##### Table of Contents



U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-QSB þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004.
 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.  INDIANA
(State or other jurisdiction of
incorporation or organization)
    
    35-1948962
(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 1994 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:  Yesþ   Noo 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 May 7, 2004Common Stock, with $.01 par value
    
    2,342,662 shares
 Transitional Small Business
Format (Check one):
  Yeso   Noþ




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FIRST SHARES BANCORP, INC.  
 INDEX PART I.
    
    FINANCIAL INFORMATIONItem 1.Consolidated Balance Sheets  March 31, 2004 and December 31, 2003Consolidated Statements of Income and Comprehensive Income  Three
Months Ended March 31, 2004 and 2003Consolidated Statements of Cash Flows  Three Months Ended March 31,
2004 and 2003Notes to Consolidated Financial Statements  March 31, 2004Item 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-KSIGNATURESCertification of Chief Executive OfficerCertification of Chief Financial OfficerCertification of Chief Executive OfficerCertification of Chief Financial Officer




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##### Table of Contents



FIRST SHARES BANCORP, INC. 
 CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands, except per share data)   (unaudited)March 31,
    
    December 31,2004
    
    2003ASSETSCash and cash equivalents
    
    $
    8,997
    
    
    $
    2,983Securities available for sale
    
    
    38,677
    
    
    
    29,357FHLB stock, at cost
    
    
    705
    
    
    
    670Loans held for sale
    
    
    1,582
    
    
    
    699Loans, net of allowance ($1,622 and $1,513)
    
    
    134,092
    
    
    
    131,456Premises and equipment, net
    
    
    3,180
    
    
    
    3,238Intangible assets, net
    
    
    21
    
    
    
    32Cash surrender value of life insurance
    
    
    4,594
    
    
    
    4,544Accrued interest receivable and other assets
    
    
    3,166
    
    
    
    2,809$
    195,014
    
    
    $
    175,788LIABILITIES AND SHAREHOLDERS EQUITYLiabilitiesNoninterest-bearing deposits
    
    $
    17,559
    
    
    $
    14,920Interest-bearing deposits
    
    
    150,195
    
    
    
    127,873Total deposits
    
    
    167,754
    
    
    
    142,793Federal Home Loan Bank advances
    
    
    5,000
    
    
    
    10,000Federal funds purchased
    
    
    
    
    
    
    516Repurchase agreements
    
    
    5,217
    
    
    
    6,508Note Payable
    
    
    1,125
    
    
    
    1,200Debentures
    
    
    4,880
    
    
    
    5,000Accrued interest payable and other liabilities
    
    
    828
    
    
    
    738184,804
    
    
    
    166,755Shareholders equityPreferred stock, 2,000,000 shares authorized; none outstanding
    
    
    
    
    
    
    Common stock, $.01 par value: 10,000,000 shares authorized,
1,625,662 and 1,592,662 shares issued and outstanding
    
    
    16
    
    
    
    16Additional paid in capital
    
    
    5,788
    
    
    
    4,758Retained Earnings
    
    
    4,449
    
    
    
    4,665Accumulated other comprehensive (loss)
    
    
    (43
    )
    
    
    (406
    )10,210
    
    
    
    9,033$
    195,014
    
    
    $
    175,788
   See accompanying notes. 3




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FIRST SHARES BANCORP, INC. 
 CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Three months ended March 31, 2004 and 2003
(Unaudited)
(Dollar amounts in thousands, except per share data)   2004
    
    2003Interest incomeLoans, including related fees
    
    $
    2,151
    
    
    $
    1,998Taxable securities
    
    
    285
    
    
    
    245Nontaxable securities
    
    
    82
    
    
    
    88Other
    
    
    7
    
    
    
    10Total Interest Income
    
    
    2,525
    
    
    
    2,341Interest expenseDeposits
    
    
    674
    
    
    
    762Other
    
    
    189
    
    
    
    188Total Interest Expense
    
    
    863
    
    
    
    950Net interest income
    
    
    1,662
    
    
    
    1,391Provision for loan losses
    
    
    45
    
    
    
    110Net interest income after provision for loan losses
    
    
    1,617
    
    
    
    1,281Noninterest incomeService charges on deposit accounts
    
    
    121
    
    
    
    107Gain of sale of loans
    
    
    222
    
    
    
    353Increase in cash surrender value of life insurance
    
    
    50
    
    
    
    29Net gain of sale of securities
    
    
    8
    
    
    
    91Other
    
    
    48
    
    
    
    51Total Noninterest Income
    
    
    449
    
    
    
    631Noninterest expensesSalaries and employee benefits
    
    
    1,050
    
    
    
    1,012Stock option compensation expense
    
    
    810
    
    
    
    Occupancy
    
    
    144
    
    
    
    126Equipment and data processing
    
    
    117
    
    
    
    113Other
    
    
    423
    
    
    
    409Total Noninterest Expense
    
    
    2,544
    
    
    
    1,660Income before income taxes
    
    
    (478
    )
    
    
    252Income tax expense
    
    
    (262
    )
    
    
    58Net Income
    
    $
    (216
    )
    
    $
    194Comprehensive Income
    
    $
    147
    
    
    $
    277Per share dataEarnings per share
    
    $
    (.13
    )
    
    $
    .12Earnings per share, assuming dilution
    
    
    (.13
    )
    
    
    .11
   See accompanying notes. 4




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FIRST SHARES BANCORP, INC. 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended March 31, 2004 and 2003
(Unaudited)
(Dollar amounts in thousands)   2004
    
    2003Cash flows from operating activitiesNet income (loss)
    
    $
    (216
    )
    
    $
    194Adjustments to reconcile net income (loss)
to net cash from operating activities:Depreciation and amortization
    
    
    103
    
    
    
    83Provision for loan losses
    
    
    45
    
    
    
    110Discount (accretion) and premium amortization
    
    
    36
    
    
    
    88(Gain) loss on sale of securities
    
    
    (8
    )
    
    
    (91
    )Amortization of intangible assets
    
    
    11
    
    
    
    10Stock option expense
    
    
    810
    
    
    
    FHLB stock dividend
    
    
    (35
    )
    
    
    Increase in cash surrender value of life insurance
    
    
    (50
    )
    
    
    (29
    )Changes in assets and liabilities:Loans held for sale
    
    
    (883
    )
    
    
    4,720Interest receivable and other assets
    
    
    (174
    )
    
    
    35Interest payable and other liabilities
    
    
    90
    
    
    
    4Net cash from operating activities
    
    
    (271
    )
    
    
    5,124Cash flows from investing activitiesProceeds from sales, maturities, calls and pay downs of securities
available for sale
    
    
    5,076
    
    
    
    10,006Purchases of securities available for sale
    
    
    (13,823
    )
    
    
    (22,067
    )Loans made to customers net of payments received
    
    
    (3,102
    )
    
    
    (2,976
    )Premises and equipment purchases
    
    
    (45
    )
    
    
    (403
    )Net cash from investing activities
    
    
    (11,894
    )
    
    
    (15,440
    )Cash flows from financing activitiesChange in deposit accounts
    
    
    24,961
    
    
    
    19,664Change in repurchase agreements
    
    
    (1,291
    )
    
    
    (118
    )Proceeds from Federal Home Loan Bank advances
    
    
    
    
    
    
    2,000Payments on Federal Home Loan Bank advances
    
    
    (5,000
    )
    
    
    (5,700
    )Change in Federal Funds Purchase
    
    
    (516
    )
    
    
    (2,245
    )Payments on note payable
    
    
    (75
    )
    
    
    (50
    )Shares issued under equity contracts
    
    
    100
    
    
    
    Net cash from financing activities
    
    
    18,179
    
    
    
    13,551Net change in cash and cash equivalents
    
    
    6,014
    
    
    
    3,235Cash and cash equivalents at beginning of period
    
    
    2,983
    
    
    
    5,348Cash and cash equivalents at end of period
    
    $
    8,997
    
    
    $
    8,583
   See accompanying notes. 5




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FIRST SHARES BANCORP, INC. 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 2004
(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 2004 presentation. Stock Compensation: Employee compensation expense under stock options is
reported using the intrinsic value method. Except for 90,000 options subject
to modification agreements (see Note 7), stock-based compensation cost is not
reflected in net income, as all options granted had an exercise price equal to
or greater than the market price of the underlying common stock at date of
grant. The following table illustrates the effect on net income and earnings
per share if expense was measured using the fair value recognition provisions
of FASB Statement No. 123, Accounting for Stock-Based Compensation. 2004
    
    2003Net income as reported
    
    $
    (216
    )
    
    $
    194Add: Stock based compensation expense
recognized under the intrinsic method, net of tax
    
    
    489
    
    
    
    Deduct: Stock-based compensation expense
determined under fair value based method
    
    
    (534
    )
    
    
    (6
    )Pro forma net income
    
    
    (261
    )
    
    
    188Basic earnings per share as reported
    
    
    (.13
    )
    
    
    .12Pro forma basic earnings per share
    
    
    (.16
    )
    
    
    .12Diluted earnings per share as reported
    
    
    (.13
    )
    
    
    .11Pro forma diluted earnings per share
    
    
    (.16
    )
    
    
    .11
 6




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FIRST SHARES BANCORP, INC. 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 2004
(Dollar amounts in thousands, except per share data)   NOTE 2  SECURITIES The fair values of securities available for sale and related gross unrealized
gains and losses recognized in accumulated other comprehensive income (loss)
were as follows: Gross
    
    GrossFair
    
    Unrealized
    
    UnrealizedValue
    
    Gains
    
    LossesMarch 31, 2004U.S. Treasury and government agency securities
    
    $
    20,501
    
    
    $
    92
    
    
    $
    (101
    )Obligations of states and political subdivisions
    
    
    10,208
    
    
    
    172
    
    
    
    (67
    )Other securities
    
    
    1,796
    
    
    
    5
    
    
    
    (153
    )Mortgage backed securities
    
    
    6,172
    
    
    
    
    
    
    
    (20
    )$
    38,677
    
    
    $
    269
    
    
    $
    (341
    )December 31, 2003U.S. Treasury and government agency securities
    
    $
    17,336
    
    
    $
    37
    
    
    $
    (434
    )Obligations of states and political subdivisions
    
    
    9,665
    
    
    
    68
    
    
    
    (229
    )Other securities
    
    
    2,336
    
    
    
    6
    
    
    
    (121
    )Mortgage backed securities
    
    
    20
    
    
    
    
    
    
    
    $
    29,357
    
    
    $
    111
    
    
    $
    (784
    )
 NOTE 3  LOANS Total loans are comprised of the following: March 31,
    
    December 31,2004
    
    2003Commercial
    
    $
    28,130
    
    
    $
    29,073Commercial Real Estate
    
    
    27,541
    
    
    
    22,518Residential Real Estate
    
    
    38,173
    
    
    
    38,228Construction
    
    
    14,893
    
    
    
    16,799Consumer
    
    
    26,977
    
    
    
    26,351Subtotal
    
    
    135,714
    
    
    
    132,969Less: Allowance for loan losses
    
    
    (1,622
    )
    
    
    (1,513
    )$
    134,092
    
    
    $
    131,456
 7




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FIRST SHARES BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 2004
(Dollar amounts in thousands, except per share data)   NOTE 4  ALLOWANCE FOR LOAN LOSSES An analysis of the allowance for loan losses follows: 2003
    
    2003Balance, January 1
    
    $
    1,513
    
    
    $
    1,386Provision charged to operations
    
    
    45
    
    
    
    110Loans charged off
    
    
    (65
    )
    
    
    (43
    )Recoveries
    
    
    129
    
    
    
    5Balance, March 31
    
    $
    1,622
    
    
    $
    1,458
 NOTE 5  BORROWINGS The Bank has advances from the Federal Home Loan Bank. Advances were as follows: Maturity Date
    
    Interest Rate
    
    March 31, 2004
    
    December 31, 2003March 15, 2004
    
    
    1.11
    %
    
    $
    
    
    
    $
    5,000March 7, 2005
    
    
    1.89
    %
    
    
    2,000
    
    
    
    2,000January 23, 2006
    
    
    4.73
    %
    
    
    1,000
    
    
    
    1,000December 27, 2010
    
    
    5.30
    %
    
    
    1,000
    
    
    
    1,000March 7, 2011
    
    
    4.75
    %
    
    
    1,000
    
    
    
    1,000$
    5,000
    
    
    $
    10,000
 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 March 31, 2004 and December 31, 2003 was $1,125 and
$1,200, respectively. The outstanding balance accrues interest at
prime minus .50% (the interest rate was 3.50% at March 31, 2004). The note requires
monthly principal payments of $25 plus interest. Scheduled annual principal
reductions over the next four years are $300 per year through 2007. The note
matures March 1, 2008 and is secured by Bank stock and other assets of the
Company. During the first quarter of 2002, the Company initiated a public offering of
Debentures and Stock Purchase Contracts. The Company raised $5,000 with the
offering closing during the third quarter of 2002. Capitalized costs in
connection with the offering totaled $661. The Debentures are unsecured and
subordinated, have a term of approximately 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. The
stock purchase contracts require a purchaser to buy common shares of the
Company at $6.67 per share on January 1, 2011. A purchaser may elect to
purchase the common shares of the Company at any time prior to that date at the
same price per share. The Stock Purchase Contracts will be 8




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FIRST SHARES BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 2004
(Dollar amounts in thousands, except per share data)   NOTE 5  BORROWINGS (continued) cancelled in the event the Debentures are redeemed. Proceeds of $3,000 were
contributed to the Bank to support growth. The Debentures qualify as part of
total capital for the Companys regulatory capital requirements. See Note 7
regarding pending merger and the effect on the Debentures. NOTE 6  EARNINGS (LOSS) PER SHARE Basic earnings (loss) per share is computed by dividing net income (loss) by
the weighted average shares outstanding during the period. A reconciliation of
the numerators and denominators used to compute earnings (loss) per share is
presented below: March 31,
    
    March 31,2004
    
    2003Earnings (loss) per shareNet income (loss)
    
    $
    (216
    )
    
    $
    194Weighted average shares outstanding
    
    
    1,608,255
    
    
    
    1,579,162Earnings (loss) per share
    
    $
    (.13
    )
    
    $
    .12Earnings (loss) per share assuming dilutionNet income
(loss)
    
    $
    (216
    )
    
    $
    194Add: interest expense, net of tax, assuming
conversion of debentures
    
    
    
    
    
    
    74$
    (216
    )
    
    $
    268Weighted average shares outstanding
    
    
    1,608,255
    
    
    
    1,579,162Add: effect of assumed stock options exercised, if dilutive
    
    
    
    
    
    
    71,401Add: convertible debentures, if dilutive
    
    
    
    
    
    
    750,000Weighted average and dilutive potential shares outstanding
    
    
    1,608,255
    
    
    
    2,400,563Earnings (loss) per share assuming dilution
    
    $
    (.13
    )
    
    $
    .11
 In 2004, stock options for 156,250 shares and stock purchase contracts for
717,000 shares were not considered in computing diluted earnings per share
because they were anti-dilutive. NOTE 7  PENDING MERGER On March 10, 2004, the Company signed a definitive agreement to merge with
Lincoln Bancorp, Plainfield, Indiana. Per the terms of the agreement,
shareholders of the Company will receive .75 shares of Lincoln Bancorp stock or
$14.80 cash per share of Company stock, with at least 50% of the total
consideration paid to be in the form of shares of Lincoln Bancorp stock. The 9




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FIRST SHARES BANCORP, INC. 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 2004
(Dollar amounts in thousands, except per share data)   NOTE 7  PENDING MERGER (continued) transaction is subject to shareholder and regulatory approval, and is expected
to close during the third quarter of 2004. In connection with the merger, the Company announced its intention to redeem
its debentures and cancel its stock purchase contracts on May 7, 2004 (see Note
5). Under the terms of the agreement, the holders of the stock purchase
contracts will have until May 7, 2004 to exercise the contracts by surrendering
the related debentures as payment of the exercise price. To the extent stock
purchase contracts are not exercised, the Company will redeem the related
debentures, which will reduce the Companys regulatory capital. Debentures
redeemed by the Company will be subject to a redemption premium of 7%, with a
1% cancellation fee for the related stock purchase contract, and unamortized
debt issuance costs related to any debentures redeemed will be expensed upon
redemption (these costs totaled $529 at March 31, 2004). Approximately $100
of debentures were redeemed and subject to the redemption premium which totaled
$7. Subsequent to the end of the quarter, the conversion of the debentures was
completed through the exercise of the stock purchase contracts by May 7, 2004.
Remaining debt issue costs of $515 were transferred to additional paid in
capital upon completion of the conversion. Additionally the Board of Directors approved extending the expiration date of
90,000 options with an exercise price of $5.49 from May 2004 to May 2009. With
the modification agreement, a new measurement date was established and expense
of $810 was recognized in the first quarter of 2004. 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 and Section 21E of the
Exchange Act. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause actual results, performance or
achievements of First Shares to differ materially from any future results,
performance or achievements expressed or implied by such forward-looking
statements. 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 legislative or regulatory changes. Results of Operations for the Three-Month Periods Ended March 31, 2004 and 2003 Net Income During 2003, we focused on increasing earnings, continued growth in loans and
deposits, and increasing market share. For 2004, we will continue our focus on
earnings and growth. We reported net loss for the three months ended March 31,
2004 of $(216,000) or $(.13) per share compared to income of $194,000 or $.12
per share for the same three months in 2003. Return on average assets (ROA)
for 2004 was (.46)% compared to .48% for 2003 on an annualized basis, while
return on average equity (ROE) was (9.32)% compared to 8.84% for the same
period last year, also on an annualized basis. The loss in earnings is the
result of a charge for stock option compensation expense which was recognized
as stock option grants were amended and is further discussed in noninterest
income and expense. 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 three months ended March 31, 2004, net interest income totaled $1.7
million, representing a $271,000 or 19.5% increase over the same period for
2003. This increase in net interest income was volume driven as the rates on
both interest earning assets and interest bearing liabilities continued to
decline. Interest income through March 31, 2004 increased $184,000 compared to 2003.
Most of the increase in interest income is attributed to the growth in volume
as the declining rate environment of 2003 continued into 2004. Average
investments, including securities and federal funds sold, were $35.7 million in
2004, down by $402,000 from 2003s $36.1 million level, a decrease of 1.1%.
The average loan balance showed solid growth, increasing from $115.8 million in
2003 to $135.6 million in 2004, an increase of $19.9 million or 17.2%. While
the increased volume of earning assets helped to contribute to growth in
interest income, the continued lower interest rate environment partially eroded
interest income with the average yield, on a fully tax equivalent basis,
decreasing to 6.00% in 2004 from 6.29% in 2003. Interest expense year to date in 2004 decreased $87,000, or 9.2% compared to
2003. The decrease was primarily attributed to the lower interest rates paid
on interest-bearing deposits. Average deposit balances continued to demonstrate
growth increasing from $122.6 million to $143.3 million. Other borrowings
interest expense remained relatively stable as average balances increased
slightly. Average other borrowings increased $180,000, with expense increasing
by $1,000. The average cost of all interest bearing liabilities was 2.16% in
2004 compared to 2.73% in 2003. With the cost of funds declining more than the yield on earning assets, the net
interest margin improved. Through March 31, 2004, the net interest margin was
3.98%, compared to 3.78% for 2003. 10




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Provision for Loan Losses and Asset Quality The provision for loan losses represents charges made to earnings to maintain
an adequate allowance for loan losses. The allowance is maintained at an
amount that we believe to be sufficient to absorb probable incurred losses in
the loan portfolio. Monitoring loan quality and maintaining an adequate
allowance is an ongoing process overseen by our senior management. On at least
a quarterly basis, a formal analysis of the adequacy of the allowance is
prepared and reviewed by management and the board of directors. This analysis
serves as a point in time assessment of the level of the allowance and serves
as a basis for provisions for loan losses. The provision for loan losses was $45,000 for the first three months of 2004
compared to $110,000 in 2003 and the allowance totaled $1.6 million at March
31, 2004 compared to $1.5 million at December 31, 2003. Nonperforming loans
have decreased $425,000 to $271,000 since year-end. Through the first three
months of 2004, we reported a net recovery of $64,000, compared to net
charge-offs of $38,000 for the same period last year. With the reduction in
nonperforming loans and net recovery recognized in the first quarter, we
reduced our provision expense. The allowance for loan losses at the end of
March 2004 was $1.6 million, or 1.18% of total loans, compared to $1.5 million,
or 1.13% of total loans at year-end. We designate certain loans for internal monitoring purposes on a watch list.
Loans may be placed on the watch list as a result of delinquent status, concern
about the borrowers financial condition or the value of the collateral
securing the loan, substandard classification during regulatory examinations,
or simply as a result of our desire to monitor more closely a borrowers
financial condition and performance. Watch category loans may include loans with loss potential that are still
performing and accruing interest and may be current under the terms of the loan
agreement. However, we may have a significant degree of concern about the
borrowers ability to continue performing according to the terms of the loan.
Loss exposure on these loans is typically evaluated based primarily upon the
estimated liquidation value of the collateral securing the loan. Also, watch
list loans may include credits which, although adequately secured and
performing, reflect a past delinquency problem or unfavorable financial trends
exhibited by the borrower. Noninterest Income and Expense Noninterest income decreased $182,000, or 28.8% to $449,000 for 2004 compared
to $631,000 for the same period in 2003. The majority of the decrease in other
income can be attributed to mortgage banking activity which declined 37.1% as
activity in this area slowed as interest rates stabilized from the historically
low interest rates experienced in 2003. The sale of securities available for
sale also only generated gains of $8,000 for the first quarter of 2004 compared
to $91,000 for the same period in 2003. Service charges on deposit accounts
increased by $14,000 or 13.1% rising from $107,000 for the first three months
of 2003 to $121,000 for the same period in 2004. Earnings on the cash
surrender value of life insurance increased by 72.4% or $21,000 for the first
the quarter of 2004 compared to 2003. This increase is due to the purchase of
$2 million in life insurance on key employees. Noninterest expense rose with an increase of $884,000 or 53.3%, reaching $2.5
million for the first three months of 2004 as compared to $1.7 million for the
same period in 2003. The primary factor contributing to the increase in
noninterest expense is an $810,000 charge against earnings for stock option
compensation expense. Stock option grants for 90,000 shares were set to expire
in May 2004. With the pending merger, the Board of Directors approved
extending the options expiration to May 2009, which is consistent with the
terms of the stock option plan. The modification of the original grant terms
resulted in a new measurement date, with expense recognized based on the
difference between the exercise price and the fair value of the shares as of
the new measurement date. Since the awards are fully vested, the full amount
of the expense was recognized in the first quarter. Occupancy costs for the
first three months of 2004 were up 14.2% or $18,000 over the same period of
2003. This is the result of opening our new Franklin office during the fourth
quarter of 2003. Other expense experienced an increase, growing $14,000 or
5.4% for the first three months of 2004. This increase is attributed to Nasdaq
fees and transfer agent fees. Income Taxes A tax benefit of $262,000 was recorded for the first three months of 2004, due
to the loss recorded in the first quarter. This is the result of the one time
charge to earnings for the stock option compensation expense. For 2003, we
recorded tax expense of $58,000 for the first quarter. 11




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FINANCIAL CONDITION Total assets were $195.0 million at March 31, 2004 compared to $175.8 million
at year-end 2003, an increase of $19.2 million or 10.9%. Increased loan and
securities totals were funded primarily by increased deposits. Securities Securities are designated as available for sale. With the influx of deposits,
investments in securities increased nearly $9.3 million with approximately $6.2
million of purchases in the first quarter comprised of mortgage backed
securities. The portfolio remains largely comprised of government agency
issues and state and political subdivision securities. Loans Total loans, including loans held for sale, increased $3.6 million or 2.7% from
year-end 2003 to March 31, 2004. Loan growth occurred primarily in the
commercial real estate area. Commercial real estate loans grew by 22.3% or
$5.0 million in total from December 31, 2003 to March 31, 2004 and comprised
20.3% of our portfolio at the period end. Growth in this segment was
attributed to the continued focus upon the Greenwood area, and further
penetration in our market areas. Residential mortgage loans comprise the largest single segment of our loan
portfolio. From year-end 2003 to March 31, 2004, residential mortgages
remained relatively stable at $38.2 million. At period end 2004, loans held
for sale, which are carried at the lower of cost or fair value, totaled $1.6
million, rising from the year-end total of $699,000. All loans are sold
servicing released. Mortgage banking provides our customers with a wider array
of mortgage loan products. Consumer loans totaled $27.0 million at March 31, 2004, increasing $626,000 or
2.4% from year-end. The indirect loan market remains strong, with
relationships maintained with local auto and recreational vehicle dealers
providing this segment with strong growth opportunities. 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 Borrowings Total deposits increased $25.0 million or 17.5%, from year-end 2003 to March
31, 2004 primarily in the area of public funds. Noninterest-bearing deposits
increased to $17.6 million from $14.9 million. At March 31, 2004, $60.6
million or 56.7% of our time deposits had balances greater than $100,000. The
average balance of time deposits issued in amounts greater than $100,000
totaled $54.8 million for the first quarter of 2004, compared to $41.2 million
for the first quarter of 2003, representing 54.3% and 48.8% of total average
time deposits in each period. While deposits have funded a significant portion of our growth, we have also
obtained funding from the Federal Home Loan Bank (FHLB). The advances from the
FHLB have fixed interest rates, which range from 1.89% to 5.30% at March 31,
2004 and mature between March 2005 and March 2011. With the growth in
deposits, we have reduced our other borrowings. Additionally, we have a note
payable and debenture at the holding company level, with a significant portion
of these proceeds contributed to First Bank to support continued growth. We
have called the debentures and reduced this debt by $120,000 from the
conversion of the debt to stock. Since the end of the quarter, we have
completed our conversion of the debentures as of May 7, 2004. Capital We 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 for sale, as
defined by bank regulators. The definition of 12




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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 a financial institution
is only adequately capitalized, regulatory approval is required to accept
brokered deposits. If a financial 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 March 31, 2004, our Tier 1 risk-based capital, total risk-based capital and
leverage ratios for the Bank were 9.56%, 10.60% and 8.01%, levels which meet
the regulatory guidelines of well capitalized. Our Tier 1 risk-based
capital, total risk-based capital and leverage ratios at the consolidated level
were 6.52%, 10.67%, and 5.51%, levels which meet the regulatory guidelines of
well capitalized. At December 31, 2003 our Tier 1 risk-based capital, total risk-based capital
and leverage ratios for the Bank were 9.82%, 10.83% and 8.43%, levels which
meet the regulatory guidelines of well capitalized. The consolidated ratios
for risk-based capital, total risk-based capital and leverage ratios were
6.52%, 10.67%, and 5.51%, levels which meet the regulatory guidelines of well
capitalized. Liquidity and Rate Sensitivity Liquidity refers to the availability of funds to meet deposit withdrawals and
borrowing repayments, fund loan commitments and pay expenses. We have many
sources of liquid funds, including cash and cash equivalents, payments and
maturities of loans and securities, and growth in deposits. In addition, we
have the ability to sell securities available for sale, and may borrow from the
Federal Reserve and the Federal Home Loan Bank. We believe we have sufficient liquidity to meet reasonable borrower, depositor,
and creditor needs in the present economic environment. We have not received
any recommendations from regulatory authorities which would materially affect
liquidity 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 March 31, 2004, we had a negative one-year interest rate gap of 35.5% of
interest earning assets. This compares to a negative 26.1% gap at December 31,
2003. 13




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Item 3. Controls and Procedures As 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-K a.) Exhibits 2
    
    
    Agreement and Plan of Reorganization dated March
10, 2004, among First Shares Bancorp, Inc., First Bank,
Lincoln Bancorp and Lincoln Bank, incorporated by reference
from Exhibit 2 to the Current Report on Form 8-K filed by
First Shares Bancorp, Inc. on March 15, 2004.3.1
    
    
    Articles of Incorporation of First Shares
Bancorp, Inc. and amendments, incorporated by reference from
Exhibit 3.1 to the Registration Statement on Form SB-2 of
First Shares Bancorp, Inc., file no. 333-31520, as amended
(the 2000 Registration Statement).3.2
    
    
    Bylaws of First Shares Bancorp, Inc.,
incorporated by reference from Exhibit 3.2 to the 2000
Registration Statement.31.1
    
    
    Rule 13a  14(a) Certification of Chief Executive Officer31.2
    
    
    Rule 13a  14(a) Certification of Chief Financial Officer32.1
    
    
    Section 1350 Certification of Chief Executive Officer32.2
    
    
    Section 1350 Certification of Chief Financial Officer
 b.) Reports on Form 8-K February 19, 2004
    
    Report of Annual Profits for 2003March 15, 2004
    
    Announcement of Agreement and Plan of
Reorganization among First Shares Bancorp, Inc., First Bank,
Lincoln Bancorp and Lincoln BankMarch 15, 2004
    
    Press Release Concerning Redeemable
Subordinated Debentures
 
 SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized. 
 FIRST SHARES BANCORP, INC.Date:  May 17, 2004
    By:
    /s/ Jerry R. EngleJerry R. EnglePresident and Chief Executive Officer Date:  May 17, 2004
    By:
    /s/ Kimberly B. KlingKimberly B. KlingSecretary, Treasurer and
Chief Financial Officer
(Principal Financial and
Accounting Officer) 14