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U. S. SECURITIES AND EXCHANGE COMMISSION  FORM 10-KSB (Mark One) [X]
    
    ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
 For the fiscal year ended December 31, 2003 [   ]
    
    TRANSITION REPORT UNDER 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, Indiana
(Address of principal executive offices)
    
    46143
(Zip Code)
 Issuers Telephone Number: (317) 882-4790 Securities registered under Section 12(b) of the Exchange Act: None Securities registered under Section 12(g) of the Exchange Act: Common Stock, $.01 par value
(Title of class) Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 [    ]. Check if no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is contained in this form, and no disclosure will be contained,
to the best of registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ X ] Issuers revenues for its most recent fiscal year: $12,085,000 Aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity
was sold, or the average bid and asked price of such common equity, as of March
16, 2004 (See definition of affiliate in Rule 12b-2 of the Exchange Act):
$16,926,269 Note: If determining whether a person is an affiliate will involve an
unreasonable effort and expense, the issuer may calculate the aggregate market
value of the common equity held by non-affiliates on the basis of reasonable
assumptions, if the assumptions are stated. (Issuers
involved in bankruptcy proceeding during the past five years)
Check whether the issuer has filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes [  ] No [  ]. (Applicable
only to corporate registrants)
Number of shares common stock outstanding, as of March 16, 2004: 1,622,662 Documents Incorporated by Reference:None. Transitional Small Business Disclosure Format (Check one): [  ] Yes [X]
No 1




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FIRST SHARES BANCORP, INC. FORM 10-KSB Table of Contents PagePART I
    
    
    3Item 1. Description of Business
    
    
    3Item 2. Description of Property
    
    
    12Item 3. Legal Proceedings
    
    
    13Item 4. Submission of Matters to a Vote of Security Holders
    
    
    13PART II
    
    
    13Item 5. Market for Common Equity and Related Stockholder Matters and Small Business Issuer
Purchases of Equity Securities
    
    
    13Item 6. Managements Discussion and Analysis or Plan of Operation
    
    
    14Item 7. Financial Statements
    
    
    14Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    14Item 8A.Controls and Procedures
    
    
    14PART III
    
    
    15Item 9. Directors and Executive Officers of the Registrant
    
    
    15Item 10. Executive Compensation
    
    
    17Item 11. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
    
    
    19Item 12. Certain Relationships and Related Transactions
    
    
    21Item 13. Exhibits and Reports on Form 8-K
    
    
    21Item 14. Principal Accountant Fees and Services
    
    
    23Signatures
    
    
    25Management's Discussion and AnalysisFinancial StatementsConsent of Crowe Chizek and Company LLCCertification of Chief Executive OfficerCertification of Chief Financial Officer1350 Certification of Chief Executive Officer1350 Certification of Chief Financial Officer
 2




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PART I 
 ITEM 1. DESCRIPTION OF BUSINESS. The information in this section contains forward-looking statements.
Although we believe that our expectations in such forward-looking statements
are reasonable, we cannot promise that our expectations will turn out to be
correct. Actual results could be materially different from and worse than our
expectations for various reasons, including competitive, economic and other
factors. General First Shares Bancorp, Inc., an Indiana corporation formed in 1991, is a
bank holding company that owns all of the common shares of First Bank, an
Indiana-chartered bank with deposit accounts insured by the FDIC. After years
of slow growth, we implemented an aggressive new growth strategy in 1999 with
the goal of capturing a significant portion of the market for banking services
in the Central Indiana counties, south of Indianapolis. To help fund our
growth, we conducted an initial public offering of our common shares in 2000,
raising net proceeds of approximately $2.7 million, and an offering in 2002 of
redeemable subordinated debentures and mandatory stock purchase contracts,
raising net proceeds of approximately 4.7 million. On March 10, 2004, we signed a definitive agreement to merge into Lincoln
Bancorp, headquartered in Plainfield, Indiana. Our subsidiary bank, First
Bank, will also be merged into Lincoln Bancorps subsidiary, Lincoln Bank. We offer a broad range of commercial banking products and services to
small and medium-sized businesses and retail customers from our eight locations
in Central Indiana. Our products include commercial, consumer and real estate
loans, credit cards, a broad range of deposit products and other non-deposit
banking services. Strategy Bank Growth. When current management assumed control of First Shares
Bancorp in March of 1999, it adopted a growth strategy of increasing assets,
deposits and loans. Between March 31, 1999, and December 31, 2003, total assets
increased from $44.0 million to $175.8 million (299%), total loans increased
from $27.4 million to $133.7 million (388%), and deposits increased from $39.3
million to $142.8 million (263%). This growth was accomplished primarily by
attracting customers from our competitors and was accomplished during periods
where our ability to maximize our growth was impeded by our regulatory capital
levels. Our goal is to continue our growth following the proposed merger and
be both profitable and customer-focused. We believe that the largest source of growth of our business is through
referrals by existing customers, and that the primary reason for referrals is
positive customer feedback regarding our customer service and response time.
The Central Indiana banking market is dominated by large national and regional
financial institutions. This dominance was achieved through the purchase of
Indiana-based financial institutions and holding companies over the past
several years, which resulted in a significant consolidation of the Indiana
banking industry. We believe that small- and medium-size businesses often are
not of sufficient size to be of interest to these large banks. We also believe
potential customers frequently have difficulty in finding personalized banking
services and seek a banking relationship with a smaller and more
service-oriented community banking organization such as us. Through our primary
emphasis on customer service, managements experience and our product lines, we
will continue to focus on attracting these customers to achieve internal
growth. We also believe that the economic expansion which has occurred in our
market area contributes significantly to new opportunities for internal growth.
As of the 2000 census, the most recent date for which figures were available,
the three counties in which we conduct most of our activities had a combined
population of approximately 196,855. One of those counties, Johnson County, was
the third fastest growing county in Indiana based on population increase from
1990 to 2000. Employment in the area is in diversified sectors, including
manufacturing, construction, retail 3




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trade, services and government. As of December 31, 2003, the three-county
area had an unemployment rate of less than 5%. In order to promote internal growth, we currently pay interest on deposits
at rates competitive with the highest in our market area. In addition, we have
increased our loan origination efforts and have expanded our indirect consumer
lending through automobile and recreational vehicle dealers. Operations and Marketing. We believe that, in meeting the needs of
consumers and small- to medium-sized businesses in our market area, our most
important strategy is to provide excellent customer service. This strategy is
emphasized above all others, from top management down to each bank teller. Our
operational systems have been designed to complement customer service. We have
Internet banking capabilities, which allow customers to perform several banking
functions on-line. We believe our banking locations are small enough to
facilitate personalized services and decision-making, yet of sufficient size to
meet most customers needs. We seek to maximize operational and support efficiencies consistent with
maintaining high quality customer service. Various management and
administrative functions are consolidated, including consumer credit
administration and lending, investment management and accounting. This enables
branch personnel to focus better on customer service and sales. In expanding our banking franchise, we have focused on identifying and
developing products and services that satisfy customer needs, particularly
customer service. We offer a wide range of consumer deposit products including
regular checking, interest bearing checking, money market accounts, regular
savings, certificates of deposit, and IRAs. We also offer ATM cards and debit
cards which provide customers with additional access to their accounts. Our
consumer loan products include home mortgages, home equity loans, automobile
loans and other secured and unsecured loans originated directly by our branches
and from indirect sources. See Loans below for a discussion of the loan
products we provide. Loans We have the ability to provide a broad range of commercial and retail
lending services. As of December 31, 2003, our loan portfolio consisted of
approximately 39% commercial and commercial real estate loans, 29% residential
mortgage loans (including home equity loans), 12% residential construction
loans and 20% automobile and other consumer loans. We follow a uniform credit
policy which sets forth underwriting and loan administration criteria,
including levels of loan commitment, loan types, credit criteria, concentration
limits, loan administration, loan review and grading and related matters. At
December 31, 2003, substantially all loans outstanding were to customers within
our market area. Commercial Loans. Commercial loans are made primarily to small- and
medium-sized businesses. These loans are made on a secured and, to a limited
extent, on an unsecured basis and are made available for general operating
purposes, acquisition of fixed assets including real estate, purchases of
equipment and machinery, financing of inventory and accounts receivable, as
well as any other purposes considered appropriate. We generally look to a
borrowers business operations as the principal source of repayment, but also
receive, when appropriate, mortgages on real estate, security interests in
inventory, accounts receivable and other personal property and/or personal
guarantees. Approximately 44% of our commercial loans are commercial real
estate loans secured by a first lien on the commercial real estate. In
addition, virtually all of our commercial loans that are not mortgage loans are
secured by a lien on equipment, inventory and/or other assets of the commercial
borrower. Commercial lending involves more risk than residential lending because
loan balances are greater and repayment is primarily dependent upon the
borrowers operations. We attempt to minimize the risks associated with these
transactions by generally limiting our lending to owner-operated businesses
with an established profitable history. In many cases, risk is further reduced
by requiring personal guarantees, additional collateral or other credit
enhancements as deemed necessary. 4




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Residential Mortgage Loans. We originate residential mortgage loans, which
are generally long-term, with either fixed or variable interest rates. Our
general policy is to retain all or a portion of variable interest rate mortgage
loans in our loan portfolio and to sell virtually all fixed rate loans in the
secondary market. This policy is subject to review by management and may be
revised as a result of changing market and economic conditions and other
factors. We also offer home equity loans. We do not retain servicing rights
with respect to the residential mortgage loans that we originate and sell into
the secondary market. Personal Loans and Lines of Credit. We make personal loans and lines of
credit available to consumers for various purposes, such as the purchase of
automobiles, boats and other recreational vehicles, and the making of home
improvements and personal investments. We retain all of these loans. Consumer loans generally have shorter terms and higher interest rates than
residential mortgage loans and, except for home equity lines of credit, usually
involve more credit risk than mortgage loans because of the type and nature of
the collateral. Consumer lending collections are dependent on a borrowers
continuing financial stability and are thus likely to be adversely affected by
job loss, illness or personal bankruptcy. In many cases, repossessed collateral
for a defaulted consumer loan will not provide an adequate source of repayment
of the outstanding loan balance because of depreciation of the underlying
collateral. We underwrite our loans carefully, with a strong emphasis on the
amount of the down payment, credit history, credit quality, collateral type,
employment stability and monthly income. These loans are generally expected to
be repaid on a monthly repayment schedule with the payment amount tied to the
borrowers periodic income. We believe that the generally higher yields earned
on consumer loans helps compensate for the increased credit risk associated
with such loans and that consumer loans are important to our efforts to serve
the credit needs of our customer base. Loan Policies. Although we take a progressive and competitive approach to
lending, we emphasize high quality in our loans. We believe that quality
control is achievable while still providing prompt and personal service. We are
subject to written loan policies that contain general lending guidelines and
are subject to periodic review and revision by our Loan Committee and our board
of directors. These policies set procedures for loan administration,
documentation, approval and reporting requirements for various types of loans. We recognize that lending money involves a degree of risk. Our loan
policies are designed to assist us in managing the risk involved in making
loans. These policies provide a general framework for our loan operations while
recognizing that not all loan activities and procedures can be anticipated. Our loan policies include procedures for oversight and monitoring of our
lending practices and loan portfolio. We have a Loan Committee comprised
currently of our President, our Executive Vice President and other lending
officers and four outside directors. Our President has signatory authority for
secured loans up to $200,000 and unsecured loans up to $50,000, and our
Executive Vice President and Senior Vice President of Commercial Lending have
signatory authority for secured loans up to $150,000 and unsecured loans up to
$50,000. Various other lending officers have signatory authority for secured
loans ranging from $30,000 to $75,000 and for unsecured loans ranging from
$5,000 to $15,000. These limits are cumulative for commercial loans up to a
maximum loan of $400,000, allowing up to three officers to approve a loan
higher than one officers limit but less than the sum of their limits, so long
as one of the officers approving the loan is either the President or the
Executive Vice President. Residential mortgage loans meeting Federal Home Loan
Mortgage Corporation guidelines for credit quality and documentation may be
approved by our Vice President of Mortgage Loans, up to the established maximum
conforming loan amount as periodically determined by secondary market agencies
such as FHLMC and FNMA. Residential mortgage loans not meeting FHLMC guidelines
may be approved by our Senior Vice President of Mortgage Loans up to $100,000.
The Loan Committee is responsible for approving all loans that exceed the above
limits. All loan limits are subject to review and revision by our board of
directors and the Loan Committee from time to time. 5




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Our loan policies provide guidelines for loan-to-value ratios that limit
the size of certain types of loans to a maximum percentage of the value of the
collateral securing the loans, which percentage varies by the type of
collateral, including the following maximum loan-to-value ratios:  
    
    raw land (65%)
    
    land development (75%)
    
    commercial and multi-family real estate (80%)
    
    one- to four-family residential real estate (80%)
    
    improved property, including farmland (80%)
    
    junior liens on real estate (90%, or 100% if we hold the senior mortgage) We use credit risk insurance, principally for owner-occupied residential
real estate mortgage loans where the loan-to-value ratio exceeds 80%.
Regulatory and supervisory loan-to-value limits are established by the Federal
Deposit Insurance Corporation Improvement Act of 1991. Our internal
loan-to-value limitations follow those limits. Our loan policies also include other underwriting standards for loans
secured by liens on real estate. These underwriting standards are designed to
determine the maximum loan amount for which a borrower can qualify based upon
the type of collateral securing the loan and the borrowers income and ability
to repay the loan. Monthly payment obligations, including the proposed loan,
any residential mortgage loan payment or rent and child support or alimony
payment (if any) should not exceed 40% of the borrowers gross monthly income.
Monthly housing expense, including the residential mortgage loan payment, real
estate taxes and insurance on the property, or rent, should not exceed 30% of
gross monthly income. In addition, the loan policies require that we obtain a
written appraisal by a state certified appraiser for loans in excess of
$250,000 secured by real estate, subject to certain limited exceptions. The
appraiser must be selected by us and must be independent and licensed. For
loans secured by real estate that are less than $250,000, we may elect to
conduct an in-house real estate evaluation. Our loan policies also include maximum loan terms for each category of
loans secured by liens on real estate. Loans secured by one- to four-family
residential real estate or multi-family residential real estate with variable
interest rates have a maximum term of 20 years. Loans secured by commercial
real estate or farmland with variable interest rates are generally offered with
a maximum term of 15 years, which may be increased to a maximum term of 20
years where the credit is strong and the property is very durable and
desirable. Home equity loans with variable interest rates have a maximum term
of 10 years. Loans secured by vacant land or by mobile homes attached to real
estate are subject to a maximum term of 15 years. We generally sell to the
secondary market all loans secured by residential real estate with fixed
interest rates, thereby reducing our interest rate risk and credit risk. In addition, our loan policies provide guidelines for:  
    
    personal guarantees
    
    environmental inspections of real estate
    
    loans to employees, executive officers and directors
    
    problem loan identification
    
    maintenance of a loan loss reserve
    
    other matters relating to our lending practices Deposits and Other Services Deposits. We offer a broad range of deposit products, including checking,
business checking, savings and money market accounts, certificates of deposit
and direct-deposit services. Transaction accounts and certificates of deposit
are tailored to the primary market area at rates and with fee structures
competitive with those offered in Central Indiana. All deposit accounts are
insured by the FDIC up to the maximum amount permitted by law, currently
$100,000. We solicit these accounts from individuals, businesses, associations,
financial institutions and government entities. 6




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Other Services. In addition to our basic deposit products, we offer our
customers certain other services, such as commercial sweep accounts,
bank-by-phone and Internet banking capabilities. We believe customer visits to
our banking locations are consistent with our personalized service approach. In
addition, we maintain relationships with correspondent banks and other
independent financial institutions to provide other services requested by our
customers, including loan participations where the requested loan amounts
exceed our policies or legal lending limits. Competition There are many thrift institutions, credit unions and commercial banks
located within our primary service area. Most are branches of larger financial
institutions which, in our view, are managed with a philosophy of strong
centralization. We face competition from thrift institutions, credit unions and
other banks as well as finance companies, insurance companies, mortgage
companies, securities brokerage firms, money market funds, trust companies and
other providers of financial services. Most of our competitors are larger and
have higher lending limits than we do. In some of our newer markets we are also
competing against financial institutions with established customer bases. We
compete for loans principally through our ability to communicate effectively
with our customers and understand and meet their needs. We believe that our
personal service philosophy enhances and will continue to enhance our ability
to compete favorably in attracting individuals and small- and medium-sized
businesses. We actively solicit retail customers and compete for deposits by
offering customers personal attention, professional service and competitive
interest rates. Employees As of December 31, 2003, we had 95 full-time employees and 8 part-time
employees. None of these employees is represented by a union. We consider
relations with our employees to be good. Supervision and Regulation General Financial institutions and their holding companies are extensively
regulated under federal and state law. Consequently, our growth and earnings
performance can be affected not only by management decisions and general
economic conditions, but also by the statutes administered by, and the
regulations and policies of, various governmental regulatory authorities. Those
authorities include, but are not limited to, the Federal Reserve Board, the
Federal Deposit Insurance Corporation (the FDIC), the Indiana Department of
Financial Institutions (the DFI), the Internal Revenue Service and state
taxing authorities. The effect of such statutes, regulations and policies can
be significant and cannot be predicted with a high degree of certainty. The system of supervision and regulation applicable to us establishes a
comprehensive framework for our operations and is intended primarily for the
protection of the FDICs deposit insurance funds, our depositors and the
public, rather than our shareholders. Federal laws and regulations, including provisions added by the Federal
Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) and
regulations promulgated thereunder, establish supervisory standards applicable
to our lending activities, including internal controls, credit underwriting,
loan documentation and loan-to-value ratios for loans secured by real property. The following references to statutes and regulations are intended to
summarize certain government regulation of our business and are qualified by
reference to the text of such statutes and regulations. Any change in
government regulation may have a material adverse effect on our business. 7




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First Shares Bancorp General. First Shares is a bank holding company and, as such, is subject
to regulation by, the Federal Reserve Board under the federal Bank Holding
Company Act of 1956 (the BHCA). Under the BHCA, First Shares is subject to
examination by the Federal Reserve Board and is required to file reports of our
operations and such additional information as the Federal Reserve Board may
require. Under Federal Reserve Board policy, First Shares is expected to act as a
source of financial strength to First Bank and to commit resources to support
First Bank in circumstances where First Shares might not do so absent such a
policy. In addition, in certain circumstances, First Shares, as an Indiana bank
holding company, may be required by order of the DFI to increase the capital of
First Bank or reduce the amount of its deposits. Any loans by a bank holding company to a subsidiary bank are subordinate
in right of payment to deposits and to certain other indebtedness of the
subsidiary bank. In the event of a bank holding companys bankruptcy, any
commitment by the bank holding company to a federal bank regulatory agency to
maintain the capital of a subsidiary bank would be assumed by the bankruptcy
trustee and entitled to a priority of payment. This priority would also apply
to guarantees of capital plans under FDICIA. Investments and Activities. Under current law, absent election as
financial holding companies, bank holding companies are prohibited, with
certain limited exceptions, from engaging in activities other than those of
banking or of managing or controlling banks. They are also prohibited from
acquiring or retaining direct or indirect ownership or control of voting shares
or assets of any company which is not a bank or bank holding company, other
than subsidiary companies furnishing services to or performing services for its
subsidiaries, and other subsidiaries engaged in activities which the Federal
Reserve Board determines to be so closely related to banking or managing or
controlling banks as to be incidental to these operations. In general, any direct or indirect acquisition by First Shares of any
voting shares of any bank that would result in First Shares direct or indirect
ownership or control of more than 5 percent of any class of voting shares of
such bank, and any merger or consolidation of First Shares with another bank
holding company, will require the prior written approval of the Federal Reserve
Board under the BHCA. In acting on such applications, the Federal Reserve Board
must consider various factors, including among others, the effect of the
proposed transaction on competition in relevant geographic and product markets,
the convenience and needs of the communities to be served and each partys
financial condition, managerial resources and record of performance under the
Community Reinvestment Act. The merger or consolidation of First Bank with another bank, or the
acquisition by First Bank of assets of another bank, or the assumption of
liability by First Bank to pay any deposits in another bank, will require the
prior written approval of the primary federal bank regulatory agency of the
acquiring or surviving bank under the federal Bank Merger Act. The approval
decision is based upon a consideration of factors similar to those outlined
above with respect to the BHCA. In addition, in certain cases, an application
to, and the prior approval of, the Federal Reserve Board under the BHCA and/or
the DFI under the Indiana Financial Institutions Act, may be required. The
proposed merger of First Bank into Lincoln Bank will require the approval of
the Office of Thrift Supervision, Lincoln Banks primary federal regulator. Effective March 11, 2000, the Gramm-Leach-Bliley Act of 1999 permits a
bank holding company to qualify as a financial holding company and, as a
result, be permitted to engage in a broader range of activities that are
financial in nature and in activities that are determined to be incidental or
complementary to activities that are financial in nature. The
Gramm-Leach-Bliley Act amends the BHCA to include a list of activities that are
financial in nature, and the list includes activities such as underwriting of
securities, dealing in and making a market in securities, insurance
underwriting and agency activities, and merchant banking. The Federal Reserve
Board is authorized to determine other activities that are financial in nature
or incidental or complementary to such activities. The Gramm-Leach-Bliley Act
also authorizes banks to engage, through financial subsidiaries, in certain of
the activities permitted for financial holding companies. We have not elected
to be treated as a financial holding 8




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company because, among other things, we have no present plans to engage
in the broader range of activities permitted by the Gramm-Leach-Bliley Act. Dividends. First Shares is a corporation separate and distinct from First
Bank. Most of First Shares revenues are received in the form of dividends or
interest paid by First Bank. First Bank is subject to statutory restrictions on
its ability to pay dividends. See - First Bank  Dividends. The Federal
Reserve Board has issued a policy statement on the payment of cash dividends by
bank holding companies. In the policy statement, the Federal Reserve Board
expressed its view that a bank holding company should not pay cash dividends
exceeding its net income or which could only be funded in ways that weakened
the bank holding companys financial health, such as by borrowing.
Additionally, the Federal Reserve Board possesses enforcement powers over bank
holding companies and their non-bank subsidiaries to prevent or remedy actions
that represent unsafe or unsound practices or violations of applicable statutes
and regulations. Among these powers is the ability in appropriate cases to
proscribe the payment of dividends by banks and bank holding companies. The
Federal Reserve Board and the DFI possess similar enforcement powers over First
Bank. It is also unlawful for any insured depository institution to pay a
dividend at a time when it is in default of payment of any assessment to the
FDIC. The prompt corrective action provisions of FDICIA impose further
restrictions on the payment of dividends by insured banks which fail to meet
specified capital levels and, in some cases, their parent bank holding
companies. In addition to the restrictions on dividends imposed by the Federal
Reserve Board, the Indiana Business Corporation Law imposes certain
restrictions on the declaration and payment of dividends by Indiana
corporations such as First Shares. See Dividend Policy. Federal Reserve Board Restrictions. At the direction of the Federal
Reserve Board, First Shares agreed to certain restrictions in January, 2001. We
have agreed that we will not do any of the following without the prior written
consent of the Federal Reserve Board:  
    
    Declare or pay any dividends;
    
    Incur any debt; or
    
    Purchase or redeem any treasury stock. We have no indication of when the Federal Reserve Board will permit First
Shares to be released from these restrictions. First Bank General. First Bank is an Indiana banking corporation that is not a member
of the Federal Reserve System. As a state-chartered, non-member bank, First
Bank is subject to the examination, supervision, reporting and enforcement
jurisdiction of the DFI, as the chartering authority for Indiana banks, and the
FDIC, as the primary federal bank regulatory agency for state-chartered,
non-member banks. First Banks deposit accounts are insured up to $100,000 per
depositor by the Bank Insurance Fund (BIF) of the FDIC, which has
supervision, reporting and enforcement jurisdiction over BIF insured banks.
These agencies, and federal and state law, extensively regulate various aspects
of the banking business including, among other things:  
    
    permissible types and amounts of loans
    
    investments and other activities
    
    capital adequacy
    
    branching
    
    interest rates on loans and on deposits
    
    the maintenance of non-interest bearing reserves on deposit accounts
    
    the safety and soundness of banking practices Deposit Insurance.As an FDIC-insured institution, First Bank is required
to pay deposit insurance premium assessments to the FDIC. Under FDICIA, the
FDIC adopted a risk-based assessment system under which all insured depository
institutions are placed into one of nine categories and assessed insurance
premiums based upon their 9




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level of capital and supervisory evaluation. Institutions classified as
well-capitalized (as defined by the FDIC) and not exhibiting financial,
operational or compliance weaknesses pay the lowest premium. Institutions that
are less than well-capitalized (as defined by the FDIC) and exhibit such
weaknesses in a moderately severe to unsatisfactory degree pay the highest
premium. Risk classification of all insured institutions is made by the FDIC
for each semi-annual assessment period. The FDIC is required to establish semi-annual assessment rates so as to
maintain the ratio of each deposit insurance fund to total estimated insured
deposits at not less than 1.25%. Currently, the FDIC has established a schedule
of BIF insurance assessments ranging from 0% of deposits for institutions in
the highest category to .27% of deposits for institutions in the lowest
category. The FDIC may terminate the deposit insurance of any insured depository
institution if the FDIC determines, after a hearing, that the institution or
its directors have engaged or are engaging in unsafe or unsound practices, or
have violated any applicable law, regulation, order or any condition imposed in
writing by, or written agreement with, the FDIC, or if the institution is in an
unsafe or unsound condition to continue operations. The FDIC may also suspend
deposit insurance temporarily during the hearing process for a permanent
termination of insurance if the institution has no tangible capital. Dividends. As a banking corporation organized under Indiana law, First
Bank is restricted as to the maximum amount of dividends it may pay to First
Shares. Indiana law prohibits First Bank from declaring or paying dividends
that would impair First Banks capital or that would be greater than its
undivided profits. In addition, the prior approval of the DFI is required for
the payment of any dividend if the aggregate amount of all dividends paid by
First Bank during a calendar year, including the proposed dividend, would
exceed the sum of the retained net income of First Bank for the year to date
and previous two years. The Federal Deposit Insurance Act (the FDIA) generally prohibits a
depository institution from making any capital distribution (including payment
of a dividend) or paying any management fee to its holding company if the
depository institution would thereafter be undercapitalized. The FDIC may
prevent an insured bank from paying dividends if the bank is in default of
payment of any assessment due to the FDIC. In addition, payment of dividends by
a bank may be prevented by the applicable federal regulatory authority if the
payment is determined, by reason of the financial condition of the bank, to be
an unsafe and unsound banking practice. As described above, the Federal Reserve
Board has issued a policy statement providing that bank holding companies and
insured banks should generally only pay dividends out of current operating
earnings. Insider Transactions. First Bank is subject to certain federal and state
statutory and regulatory restrictions on any extensions of credit to First
Shares or any subsidiaries of First Shares, on investments in the stock or
other securities of First Shares or any subsidiaries of First Shares, and on
the acceptance of the stock or other securities of First Shares or any
subsidiaries of First Shares as collateral for loans to any person. Certain
limitations and reporting requirements are also placed on extensions of credit
by First Bank to its directors and officers, to directors and officers of First
Shares and any subsidiaries of First Shares, to principal shareholders of First
Shares, and to related interests of such directors, officers and principal
shareholders. In addition, this legislation and these regulations may affect
the terms upon which any person who is a director or officer of First Shares or
any of its subsidiaries or a principal shareholder of First Shares may obtain
credit from banks with which First Bank maintains a correspondent relationship. Consumer Banking. Our business includes making a variety of types of loans
to individuals. In making these loans, we are subject to state usury and
regulatory laws and to various federal statutes, such as the Equal Credit
Opportunity Act, the Fair Credit Reporting Act, the Truth in Lending Act, the
Real Estate Settlement Procedures Act and the Home Mortgage Disclosure Act, and
the regulations promulgated thereunder, which prohibit discrimination, specify
disclosures to be made to borrowers regarding credit and settlement costs and
regulate our mortgage loan servicing activities, including the maintenance and
operation of escrow accounts and the transfer of mortgage loan servicing. In
receiving deposits, we are subject to extensive regulation under state and
federal law and regulations, including the Truth in Savings Act, the Expedited
Funds Availability Act, the Bank Secrecy Act, the Electronic 10




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Funds Transfer Act, and the FDIA. Violation of these laws could result in
the imposition of significant damages and fines upon us and our directors and
officers. Monetary Policies. The commercial banking business is affected not only by
general economic conditions but also by the monetary policies of the Federal
Reserve Board. The instruments of monetary policy employed by the Federal
Reserve Board include open market operations in United States Government
securities, changes in the discount rate on member bank borrowing and changes
in reserve requirements against deposits held by all federally insured banks.
Federal Reserve Board monetary policies have had a significant effect on the
operating results of commercial banks in the past and are expected to continue
to do so in the future. In view of changing conditions in the national economy
and in the money markets, as well as the effect of actions by monetary fiscal
authorities, including the Federal Reserve Board, no prediction can be made as
to possible future changes in interest rates, deposit levels, loan demand or
our business and earnings. Community Reinvestment Act. Under the Community Reinvestment Act (the
CRA) and the implementing regulations, we have a continuing and affirmative
obligation to help meet the credit needs of our local community, including low
and moderate-income neighborhoods, consistent with the safe and sound operation
of the institution. The CRA requires the board of directors of financial
institutions, such as us, to adopt a CRA statement for each assessment area
that, among other things, describes its efforts to help meet community credit
needs and the specific types of credit that the institution is willing to
extend. Our service area is currently designated as certain portions of Brown,
Morgan and Johnson Counties in Indiana. Our board of directors is required to
review the appropriateness of this delineation at least annually. Capital Adequacy Requirements Both bank holding companies and banks are subject to regulatory capital
requirements imposed by the Federal Reserve Board and the FDIC which vary based
on differences in risk profiles. The capital adequacy guidelines issued by the
Federal Reserve Board are applied on a bank-only basis until a bank and its
holding company assets are $150,000,000. The FDICs risk-based capital
guidelines apply directly to insured state banks regardless of whether they are
subsidiaries of a bank holding company. Both agencies requirements, which are
substantially similar, provide that banking organizations must have capital (as
defined in the rules) equivalent to 8% of risk-weighted assets. The risk
weights assigned to assets are based primarily on credit risks. Depending upon
the riskiness of a particular asset, it is assigned to a risk category. For
example, securities with an unconditional guarantee by the United States
government are assigned to the lowest risk category. The aggregate amount of
assets assigned to each risk category is multiplied by the risk weight assigned
to that category to determine the weighted values, which are added together to
determine total risk-weighted assets. Both the Federal Reserve Board and the FDIC have also adopted minimum
capital leverage ratios to be used in tandem with the risk-based guidelines in
assessing the overall capital adequacy of banks and bank holding companies. The
guidelines define a two-tier capital framework. Tier 1 capital consists of
common and qualifying preferred shareholders equity, less goodwill and other
adjustments. Tier 2 capital consists of mandatory convertible, subordinated,
and other qualifying term debt, preferred stock not qualifying for Tier 1,
hybrid debt instruments and a limited allowance for credit losses up to a
designated percentage of risk-weighted assets. Under these guidelines,
institutions must maintain a specified minimum ratio of qualifying capital to
risk-weighted assets. At least 50% of an institutions qualifying capital must
be core or Tier 1 capital, and the balance may be supplementary or Tier
2 capital. The guidelines imposed on the banks include a minimum leverage
ratio standard of capital adequacy. The leverage standard requires top-rated
institutions to maintain a minimum Tier 1 capital to assets ratio of 3%, with
institutions receiving less than the highest rating required to maintain a
ratio of 4% or greater, based upon their particular circumstances and risk
profiles. Federal bank regulatory authorities have adopted regulations revising the
risk-based capital guidelines to further ensure that the guidelines take
adequate account of interest rate risk. Interest rate risk is the adverse
effect that changes in market interest rates may have on a banks financial
condition and is inherent to the business of banking. Under the regulations,
when evaluating a banks capital adequacy, the revised capital standards now
explicitly include a banks exposure to declines in the economic value of its
capital due to changes in interest rates. The 11




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##### Table of Contents



exposure of a banks economic value generally represents the change in the
present value of its assets, less the change in the value of its liabilities,
plus the change in the value of its interest rate off-balance sheet contracts. The FDIA establishes five capital categories, and the federal bank
regulatory agencies, as directed by the FDIA, have adopted, subject to certain
exceptions, the following minimum requirements for each of such categories: Total Risk-
    
    Tier 1 Risk-Based
    
    BasedCapital Ratio
    
    Capital Ratio
    
    Leverage RatioWell capitalized
    
    10% or above
    
    6% or above
    
    5% or aboveAdequately capitalized
    
    8% or above
    
    4% or above
    
    4% or aboveUndercapitalized
    
    Less than 8%
    
    Less than 4%
    
    Less than 4%Significantly undercapitalized
    
    Less than 6%
    
    Less than 3%
    
    Less than 3%Critically undercapitalized
    
    
    
    
    
    A ratio of tangible
equity to total
assets of 2% or
less
 Subject to certain exceptions, these capital ratios are generally determined on
the basis of Call Reports submitted by each depository institution and the
reports of examination of the appropriate federal bank regulatory agency. The foregoing capital guidelines could affect First Shares and First Bank
in several ways. If First Bank grows rapidly, its capital base may become
insufficient to support continued growth, making an additional capital infusion
necessary. The capital guidelines could also impact First Banks ability to pay
dividends. Rapid growth, poor loan portfolio performance or poor earnings
performance, or a combination of these factors, could change First Banks
capital position in a relatively short period of time. Failure to meet these
capital requirements would require First Bank to develop and file with the FDIC
a plan describing the means and a schedule for achieving the minimum capital
requirements. In addition, we would not be able to receive regulatory approval
of any application that required consideration of capital adequacy, such as a
branch or merger application, unless we could demonstrate a reasonable plan to
meet the capital requirement within a reasonable period of time. As of December 31, 2003, First Bank had total Tier 1 capital of $14.7
million, or 8.43% of average total assets, 9.82% of risk-weighted assets, and a
10.83% ratio of total capital to total risk-weighted assets and met the
criteria to be classified by the FDIC as well capitalized. Legislative Proposals New proposed legislation which could significantly affect First Shares and
First Bank may be introduced from time to time. We cannot predict the future
course of legislative proposals or their impact on First Shares and First Bank,
should they be adopted. 
 ITEM 2. DESCRIPTION OF PROPERTY We conduct our operations from eight locations in Central Indiana:  
    
    Approximately 5,000 square feet at 996 South State Road
135, Greenwood, Indiana, which we occupy under a lease expiring
in 2004; 12




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
    
    Approximately 2,150 square feet at 1266 North Madison
Avenue, Greenwood, Indiana, which we occupy under a lease
expiring in 2005;
    
    Approximately 1,100 square feet at 250 North State Road
135, Bargersville, Indiana, which we occupy under a lease
expiring in 2006;
    
    Approximately 4,000 square feet at 180 West Washington
Street, Morgantown, Indiana, which we own;
    
    Approximately 1,800 square feet at 110 North State Road
135, Trafalgar, Indiana, which we own;
    
    Approximately 3,000 square feet at 189 Commercial Drive,
Nashville, Indiana, located on real estate owned by an entity
that is owned and controlled by Frank A. Rogers, one of our
directors, and which we occupy under a lease expiring on
November 30, 2006;
    
    Approximately 4,800 square feet at 3195 Fairview Road,
Greenwood, Indiana, which we occupy under a lease expiring on
January 31, 2007, with a renewal option of five years following
the expiration date;
    
    Approximately 3,750 square feet at 2259 North Morton,
Franklin, Indiana, which we own; and
    
    Approximately 3,500 square feet at 1118 North Main
Street, Suite B, Franklin, Indiana, which we do not currently
occupy, under a lease expiring on May 31, 2004, with a renewal
option of one year following the expiration date which we do not
intend to exercise. We believe the condition of our facilities is adequate to support our current
operations. 
 ITEM 3. LEGAL PROCEEDINGS We currently and from time to time are involved in litigation incidental
to the conduct of our business. However, we are not a party to any lawsuit or
proceeding which, in the opinion of management, is likely to have a material
adverse effect on us. 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders. 
 PART II 
 ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. Effective March 24, 2003, our common stock began trading on the Nasdaq
SmallCap Market under the symbol FBGI. Previously, our common stock was traded
in the over-the-counter market and was quoted on the Nasdaq OTC Bulletin Board
under the same symbol. The following table sets forth the high and low bid prices of the common
stock for the periods indicated as well as the dividends paid during the
periods. The over-the-counter quotations reflect inter-dealer prices, without
retail mark-up, mark-down or commission and may not represent actual
transactions. 13




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##### Table of Contents



Quarter Ended
    
    High
    
    Low
    
    DividendMarch 2002
    
    
    5.67
    
    
    
    4.67
    
    
    
    June 2002
    
    
    6.67
    
    
    
    5.33
    
    
    
    September 2002
    
    
    6.00
    
    
    
    5.37
    
    
    
    December 2002
    
    
    8.25
    
    
    
    5.48
    
    
    
    March 2003
    
    
    9.00
    
    
    
    7.60
    
    
    
    June 2003
    
    
    10.00
    
    
    
    8.25
    
    
    
    September 2003
    
    
    10.33
    
    
    
    8.50
    
    
    
    December 2003
    
    
    10.50
    
    
    
    8.60
    
    
    
    
 At March 16, 2004, there were approximately 130 record holders of the common
stock. For information on regulatory restrictions on the payment of dividends,
see Item 1. Description of Business  Supervision and Regulation  First
Shares Bancorp  Dividends. 
 ITEM 6. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION. Our Managements Discussion and Analysis is incorporated by reference from
a portion of our Annual Report to Security Holders and is filed as Exhibit 13.1
to this report. 
 ITEM 7. FINANCIAL STATEMENTS. Our Financial Statements are incorporated by reference from a portion of
our Annual Report to Security Holders and are filed as Exhibit 13.2 to this
report. 
 ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE. Not applicable. 
 ITEM 8A. CONTROLS AND PROCEDURES As of the end of the 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 the Exchange Act Rules 13a-15(e) and
15d-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 are, to the best of their knowledge,
effective to ensure that information required to be disclosed by First Shares
Bancorp, Inc. in reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time periods specific
in Securities and Exchange Commission rules and forms. Our Chief Executive
Officer and Chief Financial Officer have also concluded that there were no
significant changes in First Shares Bancorp, Inc.s internal controls or in
other factors during the fiscal quarter ended December 31, 2003 that could
significantly affect its internal controls, including any corrective actions
with regard to significant deficiencies and material weaknesses. 14




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##### Table of Contents



PART III 
 ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Listed below is certain information about our directors and executive
officers or executive officers of our affiliates who are not directors. The
information disclosed in the column headed Director Term Ends is the year the
directors term would end if the proposed merger with Lincoln Bancorp does not
occur. Age at
    
    
    
    
    
    DirectorDecember 31,
    
    Director
    
    TermName
    
    Position
    
    2003
    
    Since
    
    EndsJerry R. Engle
    
    President & CEO
    
    
    58
    
    
    
    1999
    
    
    
    2004Ralph M. Foley
    
    Director
    
    
    63
    
    
    
    1985
    
    
    
    2005H. Dean Hawkins
    
    Director
    
    
    68
    
    
    
    1992
    
    
    
    2004Gary W. Lewis
    
    Director
    
    
    54
    
    
    
    1999
    
    
    
    2006R. J. McConnell
    
    Director
    
    
    43
    
    
    
    1998
    
    
    
    2004William J. Meredith
    
    Director
    
    
    56
    
    
    
    1992
    
    
    
    2005Frank A. Andy Rogers
    
    Chairman of the Board
    
    
    72
    
    
    
    1999
    
    
    
    2005Norman D. Stockton
    
    Director
    
    
    59
    
    
    
    1993
    
    
    
    2006
 Age at
    
    Year FirstDecember 31,
    
    ElectedName
    
    Position
    
    2003
    
    OfficerJohn B. Ditmars
    
    Executive Vice President
    
    
    47
    
    
    
    1999Kimberly B. Kling
    
    Secretary, Treasurer and
    
    
    36
    
    
    
    1999Chief Financial Officer
 Set forth below is the principal occupation for the last five years of
each of our directors and executive officers. Jerry R. Engleis our President and Chief Executive Officer of the
Corporation and the Bank since March 1999; formerly chief executive officer of
Citizens Bank of Central Indiana, a position he assumed in 1992 when Indiana
Bancshares, Inc., of which he was chief executive officer, merged into CNB
Bancshares, Inc., the holding company for Citizens Bank. Ralph M. Foleyis a Partner in the law firm of Foley, Foley & Peden,
Martinsville, Indiana. H. Dean Hawkinsis self-employed as a real estate appraiser. President
and Chief Executive Officer of the Corporation and the Bank from December 1991
to February 1999; Chairman of the Board of Directors from March 1999 to
November 1999. Gary W. Lewisis a Financial Advisor with Raymond James & Associates, Inc.
since January, 2001; Vice President and Manager of the Greenwood office of F.C.
Tucker Realtors from 1975 to December, 2000. 15




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##### Table of Contents



R. J. McConnellis a Partner with the law firm of Bose McKinney & Evans
LLP, Indianapolis, Indiana. William J. Meredithis President and Funeral Director at Meredith-Clark
Funeral Home, Inc. and partner in C&M Monument Co., a cemetery monument
company. Frank A. Rogersis Chairman of the Board of Directors of the Corporation
and the Bank; owner and operator of restaurants and hotels in Brown County,
Indiana, and partner in a partnership owning a nursing home, also in Brown
County, Indiana; previously, chief executive officer of three other financial
institutions during the 1960s through the 1980s. Norman D. Stocktonis Superintendent of Schools for the Eminence Community
School Corporation since 1997. Previously, Director of Marketing for
Construction Control, Inc., a construction management firm (1994 - 1997). John B. Ditmarsis our Executive Vice President, a position he has held
since March 1999. Previously, he was the Senior Lending Officer and head of
the Commercial Lending Department at Citizens Bank of Central Indiana. Kimberly B. Klingis our Secretary, Treasurer and Chief Financial Officer,
duties she assumed in 1999. From 1994 to 1999, she was Controller, Secretary
and Treasurer for Kellie Plumbing, Inc. and Johnson County Distributors, Inc.,
and from 1991 to 1994 she was a staff accountant for Alemite Corporation,
Charlotte, North Carolina. Audit Committee The Audit Committee evaluates audit performance, handles relations with
our independent auditors and evaluates policies and procedures relating to
internal audit functions and controls. The Audit Committee may also examine
and consider other matters relating to our financial affairs as it deems
appropriate. The Audit Committee currently consists of Frank A. Rogers
(Chairman), Gary W. Lewis and R. J. McConnell. The Board of Directors has determined that Frank A. Rogers is an audit
committee financial expert as defined in rules adopted under the Securities
Exchange Act of 1934. The Board of Directors has also determined that Mr.
Rogers is independent under the Securities Exchange Act of 1934 and the listing
standards of The Nasdaq Stock Market, Inc. Director Nominations There have been no material changes to the procedures by which holders of
our common stock may recommend nominees to our Board of Directors. In the
event the proposed merger does not occur during 2004, the Board of Directors
will reexamine these procedures. Code of Ethics In view of the proposed merger, First Shares has not yet adopted a formal,
written code of ethics that applies to our principal executive officer,
principal financial officer, principal accounting officer or controller, or
persons performing similar functions. In the event the proposed merger does
not occur during 2004, the Board of Directors will consider the adoption of a
formal code of ethics. Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
our officers and directors, and persons who own more than 10% of our common
stock, to file reports of ownership and changes in ownership with the
Securities and Exchange Commission. Officers, directors and greater than 10%
shareholders (the Reporting Persons) are required by Securities and Exchange
Commission regulations to furnish us with copies of all Section 16(a) forms
they file. 16




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##### Table of Contents



Based solely on a review of the copies of such forms furnished to us, we
believe that during 2003 all Reporting Persons complied with the filing
requirements of Section 16(a). 
 ITEM 10. EXECUTIVE COMPENSATION. Summary Compensation Table Long-TermCompensationAnnual Compensation
    
    AwardsSecuritiesOther
    
    Underlying
    
    AllName and
    
    Year Ended
    
    
    
    
    
    
    
    
    
    Annual
    
    Options/
    
    OtherPrincipal Position
    
    December 31,
    
    Salary
    
    Bonus
    
    Compensation
    
    SARs(#)
    
    CompensationJerry R. Engle
    
    
    2003
    
    
    $
    170,000
    
    
    $
    
    
    
    $
    
    
    
    
    
    
    
    $
    5,091
    (1)President and
    
    
    2002
    
    
    
    162,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,846
    (1)Chief Executive Officer
    
    
    2001
    
    
    
    150,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,500
    (1)
   (1)
    
    Consists of matching contributions to retirement plan account. Aggregated Option/SAR Exercises in Last Fiscal Year
and Fiscal Year-End Option/SAR Values Number of SecuritiesUnderlying Unexercised
    
    Value of UnexercisedOptions/SARs
    
    In-the-Money Options/SARsShares
    
    
    
    
    
    At Fiscal Year End
    
    At Fiscal Year End (1)Acquired on
    
    ValueName
    
    Exercise
    
    Realized
    
    Exercisable
    
    Unexercisable
    
    Exercisable
    
    UnexercisableJerry R. Engle
    
    
    
    
    
    $
    
    
    
    
    58,500
    
    
    
    
    
    
    $
    274,950
    
    
    $
    
   (1)
    
    Calculated assuming a fair market value per share of $10.19 at December
31, 2003, which was the average of the bid and asked prices for the
previous ten trading days. Benefit Plans and Arrangements 1996 Stock Option Plan.Under our 1996 Stock Option Plan, our executive
officers and key employees are eligible to receive stock options which do not
qualify as incentive stock options under the Internal Revenue Code. Directors
who are not our employees are not entitled to participate. The grant of awards under the 1996 Stock Option Plan is made by the board
of directors, including the selection of appropriate grantees, the size and
exercise price of awards and other terms and conditions of awards. Options for
a total of 81,000 shares of common stock (as adjusted for the subsequent stock
split) were reserved for issuance under the 1996 Stock Option Plan until
December 31, 2001. Therefore, no further options may be granted under this
plan. Options for 31,500 shares are currently outstanding under the plan.
Options granted under the 1996 Stock Option Plan must be for a term of not more
than seven years and, unless otherwise provided in the particular option grant
agreement, will be 25% vested upon grant and become vested as to an additional
25% on each of the succeeding three anniversaries of the date of grant. Options
will become fully vested if the grantee dies or a change of control occurs at
any time during the first three years after a grant. 17




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##### Table of Contents



1999 Stock Option Plan.Under our 1999 Stock Option Plan, our directors,
executive officers and key employees are eligible to receive stock options
which either qualify as incentive stock options under the Internal Revenue Code
or do not so qualify. Options for a total of 139,500 shares of common stock may
be granted under the 1999 Stock Option Plan. Options for 124,750 shares are
currently outstanding under the plan. If an award under the plan expires or
terminates without being exercised in full or is forfeited, the shares of
common stock subject to the award generally become available for new awards. Options granted under the 1999 Stock Option Plan must be for a term of not
more than 10 years. Options granted under the 1999 Stock Option Plan allow
participants to purchase shares of our common stock at an exercise price
determined by the board of directors which, after December 31, 1999 cannot be
less than the fair market value of our common stock on the date of the grant.
As determined by the board of directors, options will generally become
exercisable in one or more installments beginning on the first anniversary of
the date of the grant. The board of directors may accelerate the
exercisability of any option. Payment of the option exercise price may be made
in cash or through the exchange of shares of our common stock owned by the
grantee. In the event of a Change in Control (as defined in the plan), options
become exercisable whether or not the vesting periods have expired and whether
or not the grantee has been employed for one year after the applicable grant
date. Director Compensation Directors are paid $600 for each regularly-scheduled meeting of the board
of directors attended and $250 for each special meeting of the board of
directors attended. Directors are entitled to be paid for one
regularly-scheduled board meeting missed each year. Directors who are not our
employees are paid $250 for each committee meeting attended or for which they
serve as an alternate (in the case of the loan committee). Four of the
directors (Messrs. Foley, Hawkins, Meredith and Stockton) have entered into a
deferred fee agreement with us pursuant to which payment of fees by us is
deferred until the earlier of the directors resignation as a director,
disability or death or a change in our control. In all cases except the death
of the director, the amount deferred bears interest at an interest rate
established by us from time to time. In the case of the death of the director,
we have agreed to pay an annual death benefit of $22,960 for 10 years. In
connection with our proposed merger with Lincoln Bancorp, the accrued balance
of these deferred fees will be paid in a lump sum within 60 days after the
merger closing. Employment Agreements In March 1999, we entered into a three-year employment agreement with
Jerry R. Engle pursuant to which we employ Mr. Engle as our Chief Executive
Officer. The initial term of the agreement ended in March 2002, but
automatically renewed successive one-year terms in March of 2002 and 2003. The
employment agreement provides that it will continue to automatically renew for
successive one-year terms unless we or Mr. Engle elect not to continue it by
giving 30 days advance notice prior to the first day of a renewal term. The
agreement provides for a base compensation plus annual bonuses to be set by the
board of directors. In 1999 pursuant to the Agreement, Mr. Engle also received
options to purchase 58,500 common shares (as adjusted for the subsequent stock
split) at a price equal to the book value per share of the outstanding common
shares on the last day of the fiscal quarter immediately preceding the date of
grant. Under the employment agreement, Mr. Engle retains the right to
participate in various other employee benefit plans we maintain for which he is
otherwise eligible. The agreement with Mr. Engle is subject to termination at any time by Mr.
Engle upon notice and by us for cause (as defined in the agreement) or upon Mr.
Engles death or disability (as defined in the agreement). In the event we
terminate Mr. Engles employment without cause and other than upon Mr. Engles
death or disability, or in the event Mr. Engle terminates his employment for
good reason (as defined in the agreement), Mr. Engle is entitled to receive his
annual base monthly salary (calculated at the highest rate during the year
preceding the termination of employment) through the end of the term of the
employment agreement. Following a termination of Mr. Engles employment other than a termination
by us without cause and other than upon Mr. Engles death or disability or a
termination by Mr. Engle for other than good reason, Mr. Engle will be
prohibited from competing with us or soliciting our customers for a period of
two years after the date of termination. 18




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##### Table of Contents



In March 1999, we also entered into a three-year employment agreement with
John B. Ditmars pursuant to which we employ Mr. Ditmars as our Executive Vice
President. The initial term of the agreement ended in March 2002, but
automatically renewed for successive one-year terms in March of 2002 and 2003.
The employment agreement provides that it will continue to automatically renew
for successive one-year terms unless we or Mr. Ditmars elect not to continue it
by giving 30 days advance notice prior to the first day of a renewal term. The
agreement provides for a base compensation plus annual bonuses to be set by the
board of directors. In 1999 pursuant to the Agreement, Mr. Ditmars also
received options to purchase 31,500 common shares (as adjusted for the
subsequent stock split) at a price equal to the book value per share of the
outstanding common shares on the last day of the fiscal quarter immediately
preceding the date of grant. Under the employment agreement, Mr. Ditmars
retains the right to participate in various other employee benefit plans we
maintain for which he is otherwise eligible. The agreement with Mr. Ditmars is subject to termination, and Mr. Ditmars
is eligible for severance benefits and subject to a noncompetition and
nonsolicitation covenant, upon the same terms and conditions as in our
employment agreement with Mr. Engle. 
 ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Stock Ownership by Directors, Officers and Certain Shareholders The following table shows, as of March 16, 2004, the number and percentage of
shares of common stock held by each person known to the Corporation who owned
beneficially more than five percent of the issued and outstanding common stock
of the Corporation and shares held by the Corporations directors and certain
executive officers. Unless otherwise indicated below, the persons and entities
named in the table have sole voting and sole investment power with respect to
all shares beneficially owned. Number of SharesName and Address
    
    Beneficially Owned
    
    PercentageJerry R. Engle
996 South State Road 135
Greenwood, Indiana 46143
    
    
    168,789
    (1)
    
    
    9.94
    %Ralph M. Foley
400 Byram Road
Martinsville, Indiana 46151
    
    
    68,277
    (2)
    
    
    4.18H. Dean Hawkins
2127 Foxcliff North
Martinsville, Indiana 46151
    
    
    64,845
    (3)
    
    
    3.99Gary W. Lewis
2302 Woodsway Drive
Greenwood, Indiana 46143
    
    
    42,000
    (4)
    
    
    2.58R. J. McConnell
2069 W. County Road 300S
Franklin, Indiana 46131
    
    
    32,280
    (5)
    
    
    1.97William J. Meredith
P.O. Box 308
Morgantown, Indiana 46160
    
    
    19,092
    (6)
    
    
    1.17Frank A. Rogers
P.O. Box 187
Nashville, Indiana
    
    
    158,760
    (7)
    
    
    9.71
 19




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##### Table of Contents



Number of SharesName and Address
    
    Beneficially Owned
    
    PercentageNorman D. Stockton
3168 S.E. County Line Road
Morgantown, Indiana 46160
    
    
    5,587
    (8)
    
    
    *John Ditmars
996 South State Road 135
Greenwood, Indiana 46143
    
    
    70,244
    (9)
    
    
    4.23Kimberly B. Kling
996 South State Road 135
Greenwood, Indiana 46143
    
    
    6,937
    (10)
    
    
    *Directors and executive officers as a group
(10 persons)
    
    
    636,791
    (11)
    
    
    35.23
   *
    
    Less than 1%.  (1)
    
    Consists of 66,609 shares owned individually, 15,000 shares owned jointly
with Mr. Engles spouse, 180 shares owned for the benefit of Mr. Engles
children, 10,500 shares held through a retirement plan trust, 1,500 shares
held as trustee for the benefit of members of Mr. Engles family, 58,500
shares represented by stock options exercisable currently or within 60
days of March 16, 2004, and 16,500 shares represented by mandatory stock
purchase contracts currently exercisable.(2)
    
    Consists of 2,160 shares owned individually, 39,210 shares owned jointly
by Mr. Foley and his spouse, 8,715 shares owned by Mr. Foleys spouse,
6,192 shares owned for the benefit of members of Mr. Foleys family, 4,500
shares represented by stock options exercisable currently or within 60
days of March 16, 2004, and 7,500 shares represented by mandatory stock
purchase contracts currently exercisable.(3)
    
    Consists of 2,304 shares owned individually, 58,041 shares owned jointly
by Mr. Hawkins and his spouse and 4,500 shares represented by stock
options exercisable currently or within 60 days of March 16, 2004.(4)
    
    Consists of 37,500 shares owned individually and 4,500 shares represented
by stock options exercisable currently or within 60 days of March 16,
2004.(5)
    
    Consists of 12,780 shares beneficially owned through a retirement plan
trust, 4,500 shares represented by stock options exercisable currently or
within 60 days of March 16, 2004, and 15,000 shares represented by
mandatory stock purchase contracts currently exercisable.(6)
    
    Consists of 8,397 shares owned individually, 1,665 shares owned by Mr.
Merediths spouse, 450 shares owned jointly with Mr. Merediths spouse,
900 shares owned through a custodian, 180 shares owned as custodian for
Mr. Merediths grandchildren, 4,500 shares represented by stock options
exercisable currently or within 60 days of March 16, 2004, and 3,000
shares represented by mandatory stock purchase contracts currently
exercisable.(7)
    
    Consists of 146,010 shares owned individually, 4,500 shares represented
by stock options exercisable currently or within 60 days of March 16,
2004, and 8,250 shares represented by mandatory stock purchase contracts
currently exercisable.(8)
    
    Consists of 1,087 shares owned individually and 4,500 shares represented
by stock options exercisable currently or within 60 days of March 16,
2004.(9)
    
    Consists of 22,074 shares owned individually, 900 shares owned jointly by
Mr. Ditmars and his spouse as custodian for the benefit of their minor
children, 8,250 shares held through a retirement plan trust, 31,500 shares
represented by stock options exercisable currently or within 60 days of
March 16, 2004, and 7,500 shares represented by mandatory stock purchase
contracts currently exercisable.(10)
    
    Consists of 1,500 shares owned jointly with Ms. Klings spouse and 5,437
shares represented by stock options exercisable currently or within 60
days of March 16, 2004.(11)
    
    Includes 126,937 shares represented by stock options exercisable
currently or within 60 days of March 16, 2004. 20




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##### Table of Contents



Equity Compensation Plan Information The following table gives information about our common stock that may be
issued upon the exercise of options, warrants and rights under all of our
existing equity compensation plans as of December 31, 2003. These plans
include the 1996 Stock Option Plan and the 1999 Amended
and Restated Stock Option Plan. Our shareholders have approved all of these
plans. Number of SecuritiesWeighted-Average
    
    RemainingNumber of Securities to
    
    Exercise Price of
    
    Available for Future Issuancebe Issued Upon Exercise
    
    Outstanding Options,
    
    under Equity Compensationof Outstanding Options,
    
    Warrants and
    
    Plans (Excluding SecuritiesWarrants and Rights
    
    Rights
    
    Reflected in Column (a))Plan Category
    
    (a)
    
    (b)
    
    (c)Equity Compensation
Plans Approved by
Security Holders
    
    
    156,250
    
    
    $
    5.31
    
    
    
    14,750Equity Compensation
Plans Not Approved
by Security Holders
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    156,250
    
    
    $
    5.31
    
    
    
    14,750
 
 ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. During the past two years, First Bank had banking transactions in the
ordinary course of business with our directors, officers and principal
shareholders and their affiliates. These transactions have been made on
substantially the same terms, including interest rates, collateral and
repayment terms on extensions of credit, as those prevailing at the same time
for comparable transactions with others and did not involve more than the
normal risk of collectibility or present other unfavorable features. All future material affiliated transactions and loans, if any, will be
made or entered into on terms that are no less favorable to us than those that
can be obtained from unaffiliated third parties. In addition, as a matter of
policy, all future material affiliated transactions and loans, if any, and any
forgiveness of loans, must be approved by a majority of our independent
directors who do not have an interest in the transactions and who have access,
at our expense, to our legal counsel or independent legal counsel. Effective on December 1, 2001, we entered into a lease agreement for our
Nashville, Indiana branch office. Prior to that time, we operated the branch
from a temporary structure. The new building consists of approximately 3,000
square feet and is located at 180 Commercial Street, Nashville, Indiana. Under
the lease, we agreed to pay $4,250 per month in rent and $450 per month in
common area maintenance fees. Under the lease, we are responsible for interior
maintenance expenses, real estate taxes and insurance premiums for hazard and
liability insurance. The original lease term expires on November 30, 2006, but
is renewable at our option for an additional five-year period. The building and
real estate on which the building is located are owned by an entity that is
owned and controlled by Frank A. Rogers, one of our directors. However, we
believe the lease terms are substantially the same as we could have received
from an independent third party for similar office space in the area. 
 ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K. Exhibits The following exhibits are filed with this Report.  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 on March 15, 2004. 21




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##### Table of Contents



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.4.1
    
    Specimen Common Stock Certificate, incorporated by reference from
Exhibit 4 to the 2000 Registration Statement4.2
    
    Trust Indenture dated April 5, 2002 between First Shares Bancorp,
Inc. and The Huntington National Bank, as Trustee, incorporated by
reference from Exhibit 4.1 to the Registration Statement on Form SB-2
of First Shares Bancorp, Inc., file no. 333-83640 (the 2002
Registration Statement).4.3
    
    Equity Contract Agency Agreement dated April 5, 2002 between First
Shares Bancorp, Inc. and First Bank, incorporated by reference from
Exhibit 4.3 to the 2002 Registration Statement.10.1
    
    1996 Amended and Restated Stock Option Plan, incorporated by
reference from Exhibit 10.1 to the 2002 Registration Statement.*10.2
    
    1999 Amended and Restated Stock Option Plan, incorporated by
reference from Exhibit 10.2 to the 2000 Registration Statement.*10.3
    
    Employment Agreement of Jerry R. Engle and amendment thereof,
incorporated by reference from Exhibit 10.3 to the 2000 Registration
Statement.*10.4
    
    Form of Director Deferred Compensation Agreements, incorporated by
reference from Exhibit 10.4 to the 2000 Registration Statement.*10.5
    
    Lease Agreement dated March 29, 1999 between Greenwood ICC Realty,
LLC and First State Bank, incorporated by reference from Exhibit 10.7
to the 2000 Registration Statement.10.6
    
    Lease dated April 12, 1999 between M. Kenton and Linda S. Franklin
and First State Bank, incorporated by reference from Exhibit 10.8 to
the 2000 Registration Statement.10.7
    
    Lease dated December 8, 1999 between G & P Real Estate, LLC and
First Bank, incorporated by reference from Exhibit 10.9 to the 2000
Registration Statement.10.8
    
    Lease Agreement dated January 23, 2002 between R & A Enterprises,
Inc. and First Bank, incorporated by reference from Exhibit 10.10 to
the 2002 Registration Statement.10.9
    
    Commercial Lease Agreement dated February 20, 2002 between
Commercial 100, L.L.C. and First Bank, incorporated by reference from
Exhibit 10.11 to the 2002 Registration Statement.10.10
    
    Lease dated June 3, 2002, between Jim D. McMillion and Sandra T.
McMillion and First Bank, incorporated by reference from Exhibit 10.11
to the Registration Statement on Form SB-2 of First Shares Bancorp,
Inc., file no. 333-100237.13.1
    
    Managements Discussion and Analysis incorporated by reference from
Annual Report to Shareholders. (1)13.2
    
    Financial Statements incorporated by reference from Annual Report
to Shareholders. (1) 22




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##### Table of Contents



21
    
    Subsidiaries of First Shares Bancorp, Inc., incorporated by
reference from Exhibit 21 to the Annual Report on Form 10-KSB of First
Shares Bancorp, Inc. for the year ended December 31, 2000.23
    
    Consent of Crowe Chizek and Company LLC. (1)31.1
    
    Rule 13a-14(a) Certification of Chief Executive Officer. (1)31.2
    
    Rule 13a-14(a) Certification of Chief Financial Officer. (1)32.1
    
    Section 1350 Certification of Chief Executive Officer. (1)32.2
    
    Section 1350 Certification of Chief Financial Officer. (1)   *
    
    Employee benefit plan(1)
    
    Filed with this report. Reports on Form 8-K November 12,
2003 Report of 3rd Quarter Earnings. 
 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES. Fees to Independent Auditors for 2003 and 2002 The following table sets forth the amount of fees (including cost
reimbursements) paid to Crowe Chizek and Company LLC, the Corporations
independent accountant, for various categories of professional services during
the years ended December 31, 2003 and 2002. 2003
    
    2002Audit Fees (1)
    
    $
    45,000
    
    
    $
    38,150Audit Related Fees (2)
    
    
    1,610
    
    
    
    40,825Tax Fees (3)
    
    
    7,910
    
    
    
    8,950All Other Fees (4)
    
    
    3,600
    
    
    
    18,575Total Fees
    
    $
    58,120
    
    
    $
    106,500
   (1)
    
    Includes annual financial statement audit and quarterly review
services, consents for SEC filings and other services that are
normally provided by the independent accountants in connection with
statutory and regulatory filings or engagements.(2)
    
    In 2003, includes collateral verification procedures for
Federal Home Loan Bank advances and advice on various accounting
matters. In 2002, includes assistance with preparation of securities
registration statements and collateral verification procedures for
Federal Home Loan Bank advances.(3)
    
    Includes preparation of federal and state income tax returns,
assistance with quarterly tax estimates and advice on various tax
matters.(4)
    
    In 2003, includes providing internal audit software. In 2002,
includes permitted internal audit services, consultation regarding
evaluation of a proposed merger and consultation regarding processes
for quarterly certification of financial statements in periodic
reports. 23




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##### Table of Contents



Engagement of the Independent Auditors and Approval of Services In 2003, prior to engaging the independent auditors to render the above
services and pursuant to its charter, the Audit Committee approved the
engagement for each of the services, and determined that the provision of such
services by the independent auditors was compatible with the maintenance of
Crowe Chizek and Company LLCs independence in the conduct of its auditing
services. In 2002, prior to certain changes in the law regarding pre-approval
requirements, the Audit Committee did not pre-approve the audit-related or tax
services prior to the engagement of the services, but did pre-approve the audit
services prior to the engagement of the services. Under its current charter,
it is the policy of the Audit Committee to pre-approve the retention of the
independent auditors for any audit services and for any non-audit services,
including tax services. No services were performed during 2003 under the de
minimis exception in Rule 2-01(c) (7)(i)(C) of Regulation S-X. 24




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##### Table of Contents



SIGNATURES In accordance with Section 13 or 15(d) 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.By:
    
    /s/ Jerry R. EngleJerry R. EnglePresidentBy:
    
    /s/ Kimberly B. KlingKimberly B. KlingSecretary, Treasurer and ChiefFinancial Officer(Principal Accounting Officer)Date: March 30, 2004
 In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated. Signature
    
    Title
    
    Date/s/ Frank A. Rogers

Frank A. Rogers
    
    Chairman of the Board and Director
    
    March 30, 2004/s/ Jerry R. Engle

Jerry R. Engle
    
    Director and President and
Chief Executive Officer
(Principal Executive Officer)
    
    March 30, 2004/s/ Ralph M. Foley

Ralph M. Foley
    
    Director
    
    March 30, 2004/s/ H. Dean Hawkins

H. Dean Hawkins
    
    Director
    
    March 30, 2004Gary W. Lewis
    
    Director
    
    March , 2004/s/
R. J. McConnell
R. J. McConnell
    
    Director
    
    March 30, 2004
 25




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##### Table of Contents



Signature
    
    Title
    
    Date/s/ William J. Meredith

William J. Meredith
    
    Director
    
    March 30, 2004Norman D. Stockton
    
    Director
    
    March , 2004
 26