrease in the yields on earning assets and a decrease in the
cost of funds was a narrowing of the net interest margin. Through September
30, 2003, the net interest margin was 3.94%, compared to 4.19% for 2002.For the quarters ended September 30, 2003 and 2002, interest income increased
$85,000 with interest income reaching $2.5 million for the third quarter of
2003. Interest expense declined from $951,000 for the three months ended
September 30, 2002 to $853,000 for the three months ended September 30, 2003.
Net interest income was $1.6 million for the third quarter of 2003, compared to
$1.4 million in 2002, an increase of $183,000 or 12.7%.Provision for Loan Losses and Asset QualityThe provision for loan losses represents charges made to earnings to maintain
an adequate allowance for loan losses. The allowance is maintained at an
amount that we believe to be sufficient to absorb losses inherent in the loan
portfolio. We conduct, on a quarterly basis, a detailed evaluation of the
adequacy of the allowance.The provision for loan losses was $1.3 million for the first nine months of
2003 compared to $248,000 in 2002. The large increase in the 2003 provision is
due to a specific provision of $885,000 for one potentially fraudulent loan.
Although the loan was current at the time, we became aware that our secured
position was suspect when equipment could not be located and the minority owner
of the corporation mysteriously disappeared in a purported boating accident.
Due to various uncertainties and our inability to determine at this time the
likelihood of recovery, the Company has established the provision at the high
end of the estimated range of loss on the loan. We are currently negotiating a
settlement with the majority owner of the corporation for a portion of the
outstanding loan balance. We also intend to pursue claims for the balance of
the loan against our bonding company and under an interest in a life insurance
policy on the minority owner that was assigned to us in connection with the
loan. Net
charge-offs through the first nine months of 2003 were $258,000, representing .21% of average loans compared to $60,000 or .06% for the same period last
year.12Table of ContentsFIRST SHARES BANCORP, INC.The allowance for loan losses at September 30, 2003 was $2.4 million, or 1.83%
of total loans, compared to $1.3 million or 1.25% of total loans at September
30, 2002.Nonperforming loans have increased $1.4 million, to $1.7 million since
year-end. The amount of nonperforming loans rose (1.27% at September 30, 2003
compared to .22% at year end 2002) primarily due to the addition of the
potentially fraudulent loan. As noted, we have fully reserved this credit
relationship. While this is a substantial amount, we believe that this is an
unusual situation and is not indicative of the credit quality of our loan
portfolio.We designate certain loans for internal monitoring purposes on a watch list.
Loans may be placed on the watch list as a result of delinquent status, concern
about the borrowers financial condition or the value of the collateral
securing the loan, substandard classification during regulatory examinations,
or simply as a result of our desire to monitor more closely a borrowers
financial condition and performance.For the quarters ended September 30, 2003 and 2002, provision expense increased
to $1.0 million from $138,000 driven by the aforementioned specific provision,
loan growth and increases in net charge offs. Provision expense is made to
maintain the allowance at levels sufficient to cover probable incurred loss in
the portfolio.Noninterest Income and ExpenseNoninterest income increased $736,000, or 61.7% to $1.9 million for 2003
compared to $1.2 million in 2002. A portion of the increase is attributed to
the larger number of deposit accounts, which increased deposit service charge
income by 14.1%. A significant part of the increase can be attributed to
higher loan sale revenue as declining rates continue to spur activity in this
area. Loan sale revenue rose $620,000, or 122.5%, from $506,000 last year.
Additionally, gains on the sale of securities rose 96.1% to $249,000 for the
nine months ended September 30, 2003 compared to $127,000 for the same period
in 2002.Noninterest expense increased by $1.1 million or 28.4%, to $5.1 million for the
first nine months of 2003. The largest contributors to the increase in
noninterest expense were professional services and employee salaries and
benefits.Salary and employee benefits expense increased from $2.3 million for the nine
months ended September 30, 2002 to $3.2 million for the same nine-month period
in 2003, an increase of $885,000 or 38.9%. This increase is the result of
annual salary increases and health insurance increases. Also, staffing levels
increased from 79 full time equivalents at September 30, 2002 to 93 full time
equivalents at September 30, 2003.Professional services (included in noninterest income) increased $68,000 of
which approximately $50,000 was expense relating to our application to be
quoted on the NASDAQ SmallCap market.For the quarters ended September 30, 2003 and 2002, noninterest income
increased from $492,000 to $545,000, a change of $53,000 or 10.8%. Much of
this increase is attributable to the increased mortgage banking revenue and
gains on the sale of securities. Noninterest expense posted an increase rising
from $1.5 million to $1.8 million, an increase of $282,000 or 19.0%. Salary
and employee benefits accounted for the majority of the increase.13Table of ContentsFIRST SHARES BANCORP, INC.Income TaxesA tax benefit of $125,000 was recorded during the second quarter of 2002. The
benefit represented the elimination of the reserve on deferred tax assets.
Having fully utilized a net operating loss carryforward during 2002, we
recorded income tax expense of $230,000 through the first half of 2003. With
the loss recognized for the third quarter, we have now recorded a tax benefit.FINANCIAL CONDITIONTotal assets were $181.2 million at September 30, 2003 compared to $155.3
million at year-end 2002, an increase of $25.8 million or 16.6%. Increased
loan totals were funded primarily by increased deposits.SecuritiesOur securities are designated as available for sale. With the influx of
deposits, investments in securities increased $8.1 million from year-end 2002
with the largest increase occurring in tax-exempt state and political
subdivisions. The portfolio remains largely comprised of state and political
subdivision securities and government agency issues.In addition to securities of the U.S. Government and its agencies, we had
concentrations in a corporate security and a municipal security that exceeded
10% of shareholders equity at September 30, 2003. The corporate obligor was
Ford Motor Credit with an amortized cost of $1.3 million and a fair value of
$1.3 million. The municipality obligor was Tell City Troy Township of Indiana
with an amortized cost of $1.1 million and fair value of $1.1 million.LoansTotal loans, excluding loans held for sale, increased $18.2 million or 16.3%
from year-end 2002 to September 30, 2003. Loan growth occurred in nearly all
categories.Residential mortgages, excluding loans held for sale, comprise the largest
single segment of our loan portfolio. From year-end 2002 to September 30,
2003, residential mortgages increased $8.8 million or 3.3% to $36.0 million.
The increase is attributed to refinancing activity from the continued low
interest rate environment. At period end 2003, loans held for sale, which are
carried at the lower of cost or fair value, totaled $313,000, declining from
the year-end total of $5.8 million. All loans are sold servicing released.Commercial loans outpaced consumer loans during the third quarter of 2003 to
become the second largest single segment of our loan portfolio. Commercial and
commercial real estate loans grew by 17.4% or $7.2 million from December 31,
2002 to September 30, 2003 and combined comprised 37.2% of our portfolio at the
period end. Growth in these segments was attributed to the local economy,
primarily in the Greenwood area, and further penetration in our market areas.Consumer loans totaled $27.2 million at September 30, 2003, remaining stable
from the 2002 year-end total of $27.8 million. The indirect loan market has
stabilized as customers have taken advantage of zero percent financing offered
by auto manufacturers. Management believes that14Table of ContentsFIRST SHARES BANCORP, INC.relationships maintained with local auto and recreational vehicle dealers
provide the indirect loan market segment with strong growth opportunities for
the future. Underwriting standards for indirect loans are consistent with the
standards applied to direct loans in an effort to maintain strong asset
quality.Deposits and Other BorrowingsTotal deposits increased $27.4 million or 22.3%, from year-end 2002 to
September 30, 2003, as we continue to gain market share. Noninterest-bearing
deposits increased to $21.5 million from $15.8 million. At September 30, 2003,
$43.4 million or 50.7% of our time deposits had balances greater than $100,000.
The average balance of time deposits issued in amounts greater than $100,000
totaled $43.0 million in 2003 and $33.1 million in 2002, representing 49.7% and
48.0% of total average time deposits in each period.While deposits have funded a significant portion of our growth, we also can
obtain funding from the Federal Home Loan Bank (FHLB). Our outstanding
advances from the FHLB have various terms with rates ranging from 1.32% to 5.3%
and maturities from March 15, 2004 to March 7, 2011. At September 30, 2003,
we also had federal funds purchased, which were obtained to meet the daily
reserve requirement as set by the Federal Reserve Bank. Additionally, we have
a note payable and debentures at the holding company, with a significant
portion of these proceeds contributed to First Bank as additional capital to
support growth.CapitalWe are subject to various regulatory capital guidelines as required by federal
banking agencies. These guidelines define the various components of core
capital and assign risk weights to various categories of assets.Tier 1 capital consists of shareholders equity net of intangible assets and
excluding unrealized gains and losses on securities available or sale, as
defined by bank regulators. The definition of Tier 2 capital includes the
amount of allowance for loan losses which does not exceed 1.25% of gross risk
weighted assets. Total capital is the sum of Tier 1 and Tier 2 capital.The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA)
requires federal regulatory agencies to define capital tiers. These are: well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized. Under these regulations, a
well-capitalized institution must achieve a Tier 1 risk-based capital ratio
of at least 6.00%, and a total capital ratio of at least 10.00%, and a leverage
ratio of at least 5.00% and not be under a capital directive order. Failure to
meet capital requirements can result in regulatory action that could have a
direct material effect on our financial statements. If an institution is only
adequately capitalized, regulatory approval is required to accept brokered
deposits. If an institution is undercapitalized, capital distributions, asset
growth, and expansion are limited, in addition to the institution being
required to submit a capital restoration plan.At September 30, 2003, our Tier 1 risked based capital ratio, total risk-based
capital ratio and leverage ratio for the Bank were 9.36%, 10.61%, and 8.07%,
levels which meet the regulatory guidelines of well capitalized.
Consolidated numbers for the Tier 1 risked based capital15Table of ContentsFIRST SHARES BANCORP, INC.ratio, total risk-based capital ratio and leverage ratio for the Bank were
5.82%, 10.39%, and 5.04%, levels which meet the regulatory guidelines of well
capitalized except for the Tier 1 risk based capital ratio which is at a level
of adequately capitalized. The decrease in these ratios is due primarily to
the loss reported for the third quarter causing growth for the year to outpace
net income for the year.At December 31, 2002 our Tier 1 risk-based capital ratio, total risk based
capital ratio and leverage ratio for the Bank were 10.46%, 11.53% and 8.52%,
levels which meet the regulatory guidelines of well-capitalized. The
consolidated numbers for the Tier 1 risk-based capital ratio, total risk-based
capital and leverage ratio were 6.56%, 11.48% and 5.34%, levels which meet the
regulatory guidelines of well-capitalized.Liquidity and Rate SensitivityLiquidity refers to the availability of funds to meet deposit withdrawals and
borrowing repayments, fund loan commitments and pay expenses. We have many
sources of liquid funds, including cash and cash equivalents, payments and
maturities of loans and securities, and growth in deposits. In addition, we
have the ability to sell securities available for sale, and may borrow from the
Federal Reserve and the Federal Home Loan Bank.We believe we have sufficient liquidity to meet reasonable borrower, depositor,
and creditor needs in the present economic environment. We have not received
any recommendations from regulatory authorities which would materially affect
liquidity, capital resources or operations.Our interest rate sensitivity position is influenced by the timing of the
maturity or repricing of interest earning assets and interest-bearing
liabilities. One method of gauging sensitivity is by a static gap analysis.Rate sensitivity gap is defined as the difference between the repricing of
interest earning assets and the repricing of interest bearing liabilities
within certain defined time frames. Rising interest rates are likely to
increase net interest income in a positive gap position, while declining rates
are likely to be beneficial in a negative gap position.At September 30, 2003, we had a negative one-year interest rate gap of 26.4% of
interest earning assets. This compares to a negative 27.6% at December 31,
2002. The negative gap is primarily the result of a large amount of time
deposits maturing within the next three to twelve months and the ability to
immediately reprice other interest-bearing deposits.16Table of ContentsFIRST SHARES BANCORP, INC.

ITEM 3. CONTROLS AND PROCEDURESAs of the end of the quarterly period covered by this report, an evaluation was
carried out under the supervision and with the participation of First Shares
Bancorp, Inc.s management, including our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of our disclosure controls and
procedures (as defined in Rule 13a-15(e) under the Securities
Exchange Act of 1934). Based on their evaluation, our Chief Executive Officer
and Chief Financial Officer have concluded that the Companys disclosure
controls and procedures were, to the best of their knowledge, effective as of
such date.
Part II. OTHER INFORMATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-Ka.) Exhibits3.1
    
    Amended and Restated Articles of Incorporation of
First Shares Bancorp, Inc., incorporated by reference to
Exhibit 3.1 to the registration statement on Form SB-2 of
First Shares Bancorp, Inc. (file no. 333-31520), as amended
(the Registration Statement).3.2
    
    Amended and Restated By-Laws of First Shares
Bancorp, Inc., incorporated by reference to Exhibit 3.2 to the
Registration Statement.31.1
    
    Certification of Chief Executive Officer under
Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Chief Financial Officer under
Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Chief Executive Officer under
Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification of Chief Financial Officer under
Section 906 of the Sarbanes-Oxley Act of 2002.b.) Reports on 8-KAugust 8, 2003 Report on Second Quarter Earnings Press Release17Table of Contents

FIRST SHARES BANCORP, INC.SIGNATURESFIRST SHARES BANCORP, INCDate:  November 14, 2003
    
    By:
    
    /s/ Jerry R. EngleJerry R. EnglePresident and Chief
Executive OfficerDate:  November 14, 2003
    
    By:
    
    /s/ Kimberly B. KlingKimberly B. KlingSecretary, Treasurer and
Chief Financial Officer
(Principal Financial and
Accounting Officer)



18