<PAGE> 1
REGISTRATION NO. 333-31520
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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 1
to
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
FIRST SHARES BANCORP, INC.
(Name of small business issuer in its charter)
<TABLE>
<S> <C> <C>
INDIANA 6022 35-1948962
(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation Classification Code Number) Identification No.)
or organization)
</TABLE>
996 SOUTH STATE ROAD 135
GREENWOOD, INDIANA 46143
(317) 882-4790
(Address and telephone number of principal executive offices)
996 SOUTH STATE ROAD 135
GREENWOOD, INDIANA 46143
(Address of principal place of business or intended principal place of business)
JERRY ENGLE
996 SOUTH STATE ROAD 135
GREENWOOD, INDIANA 46143
(317) 882-4790
(Name, address and telephone number of agent for service)
Copies to:
<TABLE>
<S> <C>
DAVID A. BUTCHER, ESQ. JOHN ZERKLE, ESQ.
BOSE MCKINNEY & EVANS LLP LEAGRE CHANDLER & MILLARD LLP
135 NORTH PENNSYLVANIA STREET, SUITE 2700 135 NORTH PENNSYLVANIA STREET, SUITE 1400
INDIANAPOLIS, INDIANA 46204 INDIANAPOLIS, INDIANA 46204
(317) 684-5000 (317) 808-3000
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
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<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE
MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS
NOT AN OFFER TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO
BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.
SUBJECT TO COMPLETION, DATED APRIL 7, 2000
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Prospectus
, 2000
[First Shares Bancorp, Inc.]
First Shares Bancorp, Inc.
750,000 shares of Common Stock
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FIRST SHARES:
- - We are the holding company for a bank serving Central Indiana, south of
Indianapolis
- - First Shares Bancorp, Inc.
996 South State Road 135
Greenwood, Indiana 46143
(317) 882-4790
- - Proposed Market: Nasdaq SmallCap Market
THE OFFERING:
- - First Shares is offering all 750,000 of the shares.
- - This is a firm commitment underwriting. The underwriters have an option to
purchase an additional 112,500 shares from First Shares to cover
over-allotments.
- - This is our initial public offering, and there is no existing active trading
market for these shares.
- - We expect the maximum offering price to be between $9 and $11 per share.
- - We plan to use the proceeds from the offering to make loans to customers and
provide capital to implement our expansion plans, including the purchase of an
additional branch bank in Nashville, Indiana, and for general corporate
purposes.
- - Closing: , 2000.
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<TABLE>
<CAPTION>
Per Share Total
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<S> <C> <C>
Public offering price: $ $
Underwriting discounts and commissions: $ $
Proceeds to First Shares: $ $
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</TABLE>
SOME OF THE RISKS OF THIS INVESTMENT ARE DESCRIBED UNDER THE CAPTION "RISK
FACTORS" BEGINNING ON PAGE 6.
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Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
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DAVID A. NOYES & COMPANY
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[LOGO]
[Graphic consisting of a map of the State of Indiana showing Marion, Johnson,
Morgan and Brown Counties, and an enlarged view of those counties showing the
approximate locations of Indianapolis and First Bank's Morgantown Office,
Greenwood Offices, Bargersville Office, Trafalgar Office and Nashville Office.]
GREENWOOD OFFICES:
996 South State Road 135
Greenwood, Indiana
1266 North Madison Avenue
Greenwood, Indiana
TRAFALGAR OFFICE:
110 North State Road 135
Trafalgar, Indiana
MORGANTOWN OFFICE:
180 West Washington Street
Morgantown, Indiana
BARGERSVILLE OFFICE:
250 North State Road 135
Bargersville, Indiana
NASHVILLE OFFICE (CURRENTLY):
160 East Main Street
Nashville, Indiana
NASHVILLE OFFICE (PENDING):
41 South Hawthorne Street
Nashville, Indiana
---------------------
INVESTOR RELATIONS:
Jerry R. Engle
(317) 882-4790
[email protected]
2
<PAGE> 4
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
business information and the financial statements and related notes that appear
elsewhere in this prospectus.
FIRST SHARES BANCORP, INC. AND FIRST BANK
BUSINESS
First Shares is a bank holding company that owns all of the common stock of
First Bank, an Indiana-chartered bank with deposit accounts insured by the
Federal Deposit Insurance Corporation. After 100 years of modest growth, we
implemented a new growth strategy in March 1999 with the goal of capturing a
significant portion of the market for banking services in Central Indiana, south
of Indianapolis. Based on data compiled by SNL Securities, as of June 30, 1999,
the total deposits at all banks in our primary market area of Johnson, Morgan
and Brown counties were approximately $1.7 billion. As of that date we had
approximately 2.5% of these deposits. During 1999 our loan portfolio and
deposits increased by 73.2% and 65.3%, respectively. We achieved this growth, in
part, by paying interest rates on our deposits competitive with the highest
offered in our market, by increasing our loan origination efforts and by
expanding our indirect consumer lending.
FIRST BANK'S MARKET AREA
We operate in Central Indiana, principally in Johnson, Morgan and Brown
counties, south of Indianapolis. As of July 1998, the most recent date for which
figures were available, these three counties had a combined population of
approximately 191,000. Johnson County was the third fastest growing county in
Indiana based on population increase from 1997 to 1998. As of December 31, 1999,
the three-county area had an unemployment rate of less than 3%.
MANAGEMENT
Anticipating the retirement of our chief executive officer, in March 1999,
Jerry R. Engle joined us as a director and our new chief executive officer
elect. John Ditmars also joined us as a new executive vice president. Shortly
thereafter, Frank A. "Andy" Rogers was elected as an additional director, and
later as the chairman of the board of directors, Gary W. Lewis was elected as an
additional director, and Mr. Rogers, Mr. Engle, Mr. Lewis and Mr. Ditmars
purchased approximately 18.5% of our outstanding common stock. Mr. Engle and Mr.
Ditmars also received options to purchase additional shares of our common stock.
As of December 31, 1999, Mr. Rogers, Mr. Engle, Mr. Lewis, Mr. Ditmars and the
other members of our board of directors beneficially owned approximately 36.7%
of our common stock. Following these changes in management, and at the direction
of our board of directors, we began to implement our new growth strategy and to
open additional branch bank locations.
Jerry R. Engle, our President and Chief Executive Officer, has
approximately 30 years of banking experience. Until March 1999, when he joined
First Bank, Mr. Engle was the 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. During his tenure at Citizens, Mr. Engle managed
the CNB affiliate bank based in Greenwood, Indiana. In 1998, this affiliate bank
had average assets of approximately $652.1 million.
John Ditmars, our Executive Vice President, has approximately 20 years of
banking experience. Until March 1999, Mr. Ditmars was the Senior Lending Officer
and head of the Commercial Lending Department at Citizens Bank of Central
Indiana, where he worked with Mr. Engle.
Frank A. "Andy" Rogers, our Chairman of the Board of Directors, has
approximately 37 years of banking experience and had served as the chief
executive officer of three separate financial institutions prior to his
affiliation with us.
3
<PAGE> 5
RECENT DEVELOPMENTS
First Bank has entered into an agreement with Huntington National Bank and
its holding company to purchase a branch bank in Nashville, Indiana. In addition
to a permanent banking facility, the branch being purchased by First Bank had
deposits of approximately $14 million and loans of approximately $5.5 million as
of December 31, 1999.
All share and per share amounts in this prospectus have been adjusted to
account for a six-for-one stock split completed by First Shares in January 2000.
THE OFFERING
Securities Offered for
Sale....................... Shares of common stock of First Shares Bancorp,
Inc.
Number of Shares being
Offered.................... 750,000. In addition, the underwriters have a
30-day option to purchase up to 112,500 additional
shares to cover over-allotments.
Price to the Public........ Estimated to be between $9.00 and $11.00 per share.
Number of Shares to be
Outstanding after the
Offering................. 1,414,512 shares, not including an additional
141,000 shares that are reserved for issuance under
First Shares' stock option plans.
Dividend Policy............ We do not intend to pay any cash dividends in the
foreseeable future.
Use of proceeds............ We intend to use the net proceeds from the offering
to make loans to customers and provide regulatory
capital to implement our expansion plans, and for
general corporate purposes. We have no acquisitions
other than the Nashville branch planned at this
time.
Risk Factors............... You should read the "Risk Factors" section
beginning on page 6 before deciding to invest in
the offering.
Proposed Trading Market.... Nasdaq SmallCap Market.
4
<PAGE> 6
SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA
The summary consolidated financial and other data presented below should be
read in conjunction with, and is qualified in its entirety by reference to, our
consolidated financial statements for the years ended December 31, 1999, 1998,
and 1997 and related notes, which can be found at the end of this prospectus,
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" contained elsewhere in this prospectus.
<TABLE>
<CAPTION>
YEAR ENDED
-----------------------------------------------
1999 1998 1997 1996 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED OPERATING DATA:
Interest income............................. $ 3,911 $ 3,321 $ 3,311 $ 3,031 $ 2,366
Interest expense............................ 1,817 1,470 1,505 1,474 1,083
------- ------- ------- ------- -------
Net interest income......................... 2,094 1,851 1,806 1,557 1,283
Provision for loan losses................... (280) (526) (15) -- --
Noninterest income.......................... 198 183 216 329 164
Noninterest expense......................... 2,694 1,599 1,537 1,406 995
------- ------- ------- ------- -------
Income (loss) before income taxes........... (682) (91) 470 480 452
Income tax expense (benefit)................ (73) (85) 182 188 179
------- ------- ------- ------- -------
Net income (loss)........................... $ (609) $ (6) $ 288 $ 292 $ 273
======= ======= ======= ======= =======
PER SHARE DATA:
Basic earnings (loss) per share............. $ (0.97) $ (0.01) $ 0.53 $ 0.53 $ 0.49
Diluted earnings (loss) per share........... (0.97) (0.01) 0.52 0.52 0.49
Cash dividends per share.................... 0.13 0.17 0.16 0.16 0.15
Book value per share........................ 6.92 8.22 8.37 7.93 7.56
CONSOLIDATED BALANCE SHEET DATA:
Total assets................................ $68,670 $42,865 $41,938 $41,369 $41,007
Earning assets.............................. 63,956 39,646 38,831 38,570 35,932
Securities available for sale............... 16,875 8,535 4,907 4,158 7,091
Securities held to maturity................. 617 1,334 2,874 6,043 8,571
Loans....................................... 46,146 26,651 28,921 25,695 18,970
Allowance for loan losses................... (549) (346) (396) (555) (564)
Total deposits.............................. 62,987 38,107 36,997 36,793 36,653
Noninterest-bearing deposits................ 6,990 5,946 5,793 4,815 5,003
Interest-bearing deposits................... 55,997 32,161 31,204 31,978 31,650
Shareholders' equity........................ 4,597 4,485 4,566 4,323 4,156
FINANCIAL RATIOS:
Loans to deposits........................... 73.26% 69.94% 78.17% 69.84% 51.76%
Return on average assets.................... (1.19) (0.01) 0.70 0.67 0.87
Return on average equity.................... (12.33) (0.13) 6.59 7.20 6.84
Dividend payout ratio....................... -- -- 30.90 29.79 30.77
Net interest margin......................... 4.56 4.87 4.74 3.86 4.36
Nonperforming loans to total loans.......... 0.31 0.97 1.50 0.70 0.49
Leverage capital ratio...................... 7.13 9.92 10.03 9.30 10.50
</TABLE>
5
<PAGE> 7
RISK FACTORS
In connection with this offer, you should consider carefully all of the
information in this prospectus and, in particular, the following factors:
WE HAVE ONLY BEEN OPERATING UNDER OUR NEW STRATEGY FOR A SHORT PERIOD OF TIME.
We changed our senior management and first began to implement our new rapid
growth strategy in March 1999. Thus, we have operated under the new strategy for
only a short period of time, and in that respect we are similar to a new
business. As a result, our historical financial information for years prior to
1999 is not a good reflection of the level of risk inherent in our new strategy.
IF WE CONTINUE TO EXPERIENCE NET LOSSES, THE VALUE OF YOUR SHARES COULD
DECREASE.
We have had net losses during our last two fiscal years. During 1998 we
experienced a net loss of $0.01 per share due principally to the charge-off of a
loan. During 1999 we experienced a net loss of $0.97 per share, resulting in a
return on average assets of (1.19) and a return on average equity of (12.33).
This loss was due principally to the expenses of implementing our growth
strategy. If we were to continue to experience net losses, the value of your
interest could decrease and we might be forced to curtail our growth strategy to
remain within regulatory capital requirements.
WE WILL BE UNABLE TO CONTINUE OUR GROWTH STRATEGY UNLESS WE INCREASE OUR
CAPITAL, SUCH AS THROUGH THE PROCEEDS OF THIS OFFERING.
At December 31, 1998, our risk-based capital ratio was 15.7%, which was
well in excess of the 10% requirement established for "well capitalized"
institutions. Following the implementation of our growth strategy in 1999 and
the resulting increase in our risk-weighted assets, our risk-based capital ratio
decreased to 9.1% at December 31, 1999, causing us to be classified as
"adequately capitalized." Unless we can increase our capital relative to our
risk-weighted assets, such as through the proceeds of this offering or increased
earnings, we will be unable to satisfy regulatory requirements to continue our
planned growth.
IF OUR GROWTH STRATEGY IS LIMITED BY FACTORS BEYOND OUR CONTROL, IT COULD LIMIT
FUTURE EARNINGS INCREASES.
Our strategy is to grow internally and by branch acquisitions. This
strategy will be successful only if we can increase our level of loans and
deposits at acceptable risk levels and terms without increasing non-interest
expenses proportionately. If we are unable to compete effectively for loans and
deposits or must assume too much risk in order to grow, then we may be forced to
limit our growth or even decrease our level of loans and deposits in order to
remain in compliance with regulatory requirements. This would likely decrease
our net income from expected levels and could result in a decrease in the value
of your shares.
UNTIL NOW THERE HAS BEEN NO ACTIVE MARKET FOR OUR COMMON STOCK, AND WE CANNOT
ASSURE YOU THAT A MARKET WILL EXIST WHEN YOU WANT TO SELL YOUR SHARES.
Prior to this offering, there has been no public market for our common
stock. Although we will apply to list our common stock on the Nasdaq SmallCap
Market, we cannot assure you that the application will be approved, that a
market for our common stock will develop or, if it develops, that it will be
sustained. We and David A. Noyes & Company have had discussions with other
investment banking firms regarding market making activity and such firms, as
well as David A. Noyes & Company, have indicated a willingness to act as market
makers with respect to our common stock. Even with such market makers, however,
we believe it is likely that the trading volume on any given day will be low
compared to other, larger companies. Thus, you may have some difficulty in
buying or selling our shares.
6
<PAGE> 8
IF FIRST BANK EXPERIENCES GREATER LOAN LOSSES THAN ANTICIPATED, IT WILL HAVE AN
ADVERSE EFFECT ON OUR NET INCOME AND OUR ABILITY TO FUND OUR GROWTH STRATEGY.
The risk of nonpayment of loans is inherent in banking. If we experience
greater nonpayment than anticipated, our earnings and overall financial
condition, as well as the value of our common stock, could be adversely
affected. During 1999 we increased our loan portfolio in part by selling
residential real estate into the secondary market and using the proceeds
together with increased deposits to increase our consumer lending, including
indirect lending through automobile and recreational vehicle dealers. In order
to continue our growth, we may be required to increase further our consumer loan
portfolio as well as our commercial loan portfolio. As a result, we may assume
greater risks than we have experienced in the past. Consumer loans generally
have shorter terms and higher interest rates than residential mortgage loans and
usually involve more credit risk than mortgage loans because of the type and
nature of the collateral and the potential adverse effects from job loss,
illness or personal bankruptcy of the borrower. Commercial loans involve more
credit risk than residential real estate loans because they rely primarily on
the operations of the borrower for repayment and secondarily on the underlying
collateral.
OUR GROWTH STRATEGY COULD RESULT IN GREATER LOAN LOSSES THAN WE HAVE EXPERIENCED
IN THE PAST.
As a result of our recent growth, our loan portfolio includes many new
loans and a greater proportion of consumer loans than in the past. Losses on
these loans may be greater than we have experienced in the past. In addition,
management's estimates of the appropriate level for the allowance for loan
losses may be in error. Loan losses can cause insolvency and failure of a
financial institution and, in such an event, our shareholders could lose their
entire investment. In addition, future provisions for loan losses could
materially and adversely affect our results of operations.
IN ORDER TO BE PROFITABLE, WE MUST COMPETE SUCCESSFULLY WITH OTHER FINANCIAL
INSTITUTIONS WHICH HAVE GREATER RESOURCES AND CAPABILITIES THAN WE DO.
The banking business is extremely competitive. Most of our competitors are
larger and have greater resources than we do. We will have to overcome
historical relationships to attract customers away from our competition. Some of
our competitors are not regulated as extensively as we are and, therefore, may
have greater flexibility in competing for business. Some of these competitors
are subject to similar regulation but have the advantages of larger established
customer bases, higher lending limits, extensive branch networks, numerous
automated teller machines or other factors.
YOU WILL SUFFER IMMEDIATE DILUTION OF YOUR INVESTMENT.
If you purchase our common stock in this offering, you will realize an
immediate dilution of approximately $2.00, or 20%, in net tangible book value
per share of common stock, based on our December 31, 1999 shareholders' equity
and assuming an offering price of $10 per share and the maximum underwriters'
commission.
THE LOSS OF ONE OR MORE KEY EXECUTIVES COULD SERIOUSLY IMPAIR OUR ABILITY TO
IMPLEMENT OUR STRATEGY.
For the foreseeable future, we will depend upon the services of Jerry R.
Engle, our President and Chief Executive Officer, as well as other senior
management we employ. The loss of services of Mr. Engle may have a material
adverse effect on our operations. To protect against such a loss, we have
applied for a key-man life insurance policy covering Mr. Engle in the amount of
$2 million. We cannot assure you that the policy will be issued or that we will
be able to maintain it on satisfactory terms. In an effort to maintain Mr.
Engle's employment, we entered into a three-year employment agreement with Mr.
Engle in March 1999. We also entered into a three-year employment agreement with
Mr. Ditmars at that time. If Mr. Engle, Mr. Ditmars or any other key employee
were no longer employed by us, it could impair our ability to implement our
growth strategy. In addition, if we are unable to hire qualified and experienced
personnel to adequately staff our anticipated growth, our operating results
would be adversely affected.
7
<PAGE> 9
OUR MANAGEMENT OWNS A SUBSTANTIAL PORTION OF OUR COMMON STOCK, AND THEIR
INTERESTS MAY CONFLICT WITH YOURS.
As of December 31, 1999, our directors and executive officers beneficially
owned approximately 36.7% of our common stock. Upon completion of this offering,
we expect that our directors and executive officers will beneficially own
approximately 19.3% of our common stock. Accordingly, such persons will be in a
position to exercise substantial influence over our affairs and may impede the
acquisition of control by a third party. We cannot assure you that the interests
of our directors, executive officers and key employees will always align
precisely with your interest as a holder of our common stock.
CHANGES IN INTEREST RATES COULD HAVE AN ADVERSE EFFECT ON OUR NET INCOME.
At any given time, our assets and liabilities are affected differently by a
given change in interest rates, principally because we do not match the
maturities of our loans and investments precisely with our deposits and other
funding sources. As of December 31, 1999, we had a negative interest rate gap of
25.7% of earning assets in the one-year time frame. This means our earnings
would be adversely affected by periods of rising interest rates because during
such periods the interest expense paid on deposits and borrowings will generally
increase more rapidly than the interest income earned on loans and investments.
For information regarding our interest rate risk sensitivity and our negative
interest rate gap at December 31, 1999 as computed on various future time
horizons, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Financial Condition -- Liquidity and Rate Sensitivity."
While management intends to take measures to mitigate interest rate risk, we
cannot assure you that such measures will be effective in minimizing our
exposure to interest rate risk.
THE MARKET PRICE OF YOUR COMMON STOCK COULD BE ADVERSELY AFFECTED BY SALES OF
ADDITIONAL SHARES INTO THE MARKET.
Following completion of this offering, we will have 1,414,512 shares of our
common stock outstanding, assuming no exercise of the underwriters'
overallotment option or any outstanding options to purchase shares of common
stock. The shares offered by this prospectus will be freely tradeable without
restriction under the Securities Act of 1933, except for any shares which are
purchased by our affiliates. Our directors and executive officers, whom we
expect to hold an aggregate of 231,752 shares upon completion of this offering
(excluding shares that they have the right to acquire pursuant to options
granted to them under our stock option plans), have agreed not to offer, sell,
or contract to sell any common stock for a period of one year after the date of
this prospectus without the prior written consent of David A. Noyes & Company
and on only a limited basis for the following three years. They have also
entered into similar lock-in agreements with various states in which this
offering is being made restricting disposition of their shares. However, sales
of a significant number of shares of common stock in the public market following
this offering, or the perception that such sales could occur, could adversely
affect the market price of our common stock. See "Shares Eligible for Future
Sale."
RECENT DEVELOPMENTS
We have entered into an agreement with Huntington National Bank and its
holding company to purchase a branch bank in Nashville, Indiana. Since November
1999, we have operated a branch in Nashville in temporary quarters. In addition
to a permanent banking facility, the branch we are purchasing had deposits of
approximately $14 million and loans of approximately $5.5 million as of December
31, 1999. The purchase is subject to state and federal regulatory approval. We
anticipate that the purchase will be closed in the second quarter. The address
for Huntington National Bank and Huntington Bancshares Incorporated, its holding
company, is 41 South High Street, Columbus, Ohio 43287. As a part of the branch
acquisition, we will receive funds from the seller equal to the amount of
deposits we assume and also pay the seller a lesser amount for loans, fixed
assets and a deposit premium. In addition, David A. Noyes & Company will receive
a commission in the approximate amount of $40,000 upon closing of the branch
acquisition.
8
<PAGE> 10
In January 2000 we effected a six-for-one split of our common stock. All
share and per share amounts in this prospectus have been adjusted to account for
this stock split.
USE OF PROCEEDS
We estimate the net proceeds from the sale of the 750,000 shares of common
stock we are offering will be about $6.7 million, assuming an offering price of
$10 per share and after deducting estimated underwriting discounts and
commissions and offering expenses (about $7.8 million if the underwriters'
over-allotment option is exercised in full).
First Shares expects to contribute $5.7 million ($6.8 million if the
underwriters' over-allotment option is exercised in full) of the net proceeds of
the offering to First Bank. We intend to use these net proceeds to make loans to
customers and provide the regulatory capital we need to implement our expansion
strategy. We have no acquisitions other than the Nashville branch planned at
this time. See "Recent Developments."
The estimated $1 million of net proceeds to be retained by First Shares
(plus any net proceeds received as a result of the exercise of the underwriters'
over-allotment option) will initially be invested in investment grade securities
and held by First Shares as working capital for general corporate purposes and
to pay operating expenses, as well as for possible future capital contributions
to First Bank. These funds will also be available to finance possible
acquisitions of other branches or expansion into other lines of business closely
related to banking, although we presently have no plans to do so.
The following table summarizes the estimated sources and uses of funds from
this offering in order of priority.
<TABLE>
<CAPTION>
AMOUNT PERCENTAGE
-------------- ----------
(IN THOUSANDS)
<S> <C> <C>
Sources:
Net proceeds from this offering........................... $6,725 100.0%
====== =====
Uses:
Funds contributed to First Bank to increase capital and
fund additional loans to customers..................... 5,725 85.1%
Funds retained by First Shares for working capital........ $1,000 14.9
------ -----
Total uses............................................. $6,725 100.0%
====== =====
</TABLE>
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<PAGE> 11
DIVIDEND POLICY
We initially expect that our earnings, if any, will be retained to finance
our growth and that we will pay no cash dividends for the foreseeable future. We
may consider payment of dividends at some point in the future. However, the
declaration of dividends is at the discretion of the board of directors, and we
cannot assure you that dividends will be declared at any time. If and when
dividends are declared, they will be largely dependent upon the earnings of
First Bank.
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 Department of Financial Institutions of
the State of Indiana (the "DFI") is required for the payment of any dividend if
the aggregate amount of all dividends paid by First Bank during such 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 DFI and
the Federal Deposit Insurance Corporation (the "FDIC") are also authorized to
prohibit the payment of dividends by First Bank under certain circumstances. See
"Supervision and Regulation -- First Bank -- Dividends." Such requirements and
policies may limit First Shares' ability to obtain dividends from First Bank for
its cash needs, including payment of dividends to our shareholders and the
payment of operating expenses.
First Shares is organized under the Indiana Business Corporation Law, which
prohibits the payment of a dividend if, after giving it effect, the corporation
would not be able to pay its debts as they become due in the usual course of
business or the corporation's total assets would be less than the sum of its
total liabilities plus (unless the articles of incorporation of the corporation
permit otherwise) the amount that would be needed, if the corporation were to be
dissolved, to satisfy the preferential rights upon dissolution of any preferred
shareholders. In addition, the Board of Governors of the Federal Reserve System
(the "Federal Reserve Board") may impose restrictions on dividends paid by First
Shares. See "Supervision and Regulation -- First Shares -- Dividends."
10
<PAGE> 12
CAPITALIZATION
The following table sets forth our capitalization as of December 31, 1999
on an actual basis and on a pro forma basis as adjusted to give effect to this
offering, assuming an offering price of $10 per share and that the underwriters'
overallotment option is not exercised. You should read this information together
with our consolidated financial statements and related notes, which are included
elsewhere in this prospectus.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
-----------------------
ACTUAL AS ADJUSTED
(IN THOUSANDS)
<S> <C> <C>
Total liabilities........................................... $64,073 $64,073
======= =======
Shareholders' equity:
Common Stock.............................................. 7 14
Additional paid-in capital................................ 1,988 8,706
Retained earnings......................................... 2,749 2,749
Accumulated other comprehensive income.................... (147) (147)
------- -------
Total shareholders' equity........................ $ 4,597 $11,322
======= =======
Book value per share.............................. $ 6.92 $ 8.00
======= =======
</TABLE>
11
<PAGE> 13
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The selected consolidated financial and other data presented below should
be read in conjunction with, and is qualified in its entirety by reference to,
our consolidated financial statements for the years ended December 31, 1999,
1998, and 1997 and related notes, which can be found at the end of this
prospectus, and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" contained elsewhere in this prospectus.
<TABLE>
<CAPTION>
YEAR ENDED
-----------------------------------------------
1999 1998 1997 1996 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED OPERATING DATA:
Interest income.............................. $ 3,911 $ 3,321 $ 3,311 $ 3,031 $ 2,366
Interest expense............................. 1,817 1,470 1,505 1,474 1,083
------- ------- ------- ------- -------
Net interest income.......................... 2,094 1,851 1,806 1,557 1,283
Provision for loan losses.................... (280) (526) (15) -- --
Noninterest income........................... 198 183 216 329 164
Noninterest expense.......................... 2,694 1,599 1,537 1,406 995
------- ------- ------- ------- -------
Income (loss) before income taxes............ (682) (91) 470 480 452
Income tax expense (benefit)................. (73) (85) 182 188 179
------- ------- ------- ------- -------
Net income (loss)............................ $ (609) $ (6) $ 288 $ 292 $ 273
======= ======= ======= ======= =======
PER SHARE DATA:
Basic earnings (loss) per share.............. $ (0.97) $ (0.01) $ 0.53 $ 0.53 $ 0.49
Diluted earnings (loss) per share............ (0.97) (0.01) 0.52 0.52 0.49
Cash dividends per share..................... 0.13 0.17 0.16 0.16 0.15
Book value per share......................... 6.92 8.22 8.37 7.93 7.56
CONSOLIDATED BALANCE SHEET DATA:
Total assets................................. $68,670 $42,865 $41,938 $41,369 $41,007
Earning assets............................... 63,956 39,646 38,831 38,570 35,932
Securities available for sale................ 16,875 8,535 4,907 4,158 7,091
Securities held to maturity.................. 617 1,334 2,874 6,043 8,571
Loans........................................ 46,146 26,651 28,921 25,695 18,970
Allowance for loan losses.................... (549) (346) (396) (555) (564)
Total deposits............................... 62,987 38,107 36,997 36,793 36,653
Noninterest-bearing deposits................. 6,990 5,946 5,793 4,815 5,003
Interest-bearing deposits.................... 55,997 32,161 31,204 31,978 31,650
Shareholders' equity......................... 4,597 4,485 4,566 4,323 4,156
FINANCIAL RATIOS:
Loans to deposits............................ 73.26% 69.94% 78.17% 69.84% 51.76%
Return on average assets..................... (1.19) (0.01) 0.70 0.67 0.87
Return on average equity..................... (12.33) (0.13) 6.59 7.20 6.84
Dividend payout ratio........................ -- -- 30.90 29.79 30.77
Net interest margin.......................... 4.56 4.87 4.74 3.86 4.36
Nonperforming loans to total loans........... 0.31 0.97 1.50 0.70 0.49
Leverage capital ratio....................... 7.13 9.92 10.03 9.30 10.50
</TABLE>
12
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our selected
consolidated financial data presented elsewhere in this prospectus, as well as
our historical financial statements and related notes which appear at the end of
this prospectus.
Certain statements in this section constitute "forward-looking statements"
which 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.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
NET INCOME
During 1999, we implemented a new strategic plan, focused on growing total
loans and deposits and increasing market share. As part of this plan, three new
branch locations were opened, a mortgage banking division was added, and various
other new products and services were introduced. With this growth, total
employees doubled. These significant expenditures resulted in a net loss of
$609,000 or $.97 per share for 1999 compared to a net loss of $6,000 or $.01 per
share in 1998. A net profit of $288,000 was reported in 1997, or earnings of
$.53 per share.
Return on average assets (ROA) for 1999, 1998, and 1997 was (1.19)%, (.01)%
and .70%, while return on average equity (ROE) was (12.33)%, (.13)%, and 6.59%
for those same periods.
NET INTEREST INCOME
Net interest income is the most significant component of our earnings. Net
interest income is the difference between interest and fees realized on earning
assets, primarily loans, securities and short-term investments, and interest
paid on deposits and other borrowings. The net interest margin is this
difference expressed as a percentage of average earning assets. Net interest
income is determined by several factors, including the volume of earning assets
and liabilities, the mix of earning assets and liabilities, and interest rates.
For 1999, net interest income totaled $2.1 million compared to $1.9 million in
1998, an increase of $243,000 or 13.1%. This increase was driven primarily by
the increase in earning assets as we expanded our branch network into new
markets, as mentioned above. Net interest income was relatively stable from 1997
to 1998, increasing by $45,000 or 2.5%, as earning assets experienced modest
growth.
Interest income for 1999 totaled $3.9 million, compared to $3.3 million for
1998, an increase of $590,000 or 17.8%. The increase in 1999 can be attributed
to growth in both the investment and loan portfolios. Average investments,
including securities and federal funds sold, were $13.9 million in 1999, up by
$4.1 million from 1998's $9.8 million level, an increase of 41.1%. The average
loan balance showed similarly strong growth, increasing from $29 million in 1998
to $32.9 million in 1999, an increase of $3.9 million or 13.4%. The increased
volume of earning assets has driven the growth in interest income, as average
yields, on a fully tax-equivalent basis, experienced a slight decline, falling
from 8.66% for 1998 to 8.45% for 1999.
Interest expense for 1999 increased $347,000, or 23.6%, compared to 1998.
The increase was primarily attributable to increased volume, as average deposits
increased, in all categories, by a total of $7.1 million, or 22.5%, during 1999.
Time deposits increased the most, with the average balance rising by $4.8
million. Despite these increases, the average cost of interest bearing
liabilities declined slightly, to 4.57% in 1999 from 4.67% in 1998, as market
factors allowed us to reduce our rates on time and savings deposits and still
attract customers. Year end balances of interest bearing deposits were up $23.8
million or 74.1%, driven by a short-term certificate of deposit promotion
initiated in November 1999. That promotion generated approximately $11.0 million
of new funds. These time deposits had relatively higher interest rates and begin
to mature in February 2000. Management anticipates retaining a significant
portion of these funds, but that cannot be assured.
13
<PAGE> 15
Interest income totaled $3.3 million for 1998, an increase of $10,000 or
.30% compared to 1997. Average earning assets were relatively flat from 1997 to
1998. Average investments declined from 1997 to 1998 by $1.9 million (16.5%)
while average loans increased slightly, from $26.8 million in 1997 to $29.0
million in 1998, a change of $2.2 million or 8.3%. The yield on interest-earning
assets was virtually unchanged, 8.64% for 1997 compared to 8.66% for 1998.
14
<PAGE> 16
The following tables set forth an analysis of our net interest income (on a
tax-equivalent basis) for 1999, 1998 and 1997.
AVERAGE BALANCE SHEETS AND INTEREST RATES
ASSETS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------------------------
1999 1998 1997
---------------------------- ---------------------------- ----------------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest earning assets
Securities
Taxable.......................... $ 9,649 $ 570 5.91% $ 5,171 $ 305 5.90% $ 9,317 $ 550 5.90%
Non-taxable(1)................... 1,634 117 7.16 1,734 126 7.27 931 67 7.20
Federal funds sold............... 2,642 105 3.97 2,898 155 5.35 1,534 86 5.61
Interest-bearing balances with
banks.......................... 43 2 4.65 -- -- -- -- -- --
Unrealized gain/loss on AFS
securities..................... (76) -- -- 45 -- -- 6 -- --
------- ------ ------- ------ ------- ------
Total securities............. 13,892 794 5.72 9,848 586 5.95 11,788 703 5.96
Loans
Commercial....................... 10,077 996 9.88 11,475 1,091 9.51 10,910 1,056 9.68
Real estate...................... 17,864 1,619 9.06 14,513 1,354 9.33 13,455 1,298 9.65
Installment and other consumer... 4,940 542 10.97 3,013 333 11.05 2,422 276 11.40
------- ------ ------- ------ ------- ------
Total loans.................. 32,881 3,157 9.60 29,001 2,778 9.58 26,787 2,630 9.82
------- ------ ------- ------ ------- ------
Total earning assets......... 46,773 $3,951 8.45% 38,849 $3,364 8.66% 38,575 $3,333 8.64%
------- ====== ------- ====== ------- ======
Noninterest-earning assets
Allowance for loan losses.......... (411) (386) (488)
Premises and equipment............. 865 555 560
Cash and due from banks............ 2,600 1,711 1,745
Accrued interest and other
assets........................... 1,295 1,180 765
------- ------- -------
Total assets................. $51,122 $41,909 $41,157
======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities
Deposits
Interest-bearing demand
deposits....................... $10,768 $ 406 3.77% $ 8,626 $ 322 3.73% $ 7,676 $ 275 3.58%
Savings deposits................. 5,615 153 2.72 5,460 163 2.99 5,475 166 3.03
Time deposits.................... 22,182 1,226 5.53 17,388 985 5.66 18,461 1,061 5.75
------- ------ ------- ------ ------- ------
Total interest-bearing
deposits................... 38,565 1,785 4.63 31,474 1,470 4.67 31,612 1,502 4.75
Borrowed funds
Short-term borrowings............ -- -- -- -- -- -- 64 3 4.69
Long-term debt................... 1,174 32 2.73 -- -- -- -- -- --
------- ------ ------- ------ ------- ------
Total borrowed funds......... 1,174 32 2.73 -- -- -- 64 3 4.69
------- ------ ------- ------ ------- ------
Total interest-bearing
liabilities................ 39,739 $1,817 4.57% 31,474 $1,470 4.67% 31,676 $1,505 4.75%
------- ====== ------- ====== ------- ======
Noninterest-bearing liabilities
Noninterest-bearing demand
deposits......................... 6,304 5,598 5,199
Accrued interest and other
liabilities...................... 141 294 (87)
Shareholders' equity............... 4,938 4,543 4,369
------- ------- -------
Total liabilities and
shareholders' equity....... $51,122 $41,909 $41,157
======= ======= =======
Interest margin recap
Net interest income and interest
rate spread...................... $2,134 3.87% $1,894 3.99% $1,828 3.89%
====== ====== ======
Net interest margin................ 4.56% 4.88% 4.74%
</TABLE>
- ------------------------------
(1) Interest income on tax-exempt securities and loans has been adjusted to a
tax-equivalent basis using a marginal federal income tax rate of 34% for all
years.
15
<PAGE> 17
VOLUME/RATE ANALYSIS
<TABLE>
<CAPTION>
1999 -- 1998 1998 -- 1997
-------------------------------- --------------------------------
TOTAL CHANGE DUE CHANGE DUE TOTAL CHANGE DUE CHANGE DUE
CHANGE TO VOLUME TO RATE CHANGE TO VOLUME TO RATE
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME
Loans......................... $379 $373 $ 6 $148 $213 $(65)
Securities
Taxable..................... 265 265 -- (245) (245) --
Tax-exempt.................. (9) (7) (2) 59 58 1
Interest-bearing balances with
banks....................... 2 2 -- -- -- --
Federal funds sold............ (50) (13) (37) 69 73 (4)
---- ---- ---- ---- ---- ----
Total interest income......... $587 $620 $(33) $ 31 $ 99 $(68)
==== ==== ==== ==== ==== ====
INTEREST EXPENSE
Interest-bearing DDA.......... $ 84 $ 81 $ 3 $ 47 $ 35 $ 12
Savings deposits.............. (10) 5 (15) (3) -- (3)
Time deposits................. 241 266 (25) (76) (61) (15)
Short-term borrowings......... -- -- -- (3) (3) --
Long-term borrowings.......... 32 32 -- -- -- --
---- ---- ---- ---- ---- ----
Total interest expense........ $347 $384 $(37) $(35) $(29) $ (6)
==== ==== ==== ==== ==== ====
Net Interest Income........... $240 $236 $ 4 $ 66 $128 $(62)
==== ==== ==== ==== ==== ====
</TABLE>
Net interest income, on a tax-equivalent basis, for 1999 was $2.1 million,
12.7% higher than in 1998. The net interest margin, on a tax-equivalent basis
for 1999, 1998 and 1997 was 4.56%, 4.88%, and 4.74%. The net interest margin
declined from 1998 to 1999, as growth in the loan portfolio was centered in
mortgage loans, which have a lower yield than other loan products. The small
increase in net interest margin from 1997 to 1998 was the result of reducing
cost of funds, principally on time deposits.
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 losses inherent in the loan
portfolio. We conduct, on a quarterly basis, a detailed evaluation of the
adequacy of the allowance.
16
<PAGE> 18
The tables below set forth a summary of the activity in and the composition
of the allowance for loan losses.
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
FOR YEARS ENDED DECEMBER 31,
------------------------------
1999 1998 1997
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of year................................ $ 346 $ 396 $ 555
Loans charged off
Commercial................................................ (94) (603) (222)
Real estate -- residential................................ (14) (2) --
Consumer.................................................. (61) (23) (11)
------- ------- -------
Total charge-offs................................. (169) (628) (233)
------- ------- -------
Charge-offs recovered
Commercial................................................ 40 2 31
Real estate -- residential................................ 12 20 1
Consumer.................................................. 40 30 27
------- ------- -------
Total recoveries.................................. 92 52 59
------- ------- -------
Net loans charged off....................................... (77) (576) (174)
Current year provision...................................... 280 526 15
------- ------- -------
Balance at end of year...................................... $ 549 $ 346 $ 396
======= ======= =======
Loans at year end........................................... $46,146 $26,651 $28,921
Ratio of allowance to loans at year end..................... 1.19% 1.30% 1.37%
Average loans............................................... $32,881 $29,001 $26,787
Ratio of net loans charged-off to average loans............. 0.23% 1.99% 0.65%
</TABLE>
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------------------
1999 1998 1997
----------------------- ----------------------- -----------------------
PERCENT OF PERCENT OF PERCENT OF
ALLOWANCE LOANS TO ALLOWANCE LOANS TO ALLOWANCE LOANS TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
--------- ----------- --------- ----------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Commercial........................ $203 35.7% $ 65 37.8% $113 33.0%
Real estate -- residential
(including construction)........ 47 41.8 39 51.1 42 56.4
Consumer.......................... 262 22.5 25 11.1 18 10.6
Unallocated....................... 37 -- 217 -- 223 --
---- ----- ---- ----- ---- -----
Total............................. $549 100.0% $346 100.0% $396 100.0%
==== ===== ==== ===== ==== =====
</TABLE>
The provision for loan losses was $280,000, $526,000, and $15,000 for 1999,
1998, and 1997, respectively. Historically, we provided nominally for the
allowance, as is evident by the $15,000 expense in 1997. However, during 1998, a
large commercial floor plan loan to a used car dealer was charged-off after the
borrower was discovered to have engaged in conduct at the time of the loan's
origination which we considered fraudulent. The borrower is currently
incarcerated, and our collection efforts against the borrower were largely
unsuccessful and have terminated. Approximately $500,000 was charged-off for
this one borrower, resulting in a provision of $526,000 in order to ensure that
the allowance for loan losses was adequate. Total charge-offs in 1997 were
$233,000, primarily attributable to two developers who suffered difficulties
during this time period and were unable to repay their loans. Total charge-offs
in 1999 were
17
<PAGE> 19
down considerably from the 1998 level. The 1999 provision and relative increase
in the allowance reflect primarily the strong loan growth realized during the
year, rather than large charge-offs as was the case in 1998. In fact, net
charge-offs in 1999 declined to $77,000 (.23% of loans). However, given the
growth experienced and our intention to continue to focus on loan growth, we
deemed it necessary to record a provision sufficient to maintain the allowance
at approximately the same level, relative to loans, as had been the case in the
past. The allowance for loan losses at year end 1999 was $549,000, or 1.19% of
total loans, compared to $346,000, or 1.30% of total loans, at year end 1998 and
$396,000 or 1.37% at year end 1997.
We maintain the reserve at a level believed appropriate based on our
ongoing analysis of the risk in the portfolio. Individual loans identified as
possible problems are analyzed and portions of the allowance allocated to those
loans, if needed, and portions of the allowance are allocated to "good" loans
based upon industry averages, judgmentally adjusted by us in consideration of
growth, the local economy and other factors.
Nonperforming loans include nonaccrual loans, restructured loans, and loans
delinquent 90 days or more. Loans are classified as nonaccrual when we believe
the collection of interest is doubtful, typically when payments are past due 90
days, unless the loans are well secured and in the process of collection.
The table below sets forth a summary of nonperforming loans.
NONPERFORMING ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1999 1998 1997
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Principal balance
Nonaccrual................................................ $ 141 $ 258 $ 271
90 days or more past due.................................. -- -- 164
Restructured loans........................................ -- -- --
-------- -------- --------
Total nonperforming loans................................... $ 141 $ 258 $ 435
======== ======== ========
Nonperforming loans as a percent of loans................. 0.31% 0.97% 1.50%
Other real estate owned................................... $ -- $ 130 $ --
OREO as a percent of loans................................ -- 0.49% --
Allowance as a percent of nonperforming loans............. 389.36% 134.11% 91.03%
</TABLE>
Nonperforming loans reflect a declining trend over the past two years,
falling from a high of $435,000 at year end 1997 to $141,000 at December 31,
1999, or from 1.50% of total loans in 1997 to 0.31% of total loans in 1999. The
declines were the result of identified problem loans being liquidated or
charged-off.
Impaired loans are those loans for which full payment in accordance with
the contractual terms is not expected. The average balance for impaired loans
was $70,000, $189,000, and $326,000 for 1999, 1998, and 1997, respectively. The
impaired loan trend has followed the nonperforming loan trend, declining over
the three year period through liquidation and charge-off as several loans which
were nonperforming were also deemed impaired.
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.
18
<PAGE> 20
At December 31, 1999, there were five loans totaling $584,000 that we
graded substandard and included on the watch list. The loans were not considered
impaired and were performing as agreed.
NONINTEREST INCOME AND EXPENSE
The table below sets forth an analysis of changes in noninterest income and
expense.
NONINTEREST INCOME AND EXPENSE
<TABLE>
<CAPTION>
PERCENT CHANGE PERCENT CHANGE
1999 FROM 1998 1998 FROM 1997 1997
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Noninterest Income
Service charges on deposits........... $ 128 5.79% $ 121 (6.92)% $ 130
Other................................. 70 12.90 62 (27.91) 86
------ ------ ------
Total noninterest income...... $ 198 8.20 $ 183 (15.28)% $ 216
====== ====== ======
Noninterest Expense
Salaries and employee benefits........ $1,615 82.49% $ 885 (5.55)% $ 937
Premises and equipment................ 404 53.61 263 33.50 197
Advertising........................... 117 387.50 24 20.00 20
Telephone............................. 64 88.24 34 13.33 30
Other................................. 494 25.70 393 11.33 353
------ ------ ------
Total noninterest expense..... $2,694 68.48% $1,599 4.03% $1,537
====== ====== ======
</TABLE>
Noninterest income increased $15,000, or 8.2% to $198,000 for 1999 compared
to $183,000 in 1998. The increase is attributed to the larger number of deposit
accounts and a change in fee structure on those accounts, which increased
service charge income by 5.8%. Other noninterest income in 1999 includes a
$25,000 loss realized on the sale of other real estate owned. Noninterest income
fell 15.3% in 1998, compared to 1997, as both service charge and other
noninterest income declined slightly.
During 1999, we opened three new branch locations, two in Greenwood,
Indiana and one in Nashville, Indiana, joining the existing offices in
Morgantown and Trafalgar, Indiana. As a result, the number of employees on a
full-time equivalent basis increased from 26 in 1998 to 52 in 1999. Salary and
employee benefits expense followed suit, increasing from $885,000 in 1998 to
$1.6 million in 1999, an increase of 82.5%. Approximately $172,000 of this
increase (23.5%) was a one-time, non-recurring charge, the result of buying-out
the former president's employment contract.
In addition to the new branch locations, we entered the mortgage banking
business, and hired personnel to staff this function. With more branch
locations, premises and equipment expenses increased from $263,000 in 1998 to
$404,000 in 1999, an increase of $141,000. Approximately $48,000 of this
increase was attributable to rental expense, as we entered into operating leases
for the three new branch locations. Advertising expense increased four fold, to
$117,000, as we initiated an aggressive marketing program in our new and
existing markets.
In 1998, as compared to 1997, total noninterest expense was fairly stable,
increasing only 4.03%. Salary and employee benefit expense decreased by $52,000
or 5.6% from 1997, as one officer-level position was vacant for a portion of the
year and bonuses were truncated due to the anticipated loss for the year.
Premises and equipment expenses increased from $197,000 in 1997 to $263,000 in
1998, a change of 33.5% or $66,000. The majority of this increase resulted from
a software conversion which took place in November 1997. Because of the
conversion, maintenance and amortization expense for software increased $84,000.
19
<PAGE> 21
INCOME TAXES
We reported a small amount of taxable income in 1998, but realized a
significant tax net operating loss in 1999. The recognition of a tax benefit for
1999 was limited to $73,000, the amount of tax paid that could be recovered by
carrying back the net operating loss. A valuation allowance was established to
reduce the carrying value of our net deferred tax asset to zero. We have a net
operating loss carryforward, for tax purposes, of approximately $450,000. This
will serve to reduce tax payable, and tax expense, in future periods, provided
we are profitable. The net operating loss carryforward expires in 2019. Further
information regarding taxes payable and tax expense can be found in Notes 1 and
9 to the consolidated financial statements.
FINANCIAL CONDITION
Total assets were $68.7 million at year end 1999 compared to $42.9 million
at year end 1998, an increase of $25.8 million or 60.2%. Increased loan totals
were funded by increased deposits. Federal funds sold balances were also reduced
and placed into higher yielding securities.
In the first half of 2000, we expect to complete the acquisition of a
branch in Nashville, Indiana. With the purchase, we will acquire approximately
$14 million in deposits, $5.5 million in loans, and real property. The value of
intangibles is estimated to be $1.2 million, which will be amortized over a
period not to exceed 25 years. The increase in deposits will provide funding for
loan growth, with any excess invested in securities. Based on 1999 year end
numbers, the acquisition will increase deposits by approximately 22.2% and loans
by 11.9%. Additional expense will be recognized through the amortization of
goodwill, which will adversely impact earnings. However, total costs of
operating the branch, including such items as staffing costs, are not expected
to change significantly as this branch will replace the existing Nashville
branch location.
The information in the preceding paragraph 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 a failure to complete the
purchase of the Nashville branch, unanticipated changes in the deposits or loans
at the branch or an unanticipated increase in the number of employees at the
branch.
20
<PAGE> 22
SECURITIES
Note 2 to the financial statements and the following table set forth
information about securities.
SECURITIES MATURITY SCHEDULE
<TABLE>
<CAPTION>
AT DECEMBER 31, 1999
---------------------------------------------------------------------------
1 YEAR OR LESS 1 TO 5 YEARS 5 TO 10 YEARS OVER 10 YEARS
-------------- -------------- -------------- -------------- TOTAL
BALANCE RATE BALANCE RATE BALANCE RATE BALANCE RATE BALANCE
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Available for sale
U.S. government and
agencies.......... $1,638 5.48% $3,933 6.01% $1,548 6.90% $ -- --% $ 7,119
States and political
subdivisions(1)... 10 9.09 194 6.53 168 7.42 336 6.75 708
Other securities..... 7,820 5.73 487 5.50 -- -- -- -- 8,307
Mortgage backed
securities........ -- -- -- -- -- -- 741 6.16 741
------ ------ ------ ------ -------
Total
available
for sale... $9,468 $4,614 $1,716 $1,077 $16,875
====== ====== ====== ====== =======
Held to maturity
U.S. government and
agencies.......... $ 251 4.42% $ -- --% $ -- --% $ -- --% $ 251
States and political
subdivisions(1)... 79 9.24 276 7.21 -- -- -- -- 355
Mortgage backed
securities........ -- -- -- -- -- -- 11 6.60 11
------ ------ ------ ------ -------
Total held to
maturity... $ 330 $ 276 $ -- $ 11 $ 617
====== ====== ====== ====== =======
</TABLE>
- ------------------------
(1) Average rates were calculated on a tax-equivalent basis using a marginal
federal income tax rate of 34%.
Securities are designated as either available for sale or as held to
maturity. To provide more flexibility and better support for our current
expansion strategy, held to maturity securities have been allowed to mature and
pay-off, with all security purchases in 1999 classified as available for sale.
During 1999, several available for sale municipal securities were sold and
reinvested in U.S. Treasury and government agency securities and other
securities, which includes commercial paper and corporate bonds. The commercial
paper portfolio had maturities typically of less than one month. Excess funds
from deposit growth were also invested in these categories of securities.
In addition to securities of the U.S. Government and its agencies, we had
concentrations in commercial paper and corporate securities that exceed 10% of
shareholders' equity at December 31, 1999 in the following obligors (table
amounts in thousands):
<TABLE>
<CAPTION>
OBLIGOR NAME AMORTIZED COST FAIR VALUE
<S> <C> <C>
Stellar Funding............................................. $2,419 $2,419
Bell Atlantic Net Funding................................... 530 529
Mont Blanc.................................................. 2,488 2,483
Wood Street Funding......................................... 996 996
Guardian Industries......................................... 994 994
Bear Stearns................................................ 510 485
</TABLE>
21
<PAGE> 23
During late 1999, we had a certificate of deposit promotion for a 100 day
certificate of deposit. Proceeds obtained from this promotion were invested in
commercial paper, with maturity dates that coincide with the maturity of the
certificates of deposit.
LOANS
Note 3 to the financial statements and the following table set forth
information about the loan portfolio.
LOAN PORTFOLIO
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- ----------------- -----------------
BALANCE PERCENT BALANCE PERCENT BALANCE PERCENT
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Loan Portfolio Composition
Commercial.............................. $10,917 23.6% $ 5,123 19.2% $ 7,270 25.1%
Commercial real estate.................. 5,566 12.1 4,952 18.6 2,292 7.9
Residential real estate................. 14,380 31.1 9,731 36.5 11,642 40.3
Construction............................ 4,921 10.7 3,883 14.6 4,657 16.1
Consumer................................ 10,362 22.5 2,962 11.1 3,054 10.6
------- ----- ------- ----- ------- -----
$46,146 100.0% $26,651 100.0% $28,915 100.0%
======= ===== ======= ===== ======= =====
</TABLE>
<TABLE>
<CAPTION>
LOAN MATURITIES AT DECEMBER 31, 1999
----------------------------------------------------
1 YEAR AND LESS 1-5 YEARS OVER 5 YEARS TOTAL
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial..................................... $ 4,430 $ 3,106 $ 3,381 $10,917
Commercial real estate......................... 312 513 4,741 5,566
Residential real estate........................ 1,304 2,641 10,435 14,380
Construction................................... 3,585 632 704 4,921
Consumer....................................... 1,084 5,539 3,739 10,362
------- ------- ------- -------
Total loans.......................... $10,715 $12,431 $23,000 $46,146
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
SENSITIVITY TO CHANGES IN INTEREST RATES AT
DECEMBER 31, 1999
---------------------------------------------
1 YEAR AND LESS OVER 1 YEAR TOTAL
(IN THOUSANDS)
<S> <C> <C> <C>
Fixed rates............................................... $ 3,544 $23,284 $26,828
Variable rates............................................ 14,608 4,710 19,318
------- ------- -------
Total loans..................................... $18,152 $27,994 $46,146
======= ======= =======
</TABLE>
Total loans increased $19.5 million or 73.2% from year end 1998 to year end
1999, as we entered into new market areas. Loan growth occurred in all
categories.
Consumer loans experienced significant growth, increasing $7.4 million or
five fold from 1998 to 1999, as we entered the indirect lending arena. Total
consumer loans were $10.4 million and comprised 22.5% of the portfolio at year
end 1999. Several relationships were established with local auto and
recreational vehicle dealers, which spurred growth in this segment of the
portfolio. Underwriting standards for indirect loans are consistent with the
standards applied to direct loans in an effort to maintain strong asset quality.
Growth in the consumer segment also occurred with a new product offering for
home equity lines of credit.
Commercial loans grew by 113% or $5.8 million during 1999 and comprised
23.6% of our portfolio at December 31, 1999. Growth in this segment was
attributed to our focus in new markets, primarily the Greenwood area.
Residential mortgages increased $4.6 million or 47.8% to $14.4 million. Although
residential mortgage loans remain the largest segment of the portfolio, they
have declined as a percent of the total portfolio as growth in other segments
has been significant. Nonetheless, our portfolio is largely
22
<PAGE> 24
secured by real estate, with residential and commercial real estate loans
comprising 43.2% of the portfolio at year end 1999.
During 1999, we started a mortgage banking division, providing our
customers with a wider array of mortgage loan products. At year end, loans held
for sale, which are carried at the lower of cost or fair value, totaled
$601,000. All loans are sold service released. We intend to continue to grow
this line of business.
DEPOSITS
Note 6 to the financial statements and the following table set forth more
information about deposits.
MATURITY RANGES OF TIME DEPOSITS WITH BALANCES OF $100,000 OR MORE AT DECEMBER
31, 1999
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
3 months or less............................................ $ 6,606
3 through 6 months.......................................... 974
6 through 12 months......................................... 2,016
Over 12 months.............................................. 848
-------
Total............................................. $10,444
=======
</TABLE>
Year end total deposits increased $24.9 million or 65.3%, from 1998 to
1999, with growth again spurred by the entrance into new market areas and active
advertising campaigns. Noninterest-bearing deposits increased to $7.0 million
from $5.9 million. At December 31, 1999, $10.4 million or 26.9% of our time
deposits had balances of greater than $100,000. The average balance of time
deposits issued in amounts greater than $100,000 totaled $5.0 million in 1999
and $3.6 million in 1998, representing 22.6% and 20.4% of total average time
deposits in each period.
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 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 minimum requirements under the capital guidelines are generally at
least a 4.00% leverage ratio (Tier 1 capital divided by average assets excluding
unrealized gains/losses), a 4.00% Tier 1 risk-based capital ratio (Tier 1
capital divided by risk-weighted assets), and an 8.00% total capital ratio (Tier
1 capital plus Tier 2 capital divided by risk-weighted assets).
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 initiate regulatory action that could have a
direct material effect on our financial statements. If only adequately
capitalized, regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions, asset growth, and expansion is limited,
in addition to the institution being required to submit a capital restoration
plan.
Management believes we met all the capital requirements as of December 31,
1999, and we were categorized as adequately capitalized under the guidelines
established by the banking regulators.
23
<PAGE> 25
At December 31, 1999, we were not aware of any current recommendations by
banking regulatory authorities which, if they were to be implemented, would
have, or are reasonably likely to have, a material effect on our consolidated
liquidity, capital resources or operations.
Note 11 to the financial statements and the following table set forth our
actual capital amounts and ratios.
CAPITAL RATIOS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1999 1998 1997
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Tier 1 capital
Shareholders' equity...................................... $ 4,566 $ 4,414 $ 4,492
Add/less: unrealized loss/gain on securities.............. 147 (27) (21)
Less: intangible assets................................... (206) (257) (304)
------- ------- -------
Total Tier 1 capital...................................... $ 4,507 $ 4,130 $ 4,167
======= ======= =======
Total risk-based capital
Tier 1 capital............................................ $ 4,507 $ 4,130 $ 4,167
Allowable allowance for loan losses....................... 549 346 352
------- ------- -------
Total risk-based capital.................................. $ 5,056 $ 4,476 $ 4,519
======= ======= =======
Risk weighted assets........................................ $55,334 $28,454 $28,096
======= ======= =======
Average assets.............................................. $63,179 $41,652 $41,527
======= ======= =======
Risk-based ratios:
Tier 1.................................................... 8.15% 14.51% 14.83%
Total risk-based capital.................................. 9.14% 15.73% 16.08%
Leverage ratio.............................................. 7.13% 9.92% 10.03%
</TABLE>
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, capital resources or operations.
24
<PAGE> 26
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, as
presented in the table below.
LIQUIDITY AND INTEREST RATE SENSITIVITY
<TABLE>
<CAPTION>
AT DECEMBER 31, 1999
---------------------------------------------------------------------
1 TO 90 DAYS 91 TO 365 DAYS 1 TO 5 YEARS OVER 5 YEARS TOTAL
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest earning assets
Loans............................... $ 13,881 $ 4,271 $ 12,741 $15,253 $46,146
Federal funds sold and other........ 189 -- -- -- 189
Securities.......................... 8,320 1,478 4,890 2,804 17,492
Restricted stock.................... -- -- -- 129 129
-------- -------- -------- ------- -------
Total earning assets........ $ 22,390 $ 5,749 $ 17,631 $18,186 $63,956
======== ======== ======== ======= =======
Interest bearing liabilities
Interest-bearing demand deposits.... $ 5,736 $ -- $ -- $ -- $ 5,736
Savings deposits.................... 11,447 -- -- -- 11,447
Time deposits....................... 16,961 9,632 12,221 -- 38,814
Short-term borrowings............... -- -- -- -- --
Long-term borrowings................ -- 800 -- -- 800
-------- -------- -------- ------- -------
Total interest-bearing
liabilities............... $ 34,144 $ 10,432 $ 12,221 $ -- $56,797
======== ======== ======== ======= =======
Rate sensitive gap.................... $(11,754) $ (4,683) $ 5,410 $18,186 $ 7,159
Rate sensitive cumulative gap......... $(11,754) $(16,437) $(11,027) $ 7,159
Cumulative gap as a percentage of
earning assets...................... (18.38)% (25.70)% (17.24)% 11.19%
</TABLE>
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.
INFLATION
The effects of price changes and inflation on a financial institution vary
considerably from an industrial organization. Changes in interest rates, rather
than changes in the prices of goods and services, are the primary determinants
of profitability of a financial institution. Inflation affects the growth of
total assets, but it is difficult to assess its impact because neither the
timing nor the magnitude of the changes in the consumer price index directly
coincide with changes in interest rates. During periods of high inflation there
are normally corresponding increases in the money supply. During such times
financial institutions often experience above average growth in loans and
deposits. Also, general increases in the price of goods and services will result
in increased operating expenses. Over the past few years the rate of inflation
has been relatively low, and its impact on the growth in the balance sheets and
increased levels of income and expense has been nominal.
25
<PAGE> 27
BUSINESS
GENERAL
First Shares Bancorp, Inc. is a bank holding company that owns all of the
common stock of First Bank, an Indiana-chartered bank with deposit accounts
insured by the FDIC. After 100 years of modest growth, we implemented a 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. Based on data compiled by SNL Securities, as of June 30, 1999, the
total deposits at all banks in our primary market area of Johnson, Morgan and
Brown counties were approximately $1.7 billion. As of that date we had
approximately 2.5% of these deposits. During 1999 our loan portfolio and
deposits increased by 73.2% and 65.3%, respectively.
We offer a broad range of commercial banking products and services to small
and medium-sized businesses and retail customers from our six locations in
Central Indiana. Our products include commercial, consumer and real estate
loans, a broad range of deposit products and other non-deposit banking services.
STRATEGY
Bank Growth. Our goal is to continue our expansion and build a profitable,
customer-focused financial institution. Management believes that our capital
structure after this offering and our management and data and operational
systems are sufficient to achieve further growth in asset size, revenues and
capital. This growth should allow us to increase our lending limits, thereby
enabling us to more effectively serve the needs of our customers.
We expect to continue our expansion strategy primarily through internal
growth, through the acquisition of a bank branch in Nashville, Indiana and
potentially through other acquisitions. However, we have no other acquisitions
planned at this time. Management believes that our largest source of growth 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. Management believes that small-and medium-size businesses
often are not of sufficient size to be of interest to these large banks,
particularly with respect to residential land development and construction
lending. Management also believes 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 in
achieving internal growth.
Management also believes that the economic expansion which has occurred in
our market area contributes significantly to new opportunities for internal
growth. Our market area is the Central Indiana counties south of Indianapolis.
As of July 1998, 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 191,000. One of those counties, Johnson County, was
the third fastest growing county in Indiana based on population increase from
1997 to 1998. Employment in the area is in diversified sectors, including
manufacturing, construction, retail trade, services and government. As of
December 31, 1999, the three-county area had an unemployment rate of less than
3%.
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.
26
<PAGE> 28
In addition to internal growth, management believes there are opportunities
to grow through branch acquisitions. We currently have six branches (including
our main office) and have recently entered into an agreement to purchase another
branch in Nashville, Indiana to augment our activities in Brown County.
Management intends to pursue acquisitions of additional branches in appropriate
locations. Management believes that branch locations will continue to become
available from time to time for purchase as bank holding companies eliminate
certain overlapping branches resulting from bank consolidation. Management has
considered and intends to consider a variety of criteria when evaluating
potential branches. These include (i) the geographic location, (ii) the
investment required for, and opportunity costs of, the branch and (iii)
economies of scale that may be achieved.
Operations and Marketing. Our objective is to continue to build a
profitable, growing community banking franchise. Management believes 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 are currently implementing an Internet banking capability,
which will allow customers to perform several banking functions on-line.
Management believes our banking locations are small enough to facilitate
personalized services and decision-making, yet of sufficient size to meet most
customers' needs in Central Indiana.
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, enabling 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, checking with interest, money market accounts, regular
savings, certificates of deposit, and IRAs. We also offer additional access to
our customers with an ATM Card and offer a debit card. 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 commercial loan products
that we provide.
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. See "Risk Factors."
LOANS
We have the ability to provide a broad range of commercial and retail
lending services. As of December 31, 1999, our loan portfolio consisted of
approximately 36% commercial loans, 31% residential mortgage loans (including
home equity loans), 11% residential construction loans and 22% 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,
1999, 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
34% of our commercial loans are commercial real estate loans secured by a first
lien on the commercial real estate. In addition,
27
<PAGE> 29
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 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 supporting letters
of credit, personal guarantees or additional collateral.
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 substantially all of such
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 quality, 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. Management believes 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 concern loan administration, documentation,
approval and reporting requirements for various types of loans.
We recognize that lending money involves a degree of business risk. Our
loan policies are designed to assist us in managing the business 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 three 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 has 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 $20,000 to $100,000 and for
unsecured loans ranging from $5,000 to $25,000. 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
28
<PAGE> 30
up to $240,000, and residential mortgage loans not meeting FHLMC guidelines may
be approved by our Vice President of Mortgage Loans up to $100,000. All loan
limits are subject to review and revision by our board of directors and the Loan
Committee from time to time. The Loan Committee is responsible for approving all
loans that exceed the established limits for our officers.
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 (75%)
- 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 policy review
- loans to employees, executive officers and directors
- problem loan identification
- maintenance of a loan loss reserve
- other matters relating to our lending practices
29
<PAGE> 31
DEPOSITS AND OTHER SERVICES
Deposits. First Bank offers 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. We solicit these
accounts from individuals, businesses, associations, financial institutions and
government entities.
Other Services. In addition to our basic deposit products, we offer our
customers certain other services, such as commercial sweep accounts, and we are
currently implementing bank-by-phone and Internet banking capabilities.
Management believes that our personalized service approach benefits from
customer visits to our bank. 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 management's 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. Management
believes 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.
PROPERTIES
We conduct our operations from six 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;
- Approximately 2,150 square feet at 1266 North Madison Avenue, Greenwood,
Indiana, which we occupy under a lease expiring in 2002 with a renewal
option of three years following the expiration date;
- Approximately 1,100 square feet at 250 North State Road 135,
Bargersville, Indiana, which we occupy under a lease expiring in 2002
with a renewal option of three years following the expiration date;
- 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; and
- Approximately 1,152 square feet housed in a temporary structure at 160
East Main Street, Nashville, Indiana, which we occupy under a lease
expiring in September 2000. The structure is located on real estate owned
by Frank A. Rogers, one of our directors, but Mr. Rogers receives no
compensation for the use of the land. We anticipate replacing the
temporary facility in Nashville with the building we will acquire in
connection with our pending branch bank purchase. See "Recent
Developments."
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<PAGE> 32
We believe the condition of our facilities is adequate to support our current
operations.
EMPLOYEES
As of December 31, 1999, we had approximately 50 full-time employees and
approximately three part-time employees. None of these employees is represented
by a union. We consider relations with our employees to be good.
LITIGATION
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.
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<PAGE> 33
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information about our executive officers and
directors as of December 31, 1999:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Frank A. Rogers.......................... 68 Chairman of the Board of Directors
Jerry R. Engle........................... 55 President and Chief Executive Officer and Director
John Ditmars............................. 43 Executive Vice President
Kimberly B. Kling........................ 32 Secretary, Treasurer and Chief Financial Officer
Ralph M. Foley........................... 59 Director
H. Dean Hawkins.......................... 64 Director
Gary W. Lewis............................ 50 Director
R. J. McConnell.......................... 39 Director
William J. Meredith...................... 53 Director
Norman D. Stockton....................... 55 Director
</TABLE>
Frank A. "Andy" Rogers was elected a director in 1999 and currently serves
as Chairman of the Board of Directors. He has owned and operated two restaurants
since 1969 and 1975, respectively, and two hotels since 1970 and 1992,
respectively. Since 1990 he has been the contract operator for a third hotel,
and since 1979 he has been a partner in a partnership owning a nursing home. All
of these businesses are in Brown County, Indiana. Prior to his service on our
board of directors, Mr. Rogers had served as the chief executive officer of
three other financial institutions during the 1960's and 1980's.
Jerry R. Engle is our President and Chief Executive Officer and a director,
positions he has held since March 1999. Previously, he was the 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. During his tenure at
Citizens, Mr. Engle managed the CNB affiliate bank based in Greenwood, Indiana.
In 1998, this affiliate bank had average assets of approximately $652.1 million.
John Ditmars is 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. Kling is 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.
Ralph M. Foley was elected a director of First Bank in 1985 and became a
director of First Shares when it was incorporated in 1991. He is a partner in
the law firm of Foley, Foley & Peden, Greenwood, Indiana.
H. Dean Hawkins was elected a director in 1992 and served from December
1991 to February 1999 as our President and Chief Executive Officer and from
March to November 1999 as our Chairman of the Board of Directors. He is
currently self-employed as a real estate appraiser.
Gary W. Lewis was elected a director in 1999. He is Vice President and
Manager of the Greenwood office of F. C. Tucker Realtors, where he has worked
since 1975.
R.J. McConnell was elected a director in 1998. He is a partner with the law
firm of Bose McKinney & Evans LLP, Indianapolis, Indiana.
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<PAGE> 34
William J. Meredith was elected a director in 1992. He is the President and
Funeral Director at Meredith-Clark Funeral Home, Inc. and a partner in C & M
Monument Co., a cemetery monument company.
Norman D. Stockton was elected a director in 1993. He has been the
Superintendent of Schools for the Eminence Community School Corporation since
1997. From 1994 to 1997 he was the Director of Marketing for Construction
Control, Inc., a construction management firm.
Our directors are elected for staggered three-year terms. The terms of our
current directors expire as follows:
- 2000 -- Mr. Lewis and Mr. Stockton
- 2001 -- Mr. Engle, Mr. Hawkins and Mr. McConnell
- 2002 -- Mr. Foley, Mr. Meredith and Mr. Rogers
To management's knowledge, all of our directors intend to stand for re-election
at the expiration of their terms. We intend to maintain at least two independent
directors on our board of directors at all times.
The board of directors currently has standing audit, personnel, executive
and asset-liability committees. 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 the
entire board of directors. However, we anticipate that the composition of the
audit committee will be changed prior to the closing of this offering to consist
solely of independent directors. The personnel committee provides a general
review of our compensation and benefit plans to ensure that they meet corporate
objectives. The personnel committee also has authority to administer and
recommend the grant of options under our stock option plans. The directors who
are members of the personnel committee are Messrs. Engle, Hawkins, Meredith and
Stockton. The executive committee acts on behalf of the board of directors
between meetings of the board. The directors who are members of the executive
committee are Messrs. Engle, Hawkins and McConnell. The asset-liability
committee reviews the matching of the rates and maturities of our loans,
investments, deposits and other borrowings and recommends adjustments to
minimize our interest rate gap. The directors who are members of the
asset-liability committee are Messrs. Engle, Foley, Hawkins and Stockton.
Anticipating the retirement of our chief executive officer, in March 1999,
Jerry R. Engle joined us as a director and our new chief executive officer
elect. John Ditmars also joined us as a new executive vice president. Shortly
thereafter, Frank A. "Andy" Rogers was elected as an additional director, and
later as the chairman of the board of directors, Gary W. Lewis was elected as an
additional director, and Mr. Rogers, Mr. Engle, Mr. Lewis and Mr. Ditmars
purchased approximately 18.5% of our outstanding common stock. Mr. Engle and Mr.
Ditmars also received options to purchase additional shares of our common stock.
As of December 31, 1999, Mr. Rogers, Mr. Engle, Mr. Lewis, Mr. Ditmars and the
other members of our board of directors beneficially owned approximately 36.7%
of our common stock. Following these changes in management, and at the direction
of our board of directors, we began to implement our new growth strategy and to
open additional branch bank locations.
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<PAGE> 35
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------------------------------------ ------------
SECURITIES
UNDERLYING
NAME AND YEAR ENDED OTHER ANNUAL OPTIONS/ ALL OTHER
PRINCIPAL POSITION DECEMBER 31, SALARY BONUS COMPENSATION SARS(#) COMPENSATION
<S> <C> <C> <C> <C> <C> <C>
JERRY R. ENGLE.......... 1999 $121,413 $ -- $-- 39,000 $ 1,871(1)
President and 1998 -- -- -- -- --
Chief Executive
Officer............ 1997 -- -- -- -- --
H. DEAN HAWKINS......... 1999 59,720 -- -- -- 172,630(2)
Director 1998 63,000 12,214 -- -- --
1997 61,000 28,389 -- -- --
</TABLE>
- ------------------------------
(1) Matching contribution to retirement plan account ($1,386) and life insurance
premium paid ($485).
(2) Severance payment ($172,038) and life insurance premium paid ($592).
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------------
NUMBER OF
SECURITIES % OF TOTAL
UNDERLYING OPTIONS/SARS EXERCISE
OPTIONS/ GRANTED TO OR BASE
SARS EMPLOYEES IN PRICE EXPIRATION
NAME GRANTED FISCAL YEAR ($/SHARE) DATE
<S> <C> <C> <C> <C>
Jerry R. Engle................................... 39,000 65% $8.23 5/25/04(1)
H. Dean Hawkins.................................. -- -- -- --
</TABLE>
- ------------------------------
(1) The grant agreements for these options and options granted to Mr. Ditmars
were amended effective March 31, 2000 to reduce the term from seven years to
five years.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS/SARS IN-THE-MONEY OPTIONS/SARS
SHARES AT FISCAL YEAR END AT FISCAL YEAR END(1)
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
<S> <C> <C> <C> <C> <C> <C>
Jerry R. Engle............ -- $-- 9,750 29,250 $ 17,258 $51,773
H. Dean Hawkins........... -- -- 36,000 -- 119,880 --
</TABLE>
- ------------------------------
(1) Calculated assuming a fair market value per share of $10 at December 31,
1999.
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
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<PAGE> 36
of awards. Options for a total of 48,000 shares of common stock may be granted
under the 1996 Stock Option Plan, all of which have been granted. 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. Options for 48,000 shares
are currently outstanding under the 1996 Stock Option Plan.
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 93,000 shares of common stock may be
granted under the 1999 Stock Option Plan. If an award under the 1999 Stock
Option 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, 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. Options for 60,000 shares are currently outstanding
under the 1999 Stock Option Plan.
Employment Agreements. We have entered into a three-year employment
agreement with Jerry R. Engle pursuant to which we employ Mr. Engle as our chief
executive officer. Mr. Engle's base compensation during the term of the
agreement is $150,000 per year, which may be increased at our discretion and is
required to be increased to $160,000 if and when we achieve an annualized return
on average assets of at least 0.75% for six consecutive calendar months. In
addition, the agreement provides for annual bonuses to be set by the board of
directors. Mr. Engle also received options pursuant to the agreement to purchase
39,000 shares of common stock at a price equal to the book value per share of
the outstanding common stock 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 engaging in a business in competition with us or soliciting our
customers for a period of two years after the date of termination.
We have also entered into a three-year employment agreement with John
Ditmars pursuant to which we employ Mr. Ditmars as our executive vice president.
Mr. Ditmars' base compensation during the term of the agreement is $75,000 per
year, which may be increased at our discretion and is required to be increased
to $80,000 if and when we achieve an annualized return on average assets of at
least 0.75% for six consecutive calendar months. In addition, the agreement
provides for annual bonuses to be set by the
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<PAGE> 37
board of directors. Mr. Ditmars also received options pursuant to the agreement
to purchase 21,000 shares of common stock at a price equal to the book value per
share of the outstanding common stock 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.
The terms of each of these employment agreements were as favorable to us as
terms generally available from unaffiliated third parties. In addition, each of
these employment agreements was approved by a majority of our independent
directors who did not have an interest in the transactions and who had access,
at our expense, to our legal counsel or independent legal counsel.
Director Compensation. Directors are paid $500 for each regularly-scheduled
meeting of the board of directors attended and $175 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 $175 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.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION.
Our personnel committee established compensation for the year ended
December 31, 1999 for employees other than Mr. Engle and Mr. Ditmars, who have
employment agreements with us which establish their base salary. Mr. Engle, who
is one of our executive officers, participated during 1999 in deliberations of
our personnel committee concerning compensation of other officers.
FUTURE AFFILIATED TRANSACTIONS
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.
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<PAGE> 38
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information known to us with respect
to beneficial ownership of our common stock (1) as of December 31, 1999 and (2)
immediately following this offering by:
- each person known to us to be the beneficial owner of more than five
percent of our issued and outstanding common stock;
- each of our directors and executive officers; and
- all executive officers and directors as a group.
Calculations of the percentage after offering assumes that the underwriters'
overallotment option is not exercised. 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.
<TABLE>
<CAPTION>
PERCENTAGE PERCENTAGE
NUMBER OF SHARES BEFORE AFTER
NAME AND ADDRESS BENEFICIALLY OWNED OFFERING OFFERING
<S> <C> <C> <C>
Jerry R. Engle......................................... 54,396(1) 8.1% 4.2%
996 South State Road 135
Greenwood, Indiana 46143
Ralph M. Foley......................................... 35,166(2) 5.3 2.7
400 Byram Road
Martinsville, Indiana 46151
H. Dean Hawkins........................................ 76,230(3) 10.9 5.3
2127 Foxcliff North
Martinsville, Indiana 46151
Gary W. Lewis.......................................... 18,006(4) 2.7 1.4
2302 Woodsway Drive
Greenwood, Indiana 46143
R. J. McConnell........................................ 5,520(5) * *
2069 W. County Road 300S
Franklin, Indiana 46131
William J. Meredith.................................... 7,428(6) 1.1 *
P.O. Box 308
Morgantown, Indiana 46160
Frank A. Rogers........................................ 47,340(7) 7.1 3.7
P.O. Box 187
Nashville, Indiana
Norman D. Stockton..................................... 600(8) * *
3168 S.E. County Line Road
Morgantown, Indiana 46160
John Ditmars........................................... 18,066(9) 2.7 1.3
996 South State Road 135
Greenwood, Indiana 46143
Kimberly B. Kling...................................... -- -- *(10)
996 South State Road 135
Greenwood, Indiana 46143
</TABLE>
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<PAGE> 39
<TABLE>
<CAPTION>
PERCENTAGE PERCENTAGE
NUMBER OF SHARES BEFORE AFTER
NAME AND ADDRESS BENEFICIALLY OWNED OFFERING OFFERING
<S> <C> <C> <C>
Directors and executive officers as a group (10 262,752 36.7 19.3
persons).............................................
Other principal shareholder:
Edith N. Tullis........................................ 180,480 27.2 12.8(11)
c/o Hershell M. Baker
433 Appleton Court
Indianapolis, Indiana 46234
</TABLE>
- ------------------------------
* Less than 1%
(1) Consists of 44,406 shares owned individually, 240 shares owned for the
benefit of Mr. Engle's children and 9,750 shares represented by stock
options exercisable within 60 days of December 31, 1999. Mr. Engle has
indicated that he intends to purchase 5,000 shares in this offering.
(2) Consists of 1,440 shares owned individually, 25,788 shares owned jointly by
Mr. Foley and his spouse, 3,810 shares owned by Mr. Foley's spouse and
4,128 shares owned by Mr. Foley as trustee. Mr. Foley has indicated that he
intends to purchase 3,000 shares in this offering.
(3) Consists of 1,536 shares owned individually, 38,694 shares owned jointly by
Mr. Hawkins and his spouse and 36,000 shares represented by stock options
exercisable within 60 days of December 31, 1999. Mr. Hawkins has indicated
that he does not intend to purchase shares in this offering.
(4) Mr. Lewis has indicated that he intends to purchase 1,994 shares in this
offering.
(5) All of these shares are beneficially owned through a retirement plan trust.
Mr. McConnell has indicated that he intends to purchase 2,500 shares in
this offering.
(6) Consists of 5,598 shares owned individually, 1,110 shares owned by Mr.
Meredith's spouse, 600 shares owned through a custodian and 120 shares
owned jointly with Mr. Meredith's grandchildren. Mr. Meredith has indicated
that he intends to purchase 500 shares in this offering.
(7) Mr. Rogers has indicated that he intends to purchase 5,606 shares in this
offering.
(8) Mr. Stockton has indicated that he intends to purchase 100 shares in this
offering.
(9) Consists of 12,216 shares owned individually, 600 shares owned jointly by
Mr. Ditmars and his spouse as custodian for the benefit of their minor
children and 5,250 shares represented by stock options exercisable within
60 days of December 31, 1999. Mr. Ditmars has indicated that he intends to
purchase 1,000 shares in this offering.
(10) Ms. Kling has indicated that she intends to purchase 300 shares in this
offering.
(11) The Percentage After Offering calculation assumes Ms. Tullis purchases no
shares in this offering.
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<PAGE> 40
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
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.
Federal and state laws and regulations generally applicable to financial
institutions and their holding companies regulate, among other things:
- the scope of business
- investments
- reserves against deposits
- capital levels relative to operations
- lending activities and practices
- the nature and amount of collateral for loans
- the establishment of branches
- mergers and consolidations
- dividends
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 law 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.
FIRST SHARES
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, as amended (the "BHCA"). Under the BHCA, First Shares is subject to
examination by the Federal Reserve Board and is required to file reports of its
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
banking corporation, 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.
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<PAGE> 41
Investments and Activities. Under current law, 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 their 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
addition, 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.
Effective March 11, 2000, the Gramm-Leach-Bliley Act of 1999, which was
signed into law on November 12, 1999, will allow 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, 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. See "-- Recent
Regulatory Developments."
FIRST BANK
General. First Bank is an Indiana banking corporation which 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 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 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. First Bank was
categorized as "adequately capitalized" at December 31, 1999.
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<PAGE> 42
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.
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.
Safety and Soundness Standards. On July 10, 1995, the FDIC, the Office of
Thrift Supervision, the Federal Reserve Board and the Office of the Comptroller
of the Currency published final guidelines implementing the FDICIA requirement
that the federal banking agencies establish operational and managerial standards
to promote the safety and soundness of federally insured depository
institutions. The guidelines, which took effect on August 9, 1995, establish
standards for internal controls, information systems, internal audit systems,
loan documentation, credit underwriting, interest rate exposure, asset quality
and growth, earnings, and compensation, fees and benefits. In general, the
guidelines prescribe the goals to be achieved in each area, and each institution
will be responsible for establishing its own procedures to achieve those goals.
If an institution fails to comply with any of the standards included in the
guidelines, the institution's primary federal bank regulator may require the
institution to submit a plan for achieving and maintaining compliance.
State Bank Activities. Under FDICIA, as implemented by final regulations
adopted by the FDIC, FDIC-insured state banks are prohibited, subject to certain
exceptions, from making or retaining equity investments of a type, or in an
amount, that are not permissible for a national bank. FDICIA, as implemented by
FDIC regulations, also prohibits FDIC-insured state banks and their
subsidiaries, subject to certain exceptions, from engaging as principal in any
activity that is not permitted for a national bank or its subsidiary,
respectively, unless the bank meets, and continues to meet its minimum
regulatory capital requirements and the FDIC determines the activity would not
pose a significant risk to the deposit insurance fund of which the bank is a
member. Impermissible investments and activities must be divested or
discontinued within certain time frames set by the FDIC in accordance with
FDICIA. These restrictions do not currently have a material impact on the
operations of First Bank.
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 Funds
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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.
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.
RECENT REGULATORY DEVELOPMENTS
Gramm-Leach-Bliley Act. On November 12, 1999, President Clinton signed into
law the Gramm-Leach-Bliley Act, previously known as the Financial Services
Modernization Act of 1999. Among other things, the Gramm-Leach-Bliley Act
repeals the restrictions on banks affiliating with securities firms contained in
sections 20 and 32 of the Glass-Steagall Act. This act also creates a new
"financial holding company" under the Bank Holding Company Act, which will
permit holding companies to engage in a statutorily provided list of financial
activities, including insurance and securities underwriting and agency
activities, merchant banking, and insurance company portfolio investment
activities, and authorizes such other financial activities as may be determined
by rule or order of the Federal Reserve Board.
In addition, the Gramm-Leach-Bliley Act imposes significant new financial
privacy obligations and reporting requirements on all financial institutions,
including banks. Among other things, it will require financial institutions (a)
to establish privacy policies and disclose them to customers both at the
commencement of a customer relationship and on an annual basis and (b) to permit
customers to opt out of a financial institution's disclosure of financial
information to nonaffiliated third parties. The Gramm-Leach-Bliley Act requires
the federal financial regulators to promulgate regulations implementing these
provisions within six months of enactment, and the statute's privacy
requirements will take effect one year after enactment.
The Gramm-Leach-Bliley Act is intended to grant to community banks certain
powers as a matter of right that larger institutions have accumulated on an ad
hoc basis. Nevertheless, this act may have the result of increasing the amount
of competition that First Shares and First Bank face from larger institutions
and other types of companies. In fact, it is not possible to predict the full
effect that the Gramm-Leach-Bliley Act will have on First Shares and First Bank.
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DESCRIPTION OF CAPITAL STOCK
GENERAL
All material provisions of our common stock are summarized in this
prospectus. However, the following description of our capital stock is subject
in all respects to applicable Indiana law and to the provisions of our amended
articles of incorporation and amended bylaws, copies of which have been filed as
exhibits to the registration statement of which this prospectus is a part.
Our authorized capital stock consists of 10 million shares of common stock
and 2 million shares of preferred stock. Upon completion of the offering, and
assuming no exercise of the underwriters' over-allotment option, there will be
1,414,512 shares of common stock issued and outstanding and no shares of
preferred stock issued and outstanding. Up to an additional 108,000 shares of
common stock will be issuable upon exercise of outstanding options granted under
our stock option plans. See "Management -- Benefit Plans and Arrangements."
Immediately prior to the offering, 664,512 shares of common stock were
outstanding and we had approximately 120 shareholders of record.
COMMON STOCK
Each holder of common stock is entitled to one vote per share of record on
all matters to be voted upon by the shareholders. Holders do not have cumulative
voting rights in the election of directors or any other matter. Subject to the
preferential rights of the holders of any preferred stock that may at the time
be outstanding, each share of common stock entitles the holder thereof to an
equal and ratable right to receive dividends when, if and as declared from time
to time by the board of directors out of legally available funds. We do not
anticipate paying cash dividends in the foreseeable future. See "Dividend
Policy."
In the event of our liquidation, dissolution or winding up, the holders of
common stock will be entitled to share ratably in all assets remaining after
payments to creditors and after satisfaction of the liquidation preference, if
any, of the holders of any preferred stock that may at the time be outstanding.
Holders of common stock have no preemptive or redemption rights and are not
subject to further calls or assessments. All of the shares of common stock to be
issued and sold in the offering will be, immediately upon consummation of the
offering, validly issued, fully paid and nonassessable.
PREFERRED STOCK
The authorized preferred stock is available for issuance from time to time
at the discretion of the board of directors without shareholder approval. The
board of directors has the authority to prescribe for each series of preferred
stock it establishes the number of shares in that series, the number of votes
(if any) to which the shares in that series are entitled, the consideration for
the shares in that series, and the designations, powers, preferences and other
rights, qualifications, limitations or restrictions of the shares in that
series. As a matter of policy, we will not offer preferred stock to our
officers, directors and principal shareholders except on the same terms as it is
offered to all other existing shareholders or to new shareholders, unless the
issuance is approved by a majority of our independent directors who do not have
interest in the transaction and who have access, at our expense, to our legal
counsel or independent legal counsel. Depending upon the rights prescribed for a
series of preferred stock, however, the issuance of preferred stock could have
an adverse effect on the voting power of the holders of common stock and could
adversely affect holders of common stock by delaying or preventing a change in
control, making removal of our present management more difficult or imposing
restrictions upon the payment of dividends and other distributions to the
holders of common stock.
AUTHORIZED BUT UNISSUED SHARES
Indiana law does not require shareholder approval for any issuance of
authorized shares. Authorized but unissued shares may be used for a variety of
corporate purposes, including future public or private offerings to raise
additional capital or to facilitate corporate acquisitions. One of the effects
of the existence
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of authorized but unissued shares may be to enable the board of directors to
issue shares to persons friendly to current management, which issuance could
render more difficult or discourage an attempt to obtain control of us by means
of a merger, tender offer, proxy contest or otherwise, and thereby protect the
continuity of our management and possibly deprive the shareholders of
opportunities to sell their shares of common stock at prices higher than
prevailing market prices.
PROVISIONS OF AMENDED ARTICLES OF INCORPORATION AND AMENDED BYLAWS
Provisions of our amended articles of incorporation and amended bylaws may
delay or make more difficult unsolicited acquisitions or changes of control.
Such provisions could have the effect of discouraging third parties from making
proposals involving an unsolicited acquisition or change in control, although
such proposals, if made, might be considered desirable by a majority of our
shareholders. Such provisions may also have the effect of making it more
difficult for third parties to cause the replacement of our current management
without the concurrence of the board of directors. These provisions include:
- the division of the Board of Directors into three classes serving
"staggered" terms of office of three years (see "Management -- Directors
and Officers");
- the availability of authorized but unissued shares of stock for issuance
from time to time at the discretion of the board of directors (see
"-- Authorized But Unissued Shares");
- provisions allowing the removal of directors only for cause and only upon
a 70% shareholder vote taken at a meeting called for that purpose;
- provisions requiring the participation of 25% of the voting power of the
outstanding common stock (or 70% if First Shares has more than 50
shareholders) in order for the shareholders to demand the calling of a
special meeting of shareholders; and
- requirements for advance notice for raising business or making
nominations at shareholders' meetings.
Our amended bylaws establish an advance notice procedure with regard to
business to be brought before an annual or special meeting of our shareholders
and with regard to the nomination of candidates for election as directors, other
than by or at the direction of the board of directors. Although our amended
bylaws do not give the board of directors any power to approve or disapprove
shareholder nominations for the election of directors or proposals for action,
they may have the effect of precluding a contest for the election of directors
or the consideration of shareholder proposals if the established procedures are
not followed, and of discouraging or deterring a third party from conducting a
solicitation of proxies to elect its own slate of directors or to approve its
proposal without regard to whether consideration of such nominees or proposals
might be harmful or beneficial to us and our shareholders.
PROVISIONS OF INDIANA LAW
The Indiana Business Corporation Law (the "IBCL") applies to First Shares
as an Indiana corporation. Under certain circumstances, the following provisions
of the IBCL may delay, prevent or make more difficult unsolicited acquisitions
or changes of control. Such provisions also may have the effect of preventing
changes in our management. It is possible that such provisions could make it
more difficult to accomplish transactions which shareholders may otherwise deem
to be in their best interests.
Control Share Acquisitions. Under Sections 23-1-42-1 to 23-1-42-11 of the
IBCL, an "acquiring person" who makes a "control share acquisition" in an
"issuing public corporation" may not exercise voting rights on any "control
shares" unless such voting rights are conferred by a majority vote of the
disinterested shareholders of the issuing corporation at a special meeting of
such shareholders held upon the request and at the expense of the acquiring
person. In the event that control shares acquired in a control share acquisition
are accorded full voting rights and the acquiring person acquires control shares
with a majority or more of all voting power, all shareholders of the issuing
corporation have dissenters' rights to receive the fair value of their shares.
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Under the IBCL, "control shares" means shares acquired by a person that,
when added to all other shares of the issuing public corporation owned by that
person or in respect to which that person may exercise or direct the exercise of
voting power, would otherwise entitle that person to exercise voting power of
the issuing public corporation in the election of directors within any of the
following ranges (a) one-fifth or more but less than one-third; (b) one-third or
more but less than a majority; or (c) a majority or more. "Control share
acquisition" means, subject to exceptions, the acquisition, directly or
indirectly, by any person of ownership of, or the power to direct the exercise
of voting power with respect to, issued and outstanding control shares. Shares
acquired within 90 days or under a plan to make a control share acquisition are
considered to have been acquired in the same acquisition. "Issuing public
corporation" means a corporation which is organized in Indiana, has 100 or more
shareholders, its principal place of business, its principal office or
substantial assets within Indiana and either (a) more than 10% of its
shareholders resident in Indiana, (b) more than 10% of its shares owned by
Indiana residents or (c) 10,000 shareholders resident in Indiana.
The above provisions do not apply if, before a control share acquisition is
made, the corporation's articles of incorporation or by-laws (including a board
adopted by-law) provide that they do not apply. First Shares' amended articles
of incorporation and amended bylaws do not exclude First Shares from the
restrictions imposed by such provisions.
Business Combinations. Sections 23-1-43-1 to 23-1-43-23 of the IBCL
restrict the ability of a "resident domestic corporation" to engage in any
combinations with an "interested shareholder" for five years after the
interested shareholder's date of acquiring shares unless the combination or the
purchase of shares by the interested shareholder on the interested shareholder's
date of acquiring shares is approved by the board of directors of the resident
domestic corporation before that date. If the combination was not previously
approved, the interested shareholder may effect a combination after the
five-year period only if such shareholder receives approval from a majority of
the disinterested shares or the offer meets statutory fair price criteria. For
purposes of the above provisions, "resident domestic corporation" means an
Indiana corporation that has 100 or more shareholders. "Interested shareholder"
means any person, other than the resident domestic corporation or its
subsidiaries, who is (1) the beneficial owner, directly or indirectly, of 10% or
more of the voting power of the outstanding voting shares of the resident
domestic corporation or (2) an affiliate or associate of the resident domestic
corporation and at any time within the five-year period immediately before the
date in question was the beneficial owner of 10% or more of the voting power of
the then outstanding shares of the resident domestic corporation. The above
provisions do not apply to corporations that so elect in an amendment to their
articles of incorporation approved by a majority of the disinterested shares.
Such an amendment, however, would not become effective until 18 months after its
passage and would apply only to stock acquisitions occurring after its effective
date. First Shares' amended articles of incorporation do not exclude First
Shares from the restrictions imposed by such provisions.
Directors' Duties And Liability. Under Section 23-1-35-1 of the IBCL, our
directors are required to discharge their duties: (a) in good faith; (b) with
the care an ordinarily prudent person in a like position would exercise under
similar circumstances; and (c) in a manner the directors reasonably believe to
be in the best interests of First Shares. However, the IBCL also provides that a
director is not liable for any action taken as a director, or any failure to
act, unless the director has breached or failed to perform the duties of the
director's office and the action or failure to act constitutes willful
misconduct or recklessness. The exoneration from liability under the IBCL does
not affect the liability of directors for violations of the federal securities
laws.
Section 23-1-35-1 of the IBCL also provides that a board of directors, in
discharging its duties, may consider, in its discretion, both the long-term and
short-term best interests of the corporation, taking into account, and weighing
as the directors deem appropriate, the effects of an action on the corporation's
shareholders, employees, suppliers and customers and the communities in which
offices or other facilities of the corporation are located and any other factors
the directors consider pertinent. If a determination is made with the approval
of a majority of the disinterested directors of the board, that determination is
conclusively presumed to be valid unless it can be demonstrated that the
determination was not made in
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good faith after reasonable investigation. Once the board has determined that
the proposed action is not in the best interests of the corporation, it has no
duty to remove any barriers to the success of the action, including a rights
plan. Section 23-1-35-1 specifically provides that certain judicial decisions in
Delaware and other jurisdictions, which might be looked upon for guidance in
interpreting Indiana law, including decisions that propose a higher or different
degree of scrutiny in response to a proposed acquisition of the corporation, are
inconsistent with the proper application of that section.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
First Shares' amended articles of incorporation provide that, to the extent
not inconsistent with applicable law, First Shares shall indemnify each of its
directors, officers, employees and agents against all liability and reasonable
expense that may be incurred by him or her in connection with or resulting from
any claim in which he or she may become involved by reason of the fact that he
or she is or was a director, officer, employee or agent of First Shares or by
reason of any action taken or not taken by him or her in any such capacity, if
such person is wholly successful with respect to the claim or, if not wholly
successful, then if such person is determined to have acted in good faith, in
what he or she reasonably believed to be the best interests of First Shares (or
at least not opposed to its best interests) and, in addition, with respect to a
criminal claim, is determined to have had reasonable cause to believe that his
or her conduct was lawful or had no reasonable cause to believe that his or her
conduct was unlawful.
FDIC regulations impose limitations on indemnification payments which could
restrict, in certain circumstances, payments by First Shares or First Bank to
their respective directors or officers otherwise permitted or required under the
IBCL or First Shares' amended articles of incorporation.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to our directors, officers and controlling persons
under the provisions discussed above or otherwise, we have been advised that, in
the opinion of the SEC, such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable.
REGISTRAR AND TRANSFER AGENT
The registrar and transfer agent for our common stock will be Registrar and
Transfer Company, Cranford, New Jersey.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the offering, we expect to have 1,414,512 shares of
common stock outstanding (plus any additional shares sold upon the underwriters'
exercise of their over-allotment option), all of which either will have been
registered with the SEC under the Securities Act or will have been outstanding
for a sufficient period of time so that they will be eligible for resale without
registration under the Securities Act unless they were acquired by our
directors, executive officers or other affiliates (collectively, "affiliates").
Our affiliates generally will be able to sell shares of the common stock only in
accordance with the limitations of Rule 144 under the Securities Act.
In general, under Rule 144 as currently in effect, an affiliate (as defined
in Rule 144) may sell shares of common stock within any three-month period in an
amount limited to the greater of 1% of our outstanding shares of common stock or
the average weekly trading volume in our common stock during the four calendar
weeks preceding such sale. Sales under Rule 144 are also subject to certain
manner-of-sale provisions, notice requirements and the availability of current
public information about us.
Our directors and executive officers (who are expected to hold an aggregate
of approximately 231,752 shares after the offering, excluding the shares that
they have the right to acquire pursuant to options granted to them under our
stock option plans) have agreed, or will agree, that we and they will not issue,
offer for sale, sell, transfer, grant options to purchase or otherwise dispose
of or register with the SEC any shares of common stock (or any securities
convertible into or exercisable for shares of common stock), without the prior
written consent of David A. Noyes & Company, for a period of one year from
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the date of this prospectus, except that (a) we may issue shares upon the
exercise of options under our stock option plans and (b) the directors and
officers may give common stock owned by them to others who have agreed in
writing to be bound by the same agreement. After the one-year period, such
directors and executive officers will be permitted to sell no more than 10% of
their common stock in each of the next three years. In addition, our executive
officers and directors have entered into lock-in agreements with various states
in which this offering is being made pursuant to which they have agreed not to
sell all or a portion of their shares for a period of one year from the date of
this offering. After this one-year period, 2.5% of the shares subject to this
escrow will be released each quarter, and all of the shares will be released two
years after the date of this offering.
As of December 31, 1999, we had outstanding options under our stock option
plans to purchase an aggregate of 108,000 shares of our common stock at an
exercise price equal to or less than the initial public offering price of the
common stock, as specified on the cover page of this prospectus. See
"Management -- Benefit Plans and Arrangements."
Prior to the offering, there has been no public trading market for the
common stock, and we cannot predict the effect, if any, that sales of shares or
the availability of shares for sale will have on the prevailing market price of
the common stock after completion of the offering. Nevertheless, sales of
substantial amounts of common stock in the public market could have an adverse
effect on prevailing market prices.
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UNDERWRITING
Subject to the terms and conditions contained in an underwriting agreement
dated , 2000, the underwriters named below, who are
represented by David A. Noyes & Company (the "Representative"), have severally
agreed to purchase from us the number of shares set forth opposite their names
below:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
<S> <C>
David A. Noyes & Company....................................
..................................................
..................................................
----------
Total.............................................
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase and accept delivery of the shares included in this
offering are subject to approval of specific legal matters by their counsel and
to specific other conditions. Except for those shares covered by the
over-allotment option, the underwriters are obligated to purchase and accept
delivery of all the shares if they purchase any of the shares. The
over-allotment option is discussed below.
The underwriters propose to offer initially some of the shares directly to
the public at the public offering price set forth on the cover page of this
prospectus and some of the shares to some dealers at the public offering price
less a concession not in excess of $ per share. The underwriters may allow,
and these dealers may reallow, a concession not in excess of $ per share on
sales to some other dealers. After the initial offering of the shares to the
public, the underwriters may change the public offering price and these
concessions.
The proceeds we will receive as shown on the cover page of this prospectus
do not reflect estimated expenses of $250,000 payable by us. These expenses are
estimated to include printing expenses of $50,000, registration, NASD and
listing fees of $10,500, professional fees of $155,000, blue sky fees and
expenses of $20,000 and miscellaneous expenses of $14,500.
The underwriters have informed us that they do not intend to make sales to
any accounts over which they exercise discretionary authority.
We have granted the underwriters an option, exercisable for 30 days from
the date of the underwriting agreement, to purchase up to 112,500 additional
shares at the public offering price less the underwriting fees. The underwriters
may exercise this option solely to cover over-allotments, if any, made in
connection with this offering. To the extent that the underwriters exercise this
option, each underwriter will become obligated, subject to specific conditions,
to purchase a number of additional shares about proportionate to that
underwriter's initial purchase commitment.
We have agreed to indemnify the underwriters against some civil
liabilities, including liabilities under the Securities Act, or to contribute to
payments that the underwriters may be required to make in respect of any of
those liabilities.
We have agreed that we will not sell, contract to sell, grant any option
for the sale of or otherwise dispose of any of our shares of common stock or
securities convertible into or exercisable for our common stock for 150 days
after the date of this prospectus, except for transactions under our stock
option plans, unless David A. Noyes & Company gives its prior written consent.
Our executive officers and directors have agreed that, for a period of one year
from the date of this prospectus, they will not, subject to some exceptions,
without the prior written consent of David A. Noyes & Company (1) offer, pledge,
sell, contract to sell, sell any option or contract to purchase, purchase any
option or contract to sell, grant any option, right or warrant to purchase or
otherwise transfer or dispose of, directly or indirectly, any shares of common
stock or any securities convertible into or exercisable or exchangeable for
common stock; or (2) enter into any swap or other arrangement that transfers all
or a portion of the economic consequences associated with the ownership of any
common stock (regardless of whether any of the transactions
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described in clause (1) or (2) is to be settled by the delivery of common stock
or other securities, in cash or otherwise). After the one-year period, such
directors and executive officers will be permitted to sell no more than 10% of
their common stock in each of the next three years. In addition, our executive
officers and directors have entered into lock-in agreements with various states
in which this offering is being made pursuant to which they have agreed not to
sell all or a portion of their shares for a period of one year from the date of
this offering. After this one-year period, 2.5% of the shares subject to this
escrow will be released each quarter, and all of the shares will be released two
years after the date of this offering.
Other than in the United States, no action has been taken by us or the
underwriters that would permit a public offering of the shares of common stock
included in this offering in any jurisdiction where action for that purpose is
required. The shares included in this offering may not be offered or sold,
directly or indirectly, nor may this prospectus or any other offering material
or advertisement in connection with the offer and sale of any of these shares be
distributed or published in any jurisdiction, except under circumstances that
will result in compliance with the applicable rules and regulations of that
jurisdiction. Persons who receive this prospectus are advised to inform
themselves about and to observe any restrictions relating to the offering of the
common stock and the distribution of this prospectus. This prospectus is not an
offer to sell or a solicitation of an offer to buy any shares of common stock
included in this offering in any jurisdiction where that would not be permitted
or legal.
The common stock being offered is a new issue of securities with no prior
established trading market. The underwriters have advised us that, upon
completion of the offering, they intend to make a market in the common stock,
although they are not obligated to do so. Making a market in securities involves
maintaining bid and ask quotations and being able, as principal, to effect
transactions in reasonable quantities at those quoted prices, subject to various
securities laws and other regulatory requirements. The development of a public
trading market depends, however, upon the existence of willing buyers and
sellers, the presence of which is not within our control or the control of any
market-maker. The underwriters may discontinue market-making at any time without
notice. We cannot assure you that the trading market for the common stock
offered in this prospectus will be liquid.
In connection with this offering, some underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
common stock. Specifically, the underwriters may over-allot this offering,
creating a syndicate short position. In addition, the underwriters may bid for
and purchase shares of common stock in the open market to cover syndicate short
positions or to stabilize the price of the common stock. These activities may
stabilize or maintain the market price of the common stock above independent
market levels. The underwriters are not required to engage in these activities
and may end any of these activities at any time.
Prior to this offering, there has been no public market for our common
stock. Accordingly, the public offering price for the common stock was
determined by negotiations between us and the underwriters. This price should
not be construed as indicative of the present or anticipated future value of the
common stock. Several factors were considered in determining the initial
offering price of the common stock, among them the size of the offering, the
initial public offering prices of similar bank holding companies, the
underwriters' experience in dealing with initial public offerings for financial
institutions and the general condition of the equity securities market. We
cannot assure you, however, that the prices at which the common stock will sell
in the public market after this offering will not be lower than the price at
which the shares of common stock are sold by the underwriters.
David A. Noyes & Company from time to time provides investment banking and
financial advisory services to us, including in connection with our acquisition
of a branch in Nashville, Indiana, for which it receives customary fees.
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LEGAL OPINIONS
Bose McKinney & Evans LLP, Indianapolis, Indiana, will pass upon the
legality of the securities offered by this prospectus for us. R.J. McConnell,
one of our directors, is a partner in Bose McKinney & Evans LLP. Certain legal
matters in connection with this offering will be passed upon for the
underwriters by Leagre Chandler & Millard LLP. Leagre Chandler & Millard LLP has
acted as counsel for us in the past and is currently acting as our counsel in
connection with the acquisition of a branch bank.
EXPERTS
The audited consolidated financial statements of First Shares Bancorp, Inc.
and Subsidiaries as of December 31, 1999 and 1998 and for each of the three
years in the period ended December 31, 1999, included in this prospectus, have
been audited by Crowe, Chizek and Company LLP, independent public accountants,
as indicated in their report with respect thereto and included herein in
reliance upon the authority of said firm as experts in giving said report.
50
<PAGE> 52
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Three Years Ended December 31, 1999
Report of Independent Auditors.............................. F-2
Consolidated Balance Sheets, December 31, 1998 and December
31, 1999.................................................. F-3
Consolidated Statements of Operations for the three-year
period ended December 31, 1999............................ F-4
Consolidated Statements of Changes in Shareholders' Equity
for the three-year period ended December 31, 1999......... F-5
Consolidated Statements of Cash Flows for the three year
period ended December 31, 1999............................ F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 53
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
First Shares Bancorp, Inc.
Greenwood, Indiana
We have audited the accompanying consolidated balance sheets of First
Shares Bancorp, Inc. as of December 31, 1999 and 1998, and the related
consolidated statements of operations, changes in shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of First Shares Bancorp, Inc.
as of December 31, 1999 and 1998, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1999 in
conformity with generally accepted accounting principles.
Crowe, Chizek and Company LLP
Indianapolis, Indiana
January 14, 2000, except for Note 1 with
respect to the equity transaction, as to which
the date is February 11, 2000
F-2
<PAGE> 54
FIRST SHARES BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Cash and due from banks..................................... $ 2,460 $ 1,674
Interest-bearing deposits................................... 100 --
Federal funds sold.......................................... 89 3,000
------- -------
Cash and cash equivalents......................... 2,649 4,674
Securities available for sale (at market)................... 16,875 8,535
Securities held to maturity (market values of $616 and
$1,341 in 1999 and 1998).................................. 617 1,334
FHLB stock, at cost......................................... 129 126
Loans held for sale......................................... 601 --
Loans, net of allowance ($549 and $346)..................... 44,996 26,305
Premises and equipment, net................................. 1,696 634
Intangible assets, net...................................... 206 250
Accrued interest receivable and other assets................ 901 1,007
------- -------
$68,670 $42,865
======= =======
</TABLE>
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<S> <C> <C>
Liabilities
Noninterest-bearing deposits.............................. $ 6,990 $ 5,946
Interest-bearing deposits................................. 55,997 32,161
------- -------
Total deposits.................................... 62,987 38,107
Federal Home Loan Bank advances........................... 800 --
Accrued interest payable and other liabilities............ 286 273
------- -------
64,073 38,380
Shareholders' equity
Common stock, $.01 par value: 10,000,000 shares
authorized, 664,512 (1999) and 557,760 (1998) shares
issued................................................. 7 6
Additional paid in capital................................ 1,988 1,089
Retained earnings......................................... 2,749 3,447
Accumulated other comprehensive income.................... (147) 27
Less: Treasury stock, at cost (0 and 12,180 shares)....... -- (84)
------- -------
4,597 4,485
------- -------
$68,670 $42,865
======= =======
</TABLE>
F-3
<PAGE> 55
FIRST SHARES BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Interest income
Loans, including related fees............................. $3,157 $2,778 $2,630
Taxable securities........................................ 555 295 541
Nontaxable securities..................................... 77 83 45
Other..................................................... 122 165 95
------ ------ ------
3,911 3,321 3,311
Interest expense
Deposits.................................................. 1,785 1,470 1,502
Other..................................................... 32 -- 3
------ ------ ------
1,817 1,470 1,505
NET INTEREST INCOME......................................... 2,094 1,851 1,806
Provision for loan losses................................... 280 526 15
------ ------ ------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES......... 1,814 1,325 1,791
Noninterest income
Service charges on deposit accounts....................... 128 121 130
Gain (loss) on sale of other real estate.................. (25) 3 6
Other..................................................... 95 59 80
------ ------ ------
198 183 216
Noninterest expenses
Salaries and employee benefits............................ 1,615 885 937
Occupancy................................................. 151 67 62
Equipment and data processing............................. 253 196 135
Core deposit amortization................................. 44 44 42
Postage, freight and express.............................. 44 39 40
Advertising............................................... 117 24 20
Stationery and office supplies............................ 57 27 31
Telephone and telegraph................................... 64 34 30
Committee and director fees............................... 46 39 34
Other..................................................... 303 244 206
------ ------ ------
2,694 1,599 1,537
------ ------ ------
INCOME (LOSS) BEFORE INCOME TAXES........................... (682) (91) 470
Income tax expense (benefit)................................ (73) (85) 182
------ ------ ------
NET INCOME (LOSS)........................................... $ (609) $ (6) $ 288
====== ====== ======
Per share data
Earnings/(loss) per share................................. $ (.97) $ (.01) $ .53
Earnings/(loss) per share, assuming dilution.............. (.97) (.01) .52
</TABLE>
F-4
<PAGE> 56
FIRST SHARES BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER TOTAL
COMMON PAID-IN RETAINED COMPREHENSIVE TREASURY SHAREHOLDERS'
STOCK CAPITAL EARNINGS INCOME STOCK EQUITY
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1997.... $ 6 $1,061 $3,345 $ 1 $(90) $4,323
Comprehensive income:
Net income.................. -- -- 288 -- -- 288
Change in unrealized gain/
(loss)................... -- -- -- 20 -- 20
------
Total comprehensive
income............ 308
Cash dividends ($.16 per
share)................... -- -- (89) -- -- (89)
Reissue of treasury stock
(672 shares)............. -- -- -- -- 5 5
Stock options outstanding... -- 19 -- -- -- 19
------ ------ ------ ----- ---- ------
BALANCE AT DECEMBER 31,
1997........................ 6 1,080 3,544 21 (85) 4,566
Comprehensive loss:
Net loss.................... -- (6) -- -- (6)
Changes in unrealized
gain/(loss).............. -- -- -- 6 -- 6
------
Total comprehensive
loss.............. --
Cash dividends ($.17 per
share)................... -- -- (91) -- -- (91)
Reissue of treasury stock
(90 shares).............. -- -- -- -- 1 1
Stock options outstanding... -- 9 -- -- -- 9
------ ------ ------ ----- ---- ------
BALANCE AT DECEMBER 31,
1998........................ 6 1,089 3,447 27 (84) 4,485
Comprehensive loss:
Net loss.................... -- -- (609) -- -- (609)
Changes in unrealized gain/
(loss)................... -- -- -- (174) -- (174)
------
Total comprehensive
loss.............. (783)
Cash dividends ($.13 per
share)................... -- -- (89) -- -- (89)
Sale of 121,830 shares at
$8.19 per share.......... 1 996 -- -- -- 997
Purchase of treasury stock
(2,898 shares)........... -- -- -- -- (23) (23)
Retirement of treasury
stock.................... -- (107) -- -- 107 --
Stock options outstanding... -- 10 -- -- -- 10
------ ------ ------ ----- ---- ------
BALANCE AT DECEMBER 31,
1999........................ $ 7 $1,988 $2,749 $(147) $ -- $4,597
====== ====== ====== ===== ==== ======
</TABLE>
F-5
<PAGE> 57
FIRST SHARES BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)......................................... $ (609) $ (6) $ 288
Adjustments to reconcile net income (loss) to net cash
from operating activities:
Depreciation and amortization.......................... 171 111 91
Provision for loan losses.............................. 280 526 15
Stock option compensation expense...................... 10 9 19
Discount (accretion) and premium amortization.......... 13 2 (4)
Amortization of intangible asset....................... 44 44 48
Changes in assets and liabilities:
Loans held for sale.................................. (601) -- --
Interest receivable and other assets................. 85 (271) 122
Interest payable and other liabilities............... 126 (105) 106
-------- ------- -------
Net cash from operating activities................ (481) 310 685
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales and maturities of securities available
for sale............................................... 5,941 3,539 2,558
Proceeds from maturities of securities held to maturity... 715 1,541 3,174
Purchases of securities available for sale................ (14,579) (7,158) (3,277)
Purchase of Federal Home Loan Bank stock.................. (3) (2) (3)
Loans made to customers net of payments received.......... (18,971) 1,860 (3,627)
Premises and equipment purchases.......................... (1,212) (76) (151)
-------- ------- -------
Net cash from investing activities................ (28,109) (296) (1,326)
CASH FLOWS FROM FINANCING ACTIVITIES
Change in deposit accounts................................ 24,880 1,109 206
Proceeds from Federal Home Loan Bank advances............. 2,300 -- --
Payments on Federal Home Loan Bank advance................ (1,500) -- --
Dividends paid............................................ (89) (91) (89)
Issuance of common stock.................................. 997 -- --
Net purchase/reissue of treasury stock.................... (23) 1 5
-------- ------- -------
Net cash from financing activities................ 26,565 1,019 122
-------- ------- -------
Net change in cash and cash equivalents..................... (2,025) 1,033 (519)
Cash and cash equivalents at beginning of year.............. 4,674 3,641 4,160
-------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR.................... $ 2,649 $ 4,674 $ 3,641
======== ======= =======
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest............................................... $ 1,724 $ 1,410 $ 1,520
Income taxes........................................... 34 39 127
</TABLE>
F-6
<PAGE> 58
FIRST SHARES BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations and Description of Consolidation: The accompanying
consolidated financial statements include the accounts of First Shares Bancorp,
Inc. (the Company) and its wholly-owned subsidiary, First Bank (the Bank).
Intercompany balances and transactions are eliminated in consolidation. The Bank
operates from five locations which generate commercial, mortgage and installment
loans, and receives deposits from customers located primarily in Johnson, Morgan
and Brown Counties of Indiana. The majority of the Company's income is derived
from commercial and retail lending activities and investments. The majority of
the Bank's loans are secured by specific items of collateral including business
assets, real property and consumer assets.
Use of Estimates: To prepare financial statements in conformity with
generally accepted accounting principles, management makes estimates and
assumptions based on available information. These estimates and assumptions
affect the amounts reported in the financial statements and the disclosures
provided, and future results could differ. Areas where management's estimates
and assumptions are more susceptible to change in the near term include the
allowance for loan losses and the fair values of financial instruments.
Securities: Securities are classified as held to maturity and carried at
amortized cost when management has the positive intent and ability to hold them
to maturity. Securities are classified as available for sale when they might be
sold before maturity. Securities available for sale are carried at fair value,
with unrealized holding gains and losses reported in other comprehensive income
(loss). Other securities such as Federal Home Loan Bank are carried at cost.
Securities are written down to fair value when a decline in fair value is not
temporary. Interest and dividend income, adjusted by amortization of purchase
premium or discount, is included in earnings.
Loans: Loans are reported at the principal balance outstanding, net of
unearned interest, deferred loan fees and costs, and an allowance for loan
losses. Loans held for sale are reported at the lower of cost or market, on an
aggregate basis. Interest income is reported on the interest method and includes
amortization of net deferred loan fees and costs over the loan term.
Interest income is not reported when full loan repayment is in doubt,
typically when payments are past due over 90 days. Payments received on such
loans are reported as principal reductions.
Allowance for Loan Losses: The allowance for loan losses is a valuation
allowance, increased by the provision for loan losses and decreased by
charge-offs less recoveries. Management estimates the allowance balance required
based on past loan loss experience, known and inherent risks in the portfolio,
information about specific borrower situations and estimated collateral values,
economic conditions, and other factors. Allocations of the allowance may be made
for specific loans, but the entire allowance is available for any loan that, in
management's judgement, should be charged-off.
A loan is impaired when full payment under the loan terms is not expected.
Impairment is evaluated in total for smaller-balance loans of similar nature
such as residential mortgage, consumer, and credit card loans, and on an
individual loan basis for other loans. If a loan is impaired, a portion of the
allowance is allocated so that the loan is reported, net, at the present value
of estimated future cash flows using the loan's existing rate or at the fair
value of collateral if repayment is expected solely from collateral.
Premises and Equipment: Asset cost is reported net of accumulated
depreciation. Depreciation expense is calculated on the straight-line method
over asset useful lives.
Long-Term Assets: These assets are reviewed for impairment when events
indicate their carrying amount may not be recoverable from future undiscounted
cash flows. If impaired, the assets are recorded at discounted amounts.
F-7
<PAGE> 59
FIRST SHARES BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Income Taxes: Income tax expense is the sum of the current year income tax
due or refundable and the change in deferred tax assets and liabilities.
Deferred tax assets and liabilities are the expected future tax consequences of
temporary differences between the carrying amounts and tax bases of assets and
liabilities, computed using enacted tax rates. A valuation allowance, if needed,
reduces deferred tax assets to the amount expected to be realized.
Loss Contingencies: Loss contingencies, including claims and legal actions
arising in the ordinary course of business, are recorded as liabilities when the
likelihood of loss is probable and an amount or range of loss can be reasonably
estimated. Management does not believe there now are such matters that will have
a material effect on the financial statements.
Intangible Assets: Intangibles consist primarily of a core deposit
intangible from a 1996 branch acquisition and is being amortized over 10 years
on an accelerated basis.
Concentration of Funds: At December 31, 1999 and 1998 the Bank's cash
balances with Bank One, Indianapolis NA totaled $778 and $3,821, respectively.
Cash Flows: Cash and cash equivalents include cash, deposits with other
financial institutions under 90 days, and federal funds sold. Net cash flows are
reported for customer loan and deposit transactions and interest bearing
deposits with other banks.
Stock Compensation: Expense for employee compensation under stock option
plans is reported when options are granted below market price at grant date. In
addition, pro forma disclosures of net income and earnings per share are shown
using the fair value method to measure expense for options granted, using an
option pricing method to estimate fair value.
Earnings Per Share: Earnings per share is based on weighted-average common
shares outstanding. Diluted earnings per share includes the dilutive effect of
additional potential shares issuable under outstanding options.
Equity Transaction: On January 21, 2000, the Company declared a 6:1 stock
split. On February 11, 2000, the shareholders approved a change in authorized
shares to 10,000,000 and set par value at $.01 per share. Earnings, dividends
per share, and other financial information are restated for all stock splits and
dividends through the date of issue of the financial statements.
Comprehensive Income/(Loss): Comprehensive income consists of net
income/(loss) and other comprehensive income/(loss). Other comprehensive
income/(loss) includes unrealized gains and losses on securities available for
sale which are also recognized as separate components of equity.
Fair Value of Financial Instruments: Fair values of financial instruments
are estimated using relevant market information and other assumptions, as more
fully disclosed in a separate note. Fair value estimates involve uncertainties
and matters of significant judgment regarding interest rates, credit risk,
prepayments, and other factors, especially in the absence of broad markets for
particular items. Changes in assumptions or in market conditions could
significantly affect the estimates.
Dividend Restriction: Banking regulations require the maintenance of
certain capital levels that may limit the amount of dividends which may be paid
by the Bank to the Company or by the Company to its shareholders.
Industry Segment: Internal financial information is reported and aggregated
in one line of business, banking.
New Accounting Pronouncements: Beginning January 1, 2001, a new accounting
standard will require all derivatives to be recorded at fair value. Unless
designated as hedges, changes in these fair values will be recorded in the
income statement. Fair value changes involving hedges will generally be recorded
by
F-8
<PAGE> 60
FIRST SHARES BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
offsetting gains and losses on the hedge and on the hedged item, even if the
fair value of the hedged item is not otherwise recorded. This is not expected to
have a material effect, but the effect will depend on derivative holdings when
this standard applies.
NOTE 2 -- SECURITIES
The amortized cost and fair values of securities at December 31, 1999 and
1998 are as follows:
<TABLE>
<CAPTION>
1999
---------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE
U.S. Treasury and government agency securities...... $ 7,270 $-- $(151) $ 7,119
Obligations of states and political subdivisions.... 749 -- (41) 708
Other securities.................................... 8,336 3 (32) 8,307
Mortgage backed securities.......................... 763 -- (22) 741
------- --- ----- -------
$17,118 $ 3 $(246) $16,875
======= === ===== =======
HELD TO MATURITY
U.S. Treasury and government agency securities...... $ 251 $-- $ (3) $ 248
Obligations of states and political subdivisions.... 355 2 -- 357
Mortgage backed securities.......................... 11 -- -- 11
------- --- ----- -------
$ 617 $ 2 $ (3) $ 616
======= === ===== =======
</TABLE>
<TABLE>
<CAPTION>
1998
---------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE
U.S. Treasury and government agency securities...... $ 4,503 $19 $ (7) $ 4,515
Obligations of states and political subdivisions.... 1,949 44 (7) 1,986
Other securities.................................... 1,020 -- (7) 1,013
Mortgage backed securities.......................... 1,019 2 -- 1,021
------- --- ----- -------
$ 8,491 $65 $ (21) $ 8,535
======= === ===== =======
HELD TO MATURITY
U.S. Treasury and government agency securities...... $ 747 $ 3 $ (5) $ 745
Obligations of states and political subdivisions.... 355 9 -- 364
Mortgage backed securities.......................... 232 -- -- 232
------- --- ----- -------
$ 1,334 $12 $ (5) $ 1,341
======= === ===== =======
</TABLE>
F-9
<PAGE> 61
FIRST SHARES BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The amortized cost and fair value of debt securities at December 31, 1999,
by contractual maturity, are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
AVAILABLE FOR SALE HELD TO MATURITY
------------------- -----------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
<S> <C> <C> <C> <C>
Due in one year or less......................... $ 9,485 $ 9,468 $330 $328
Due after one year through five years........... 4,744 4,614 276 277
Due after five years through ten years.......... 1,761 1,716 -- --
Due after ten years............................. 365 336 -- --
Mortgage backed securities...................... 763 741 11 11
------- ------- ---- ----
$17,118 $16,875 $617 $616
======= ======= ==== ====
</TABLE>
Information about the sales of securities available for sale follows:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Proceeds.................................................... $1,192 $-- $956
Gross realized gains........................................ 7 -- 5
Gross realized losses....................................... 7 -- 5
</TABLE>
NOTE 3 -- LOANS
Total loans are comprised of the following at December 31:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Commercial.................................................. $10,917 $ 5,123
Commercial Real Estate...................................... 5,566 4,952
Residential Real Estate..................................... 13,779 9,731
Construction................................................ 4,921 3,883
Consumer.................................................... 10,362 2,962
------- -------
$45,545 $26,651
======= =======
</TABLE>
NOTE 4 -- ALLOWANCE FOR LOAN LOSSES
An analysis of the allowance for loan losses follows:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Balance, January 1.......................................... $ 346 $ 396 $ 555
Provision charged to operations............................. 280 526 15
Loans charged off........................................... (169) (628) (233)
Recoveries.................................................. 92 52 59
----- ----- -----
Balance, December 31........................................ $ 549 $ 346 $ 396
===== ===== =====
</TABLE>
F-10
<PAGE> 62
FIRST SHARES BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Impaired loans were as follows.
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Year-end loans with no allowance for loan losses
allocated................................................. $ -- $ 94
Year-end loans with allowance for loan losses allocated..... -- 106
Amount of the allowance allocated........................... -- 13
Average of impaired loans during the year................... 70 189
Interest income recognized during impairment................ -- --
Cash-basis interest income recognized....................... -- --
</TABLE>
NOTE 5 -- PREMISES AND EQUIPMENT
Premises and equipment consists of the following at December 31:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Land........................................................ $ 26 $ 26
Buildings and improvements.................................. 540 508
Leasehold improvements...................................... 466 --
Furniture and equipment..................................... 1,507 821
------ ------
Total............................................. 2,539 1,355
Accumulated depreciation.................................... (843) (721)
------ ------
$1,696 $ 634
====== ======
</TABLE>
NOTE 6 -- DEPOSITS
Certificates of deposit in denominations of $100 or more totaled $10,444
and $3,168 at December 31, 1999 and 1998.
At year-end 1999, scheduled maturities of time deposits were as follows:
<TABLE>
<S> <C>
2000....................................................... $26,593
2001....................................................... 8,857
2002....................................................... 1,130
2003....................................................... 2,031
2004....................................................... 203
Thereafter................................................. --
-------
$38,814
=======
</TABLE>
NOTE 7 -- FEDERAL HOME LOAN BANK ADVANCES
At December 31, 1999, the Bank has an outstanding advance with the Federal
Home Loan Bank. The advance has a principal balance of $800 and is payable at
its maturity date of September 10, 2001, with a pre-payment penalty. The advance
has a variable interest rate which was 6.60% at December 31, 1999. The advance
is collateralized by eligible securities and first mortgage loans under a
blanket lien arrangement. At December 31, 1998, the Bank had no advances
outstanding.
NOTE 8 -- EMPLOYMENT BENEFIT PLANS
The Bank maintains a 401(k) retirement plan in which substantially all
employees may participate. Employee contributions are limited to a maximum of
15% of their salary. The Plan allows for employer matching contributions up to
6% of employee's compensation, and employer discretionary contributions. The
Bank's contributions to the Plan become 20% vested after each year of service,
and are fully vested
F-11
<PAGE> 63
FIRST SHARES BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
after 5 years. Total 401(k) contributions charged to expense were $18, $22 and
$40 in 1999, 1998 and 1997.
The Bank has a deferred compensation plan for the benefit of certain
directors. Under the plan, the Bank agrees, in return for the directors
deferring the receipt of a portion of their current compensation, to pay a
retirement benefit computed as the amount of the compensation deferred plus
accrued interest at a variable rate. Accrued benefits payable totaled $92 and
$70 at December 31, 1999 and 1998. The Bank purchased life insurance on the
directors. The cash surrender value of that insurance was $438 and $415 at
December 31, 1999 and 1998 and is carried as an other asset on the consolidated
balance sheet.
NOTE 9 -- INCOME TAXES
Income tax expense/(benefit) consists of the following:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Current payable/(receivable)................................ $(74) $(43) $125
Deferred income tax......................................... 1 (42) 57
---- ---- ----
Income tax expense/(benefit)...................... $(73) $(85) $182
==== ==== ====
</TABLE>
The following is a reconciliation of income taxes and the amount computed
by applying the statutory federal income tax rate of 34% to income/(loss) before
income taxes for December 31:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Statutory rate applied to income/(loss) before income
taxes..................................................... $(232) $(38) $160
Add (deduct)
State income tax, net..................................... -- (4) 29
Tax exempt interest income, net........................... (22) (24) (14)
Other..................................................... (13) (19) 7
Valuation Allowance......................................... 194 -- --
----- ---- ----
Total income tax expense/(benefit)................ $ (73) $(85) $182
===== ==== ====
</TABLE>
F-12
<PAGE> 64
FIRST SHARES BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred tax assets and liabilities as of December 31, 1999 and 1998, are
comprised of the following components:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses................................. $ 142 $ 91
Stock options............................................. 15 11
Core deposit.............................................. 36 28
Net unrealized loss on securities available for sale...... 96 --
Net operating loss carryforward........................... 155 --
----- -----
Total deferred tax assets......................... 444 130
Deferred tax liabilities:
Depreciation.............................................. (86) (53)
Deferred loan fees........................................ (54) --
Accrual to cash........................................... (14) (57)
Net unrealized gain on securities available for sale...... -- (17)
Other..................................................... -- (19)
----- -----
Total deferred liabilities........................ (154) (146)
Valuation allowance......................................... (194) --
----- -----
Net deferred tax asset/(liability)........................ $ 96 $ (16)
===== =====
</TABLE>
A net operating loss of approximately $450 is being carried forward. It
expires, if not used, in 2019.
NOTE 10 -- COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, the Bank has guarantees and commitments
to extend credit which are not reflected in the balance sheet. The Bank's
exposure to credit loss in the event of nonperformance by the other party to the
financial instrument is represented by the contractual amount of those
instruments. The Bank uses the same credit policy to make such commitments as it
does for on-balance sheet items. At December 31, 1999 and 1998, unused lines of
credit and standby letters of credit totaled $8,439 and $3,059, respectively.
Since many commitments to make loans expire without being used, the amount does
not necessarily represent future cash commitments. Collateral obtained upon
exercise of the commitment is determined using management's credit evaluation of
the borrower, and may include accounts receivable, inventory, property, land and
other items.
At year-end 1999 and 1998, reserves of $183 and $117 were required as
deposits with the Federal Reserve or as cash on hand. These reserves do not earn
interest.
The Bank leases branch facilities under operating leases expiring in
various years through 2004. Expense for leased premises was $48, $0, and $0 for
1999, and 1998 and 1997.
Future minimum lease payments are as follows:
<TABLE>
<S> <C>
2000........................................................ $111
2001........................................................ 78
2002........................................................ 78
2003........................................................ 47
2004........................................................ 47
----
Total............................................. $361
====
</TABLE>
F-13
<PAGE> 65
FIRST SHARES BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During 1999, the Company entered into employment contracts with certain
executive officers. The contracts have an initial term of three years, with the
expiration extended an additional year at each anniversary date. The contracts
provide for severance payments and other benefits, the amount of which depends
upon the nature of the separation. No amount is accrued at December 31, 1999
under these contracts.
NOTE 11 -- REGULATORY MATTERS
The Bank is subject to regulatory capital requirements administered by
federal banking agencies. Capital adequacy guidelines and prompt corrective
action regulations involve quantitative measures of assets, liabilities, and
certain off-balance sheet items calculated under regulatory accounting
practices.
The prompt corrective action regulations provide five classifications,
including well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized, although these
terms are not used to represent overall financial condition. If adequately
capitalized, regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and
expansion, and plans for capital restoration are required.
At year end 1999, the capital requirements were met and the Bank was
categorized as "adequately capitalized." Actual capital levels and minimum
required levels for the Bank were as follows:
<TABLE>
<CAPTION>
1999
--------------------------------------------------------
MINIMUM REQUIRED
TO BE WELL
MINIMUM REQUIRED CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION REGULATIONS
-------------- ------------------ ------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
<S> <C> <C> <C> <C> <C> <C>
Total capital (to risk weighted assets).... $5,056 9.1% $4,427 8.0% $5,533 10.0%
Tier 1 capital (to risk weighted assets)... $4,507 8.1% $2,213 4.0% $3,320 6.0%
Tier 1 capital (to average assets)......... $4,507 7.1% $2,527 4.0% $3,159 5.0%
</TABLE>
<TABLE>
<CAPTION>
1998
--------------------------------------------------------
MINIMUM REQUIRED
TO BE WELL
MINIMUM REQUIRED CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION REGULATIONS
-------------- ----------------- -------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
<S> <C> <C> <C> <C> <C> <C>
Total capital (to risk weighted
assets)................................ $4,476 15.7% $2,276 8.0% $2,845 10.0%
Tier 1 capital (to risk weighted
assets)................................ $4,130 14.5% $1,138 4.0% $1,707 6.0%
Tier 1 capital (to average assets)....... $4,130 9.9% $1,666 4.0% $2,083 5.0%
</TABLE>
NOTE 12 -- STOCK OPTIONS
The Company has established two separate stock option plans, the 1996 plan
and the 1999 plan. Under the 1996 plan, 48,000 shares of common stock were set
aside for option granting. In November 1996, 48,000 shares were granted at an
exercise price of $6.67, which was less than fair value at the date of grant. At
grant date 25% of the options granted were available for immediate exercise with
the balance vesting at 25% over the next three years. The options expire seven
years from the grant date. No options have been exercised, or forfeited.
Compensation cost recognized for stock options was $10, $9 and $19 for 1999,
1998 and 1997.
F-14
<PAGE> 66
FIRST SHARES BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, options outstanding under the 1996 plan were as follows:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Number of options.......................................... 48,000 48,000
Exercise price............................................. $6.67 $6.67
Remaining option life...................................... 4 years 5 years
Options now exercisable.................................... 48,000 36,000
</TABLE>
Under the 1999 plan, 93,000 shares of common stock were set aside for
option granting. In May, 1999, 60,000 shares were granted at an exercise price
of $8.23, which was fair value at the date of grant. At grant date 25% of the
options granted were available for immediate exercise with the balance vesting
at 25% over the next three years. The options expire seven years from grant
date. No options were exercised or forfeited during the year. No compensation
cost was recognized for stock options granted in 1999.
At December 31, options outstanding for the 1999 plan were as follows:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Number of options........................................... 60,000 --
Exercise price.............................................. $8.23 --
Remaining option life....................................... 6.5 years --
Options now exercisable..................................... 15,000 --
</TABLE>
Had compensation cost for stock options been measured using the fair value
method, net income and earnings per share would have been the pro forma amounts
indicated below. The pro forma effect may increase in the future if more options
are granted.
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Net income as reported...................................... $(609) $ (6) $288
Pro forma net income........................................ (644) (12) 278
Basic earnings per share as reported........................ (.97) (.01) .53
Pro forma basic earnings per share.......................... (1.03) (.02) .51
Diluted earnings per share as reported...................... (.97) (.01) .52
Pro forma diluted earnings per share........................ (1.03) (.02) .50
</TABLE>
The pro forma effects are computed using option pricing models, using the
following weighted-average assumptions as of grant date.
<TABLE>
<CAPTION>
1999
<S> <C>
Risk-free interest rate..................................... 5.66%
Expected option life........................................ 7 years
Expected stock price volatility............................. 0
Dividend yield.............................................. 1.63%
Weighted average fair value per option granted.............. $1.75
</TABLE>
F-15
<PAGE> 67
FIRST SHARES BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13 -- EARNINGS (LOSS) PER SHARE
A reconciliation of the numerators and denominators used to compute
earnings per share and earnings per share, assuming dilution, is presented
below:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
EARNINGS (LOSS) PER SHARE
Net income (loss).................................. $ (609) $ (6) $ 288
======== ======== ========
Weighted average shares outstanding................ 627,372 545,532 545,304
======== ======== ========
Earnings (loss) per share.................. $ (.97) $ (.01) $ .53
======== ======== ========
EARNINGS (LOSS) PER SHARE ASSUMING DILUTION
Net income (loss).................................. $ (609) $ (6) $ 288
======== ======== ========
Weighted average shares outstanding................ 627,372 545,532 545,304
Add: effect of assumed stock options exercised,
if dilutive..................................... -- -- 8,898
-------- -------- --------
Weighted average and dilutive potential shares
outstanding..................................... 627,372 545,532 554,202
======== ======== ========
Earnings (loss) per share assuming
dilution................................. $ (.97) $ (.01) $ .52
======== ======== ========
</TABLE>
NOTE 14 -- OTHER COMPREHENSIVE INCOME
Other comprehensive income components and related taxes were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Unrealized holding gains (losses) on securities
available-for-sale........................................ $(287) $10 $ 32
Less reclassification adjustments for gains and losses later
recognized in income...................................... -- -- --
----- --- ----
Net unrealized gains.............................. (287) 10 32
Tax effect.................................................. 113 (4) (12)
----- --- ----
Other comprehensive income........................ $(174) $ 6 $ 20
===== === ====
</TABLE>
F-16
<PAGE> 68
FIRST SHARES BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 15 -- FAIR VALUES OF FINANCIAL INSTRUMENTS
Carrying amount and estimated fair values of financial instruments were as
follows at year-end.
<TABLE>
<CAPTION>
1999 1998
------------------- -------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
<S> <C> <C> <C> <C>
Financial assets
Cash and cash equivalents........................ $ 2,649 $ 2,649 $ 4,674 $ 4,674
Securities available for sale.................... 16,875 16,875 8,535 8,535
Securities held to maturity...................... 617 616 1,334 1,341
Loans held for sale.............................. 601 601 -- --
Loans, net....................................... 44,996 45,255 26,305 26,722
Federal Home Loan Bank stock..................... 129 129 126 126
Accrued interest receivable...................... 318 318 329 329
Financial liabilities
Deposits......................................... (62,987) (63,230) (38,107) (38,266)
Federal Home Loan Bank advances.................. (800) (800) -- --
Accrued interest payable......................... (187) (187) (94) (94)
</TABLE>
The methods and assumptions used to estimate fair value are described as
follows:
Carrying amount is the estimated fair value for cash and cash equivalents,
short-term borrowings, Federal Home Loan Bank stock, accrued interest receivable
and payable, demand deposits, short-term debt, and variable rate loans or
deposits that reprice frequently and fully. Security fair values are based on
market prices or dealer quotes, and if no such information is available, on the
rate and term of the security and information about the issuer. For fixed rate
loans or deposits and for variable rate loans or deposits with infrequent
repricing and repricing limits, fair value is based on discounted cash flows
using current market rates applied to the estimated life and credit risk. Fair
values for impaired loans are estimated using discounted cash flow analysis or
underlying collateral values. Fair value of loans held for sale is based on
market quotes. Fair value of debt is based on current rates for similar
financing. The fair value of off-balance-sheet is based on the current fees or
cost that would be charged to enter into or terminate such arrangements.
NOTE 16 -- BRANCH ACQUISITION
Effective February 2000, the Bank signed a definitive agreement to acquire
a branch located in Nashville, Indiana. Under the terms of the agreement, the
Bank will acquire the deposits totaling approximately $14,000, selected loans
totaling approximately $5,500 in addition to all physical facilities.
Intangibles associated with this purchase will be approximately $1,200. The
transaction is subject to regulatory approval and is expected to close in the
second quarter of 2000.
F-17
<PAGE> 69
FIRST SHARES BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 17 -- PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
Condensed financial information of First Shares Bancorp, Inc. follows:
CONDENSED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
ASSETS
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Cash and cash equivalents................................... $ 37 $ 63
Investment in and advances to banking subsidiaries.......... 4,566 4,407
Other assets................................................ 58 46
------ ------
Total assets...................................... $4,661 $4,516
====== ======
LIABILITIES AND EQUITY
Accrued expenses and other liabilities...................... $ 64 $ 31
Shareholders' equity........................................ 4,597 4,485
------ ------
Total liabilities and shareholders' equity........ $4,661 $4,516
====== ======
</TABLE>
CONDENSED STATEMENTS OF OPERATIONS
DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Dividends from banking subsidiaries......................... $ 89 $91 $ 89
Other income................................................ 2 -- --
Other expense............................................... 25 21 30
----- --- ----
Income before income tax and undistributed subsidiary
income.................................................... 66 70 59
Income tax expense (benefit)................................ -- (7) (5)
Equity in undistributed subsidiary income................... (675) (83) 224
----- --- ----
Net income........................................ $(609) $(6) $288
===== === ====
</TABLE>
F-18
<PAGE> 70
FIRST SHARES BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Cash flows from operating activities
Net income/(loss)......................................... $ (609) $ (6) $ 288
Adjustments:
Stock option compensation expense...................... 9 10 19
Equity in undistributed subsidiary income.............. 675 83 (224)
Change in other assets................................. (19) 11 11
Change in other liabilities............................ 33 -- 9
------- ---- -----
Net cash from operating activities................ 89 98 103
Cash flows from financing activities
Contribution to subsidiary................................ (1,000) -- --
Issuance of common stock.................................. 997 -- --
Net purchase/reissue of treasury stock.................... (23) 1 5
Dividends paid............................................ (89) (91) (89)
------- ---- -----
Net cash from financing activities................ (115) (90) (84)
------- ---- -----
Net change in cash and cash equivalents..................... (26) 8 19
Beginning cash and cash equivalents......................... 63 55 36
------- ---- -----
Ending cash and cash equivalents............................ $ 37 $ 63 $ 55
======= ==== =====
</TABLE>
F-19
<PAGE> 71
------------------------------------------------------
------------------------------------------------------
WE HAVE NOT AUTHORIZED ANY DEALER, SALESPERSON OR OTHER PERSON TO GIVE YOU
WRITTEN INFORMATION OTHER THAN THIS PROSPECTUS OR TO MAKE REPRESENTATIONS AS TO
MATTERS NOT STATED IN THIS PROSPECTUS. YOU MUST NOT RELY ON UNAUTHORIZED
INFORMATION. THIS PROSPECTUS IS NOT AN OFFER TO SELL THOSE SECURITIES OR OUR
SOLICITATION OF YOUR OFFER TO BUY THE SECURITIES IN ANY JURISDICTION WHERE THAT
WOULD NOT BE PERMITTED OR LEGAL. NEITHER THE DELIVERY OF THIS PROSPECTUS OR ANY
SALES MADE HEREUNDER AFTER THE DATE OF THIS PROSPECTUS SHALL CREATE AN
IMPLICATION THAT THE INFORMATION CONTAINED HEREIN OR THE AFFAIRS OF THE COMPANY
HAVE NOT CHANGED SINCE THE DATE HEREOF.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary................... 1
Risk Factors......................... 6
Recent Developments.................. 8
Use of Proceeds...................... 9
Dividend Policy...................... 10
Capitalization....................... 11
Selected Consolidated Financial and
Other Data......................... 12
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 13
Business............................. 26
Management........................... 32
Principal Shareholders............... 37
Supervision and Regulation........... 39
Description of Capital Stock......... 43
Shares Eligible for Future Sale...... 46
Underwriting......................... 48
Legal Opinions....................... 49
Experts.............................. 50
Index to Financial Statements........ F-1
</TABLE>
UNTIL , 2000 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS
IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
750,000 SHARES
[FIRST SHARES BANCORP, INC. LOGO]
FIRST SHARES
BANCORP, INC.
COMMON STOCK
---------------------------------
PROSPECTUS
---------------------------------
DAVID A. NOYES
& COMPANY
, 2000
------------------------------------------------------
------------------------------------------------------
<PAGE> 72
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 1. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
First Shares is an Indiana corporation. First Shares' officers and
directors are and will be indemnified under Indiana law and the amended articles
of incorporation of First Shares against certain liabilities. Chapter 37 of The
Indiana Business Corporation Law (the "IBCL") requires a corporation, unless its
articles of incorporation provide otherwise, to indemnify a director or an
officer of the corporation who is wholly successful, on the merits or otherwise,
in the defense of any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative and whether
formal or informal, against reasonable expenses, including counsel fees,
incurred in connection with the proceeding. First Shares' amended articles of
incorporation do not contain any provision prohibiting such indemnification.
The IBCL also permits a corporation to indemnify a director, officer,
employee or agent who is made a party to a proceeding because the person was a
director, officer, employee or agent of the corporation against liability
incurred in the proceeding if (i) the individual's conduct was in good faith and
(ii) the individual reasonably believed (A) in the case of conduct in the
individual's official capacity with the corporation that the conduct was in the
corporation's best interests and (B) in all other cases that the individual's
conduct was at least not opposed to the corporation's best interests and (iii)
in the case of a criminal proceeding, the individual either (A) had reasonable
cause to believe the individual's conduct was lawful or (B) had no reasonable
cause to believe the individual's conduct was unlawful. The IBCL also permits a
corporation to pay for or reimburse reasonable expenses incurred before the
final disposition of the proceeding and permits a court of competent
jurisdiction to order a corporation to indemnify a director or officer if the
court determines that the person is fairly and reasonably entitled to
indemnification in view of all the relevant circumstances, whether or not the
person met the standards for indemnification otherwise provided in the IBCL.
First Shares' amended articles of incorporation provide for certain
additional limitations of liability and indemnification. The amended articles of
incorporation provide that a director shall not be personally liable to First
Shares or its shareholders for an action taken as a director, or any failure to
take any action, unless (1) the director has breached or failed to perform the
duties of the director's office in compliance with the Articles of Incorporation
and (2) the breach or failure to perform constitutes willful misconduct or
recklessness. Another section of the amended articles of incorporation generally
provides that any director or officer of First Shares or any person who is
serving at the request of First Shares as a director, officer, employee or agent
of another entity shall be indemnified and held harmless by First Shares to the
fullest extent authorized by the IBCL against all expense, liability and loss
(including attorneys' fees, judgments, fines certain employee benefits excise
taxes or penalties and amounts paid or to be paid in settlement) reasonably
incurred or suffered in connection with a civil, criminal, administrative or
investigative action, suit or proceeding to which such person is a party by
reason of the person's service with or at the request of First Shares. This
section of the amended articles of incorporation also provides such persons with
certain rights to be paid by First Shares the expenses incurred in defending any
such proceeding in advance of the final disposition and the right to enforce
indemnification claims against First Shares by bringing suit against First
Shares.
First Shares' amended articles of incorporation authorize First Shares to
maintain insurance to protect itself and any director, officer, employee or
agent of First Shares or another corporation, partnership, joint venture, trust
or other entity against expense, liability or loss, whether or not First Shares
would have the power to indemnify such person against such expense, liability or
loss under the IBCL. First Shares currently maintains such insurance.
II-1
<PAGE> 73
ITEM 2. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
<TABLE>
<S> <C>
Registration Fee............................................ $ 2,500
NASD Fee.................................................... 1,500
Listing Fee................................................. 6,500
Printing and Engraving Expenses............................. 50,000
Legal Fees and Expenses..................................... 125,000
Accounting Fees and Expenses................................ 30,000
Blue Sky Fees and Expenses.................................. 20,000
Miscellaneous............................................... 14,500
--------
Total............................................. $250,000
========
</TABLE>
ITEM 3. UNDERTAKINGS.
The undersigned Registrant hereby undertakes that insofar as
indemnification for liabilities arising under the Securities Act of 1933 may be
permitted to directors, officers and controlling persons of the registrant
pursuant to the provisions described in Item 15 above, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned Registrant hereby undertakes to provide to the underwriter
at the closing specified in the underwriting agreements certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-2
<PAGE> 74
ITEM 4. UNREGISTERED SECURITIES ISSUED OR SOLD WITHIN ONE YEAR.
On April 19, 1999, First Shares Bancorp, Inc. issued and sold the following
number of shares of its common stock (as adjusted for the subsequent 6 for 1
stock split) at their book value to the following persons for the following cash
consideration. These sales were made in reliance on the exemption from
registration in Section 4(2) of the Securities Act of 1933, as amended.
<TABLE>
<CAPTION>
NUMBER CASH
PURCHASER OF SHARES CONSIDERATION
<S> <C> <C>
Jerry R. Engle.............................................. 44,280 $362,506
President and Chief Executive Officer
John B. Ditmars............................................. 12,216 100,008
Executive Vice President, First Bank
Frank A. Rogers............................................. 47,334 387,508
Chairman of the Board of Directors
Gary Lewis.................................................. 18,000 147,360
Director
</TABLE>
ITEM 5. INDEX TO EXHIBITS.
The following exhibits are filed with this Registration Statement. Except
as otherwise noted, all exhibits have been previously filed.
<TABLE>
<C> <S>
1 -- Form of Underwriting Agreement(1)
3.1 -- Articles of Incorporation of First Shares Bancorp, Inc.
and amendments
3.2 -- Bylaws of First Shares Bancorp, Inc.
4 -- Specimen Common Stock Certificate
5 -- Opinion and consent of Bose McKinney & Evans LLP
regarding legality of the securities being registered
10.1 -- 1996 Stock Option Plan
10.2 -- 1999 Amended and Restated Stock Option Plan
10.3 -- Employment Agreement of Jerry R. Engle
10.4 -- Form of Director Deferred Compensation Agreements
10.5 -- Deferred Compensation Agreement dated October 26, 1999
between First Bank and H. Dean Hawkins and Termination of
First Bank Deferred Compensation Agreement for H. Dean
Hawkins dated January 31, 2000
10.6 -- Purchase and Assumption Agreement between Huntington
Bancshares Incorporated, The Huntington National Bank and
First Bank
10.7 -- Lease Agreement dated March 29, 1999 between Greenwood
ICC Realty, LLC and First State Bank
10.8 -- Lease dated April 12, 1999 between M. Kenton and Linda S.
Franklin and First State Bank
10.9 -- Lease dated December 8, 1999 between G & P Real Estate,
LLC and First Bank
10.10 -- Form of amendment to Employment Agreement of Jerry R.
Engle(1)
21 -- Subsidiaries of First Shares Bancorp, Inc.
23.1 -- Consent of Crowe, Chizek and Company LLP(1)
23.2 -- Consent of Bose McKinney & Evans LLP (included in Exhibit
5)
24 -- Powers of Attorney
27 -- Financial Data Schedule
</TABLE>
- ------------------------------
(1) Filed with this amendment.
II-3
<PAGE> 75
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Greenwood, State of Indiana, on April
7, 2000.
FIRST SHARES BANCORP, INC.
By: /s/ JERRY R. ENGLE
----------------------------------
Jerry R. Engle
President
Pursuant to the requirements of the Securities Act of 1933, this Amendment
has been signed below on April 7, 2000 by the following persons in the
capacities indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE
<C> <S>
FRANK A. ROGERS* Chairman of the Board and Director
- -----------------------------------------------------
Frank A. Rogers
/s/ JERRY R. ENGLE Director and President and Chief Executive
- ----------------------------------------------------- Officer (Principal Executive Officer)
Jerry R. Engle
JOHN DITMARS* Executive Vice President and Chief Operating
- ----------------------------------------------------- Officer (Principal Operating Officer)
John Ditmars
KIMBERLY B. KLING* Secretary, Treasurer and Chief Financial
- ----------------------------------------------------- Officer (Principal Accounting Officer)
Kimberly B. Kling
RALPH M. FOLEY* Director
- -----------------------------------------------------
Ralph M. Foley
H. DEAN HAWKINS* Director
- -----------------------------------------------------
H. Dean Hawkins
GARY W. LEWIS* Director
- -----------------------------------------------------
Gary W. Lewis
R.J. MCCONNELL* Director
- -----------------------------------------------------
R.J. McConnell
WILLIAM J. MEREDITH* Director
- -----------------------------------------------------
William J. Meredith
NORMAN D. STOCKTON* Director
- -----------------------------------------------------
Norman D. Stockton
</TABLE>
*By: /s/ JERRY R. ENGLE
-------------------------------
Jerry R. Engle
Attorney-in-Fact
II-4
<PAGE> 1
EXHIBIT 1
UNDERWRITING AGREEMENT
750,000 SHARES
FIRST SHARES BANCORP, INC.
COMMON STOCK
UNDERWRITING AGREEMENT
_____________________, 2000
David A. Noyes & Company,
as Representative of the Several Underwriters
111 Monument Circle, Suite 300
Indianapolis, Indiana 46204
Dear Sirs:
First Shares Bancorp, Inc., an Indiana corporation (the "COMPANY"),
proposes to issue and sell 750,000 shares (the "FIRM SHARES") of its authorized
but unissued Common Stock (the "COMMON STOCK") to the several Underwriters named
in Schedule I hereto (the "UNDERWRITERS"). In addition, the Company proposes to
grant to the Underwriters an option to purchase up to an additional 112,500
shares (the "OPTIONAL SHARES") to cover over-allotments. The Firm Shares and the
Optional Shares are called, collectively, the "SHARES." (David A. Noyes &
Company is hereinafter referred to as "you" or as "Noyes.") You represent and
warrant that you are acting as the representative of the Underwriters and that
you have been authorized by each of the other Underwriters to enter into this
Underwriting Agreement on its behalf and to act for it in the manner herein
provided.
1. SALE AND PURCHASE OF THE SHARES.
(a) On the basis of the representations, warranties and agreements of the
Company contained in, and subject to the terms and conditions of, this
Agreement, the Company agrees to issue and sell to the Underwriters,
and each of the Underwriters agrees, severally and not jointly, to
purchase the number of the Firm Shares set forth opposite such
Underwriter's name in Schedule I hereto at a purchase price of $_____
per Share, except as set forth in Section 1(b) below.
(b) On the basis of the representations, warranties and agreements of the
Company contained in, and subject to the terms and conditions of, this
Agreement, and pursuant to directions from the Company, the
Underwriters will offer to sell to each of the persons named in a list
provided by the Company to the Underwriters (who
<PAGE> 2
may purchase alone or with family members to the extent permitted by
the Free-Riding and Withholding Interpretation (the "INTERPRETATION")
under the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. (the "NASD")) the number of Shares set forth
opposite their respective names on the list. To the extent such
persons (alone or with such members) buy such Shares, the Underwriters
agree to purchase up to 120,000 of the Shares at a purchase price of
$_____ per Share. The parties agree that the securities purchased and
sold under this subparagraph to the Company's employees and directors
shall constitute "issuer directed securities" under the
Interpretation. The provisions of this Section 1(b) shall not affect
the Underwriters' right, with respect to persons who are not employees
or directors of the Company, to withdraw, cancel or modify orders or
to reject orders in whole or in part.
(c) On the basis of the representations, warranties and agreements of the
Company contained in, and subject to the terms and conditions of, this
Agreement, the Company grants to the Underwriters an option to
purchase all or any part of the Optional Shares at a price per Share
of $________. Optional Shares shall be purchased from the Company,
severally and not jointly, for the accounts of the several
Underwriters in proportion to the number of Firm Shares set opposite
such Underwriter's name in Schedule I hereto, except that the
respective purchase obligations of each Underwriter shall be adjusted
by Noyes so that no Underwriter shall be obligated to purchase
fractional Optional Shares. The over-allotment option may be exercised
only to cover over-allotments in the sale of the Firm Shares by the
Underwriters and may be exercised in whole or in part at any time or
times on or before 12:00 noon, Indianapolis time, on the day before
the Firm Shares Closing Date (as defined in Section 2 below), and only
once at any time after that date and within 30 days after the
Effective Date (as defined in Section 4 below), in each case upon
written or transmitted facsimile notice, or verbal notice confirmed by
transmitted facsimile, written or telegraphic notice, by Noyes to the
Company no later than 12:00 noon, Indianapolis time, on the day before
the Firm Shares Closing Date or at least three but not more than five
full business days before the Optional Shares Closing Date (as defined
in Section 2 below), as the case may be, setting forth the number of
Optional Shares to be purchased and the time and date (if other than
the Firm Shares Closing Date) of such purchase.
2. DELIVERY AND PAYMENT. Delivery by the Company of the Firm Shares to be
purchased by the Underwriters and payment of the purchase price by certified or
official bank check payable in Indianapolis Clearing House (next day) funds to
the Company, shall take place at the offices of ____________
______________________________________________, at 10:00 a.m., Indianapolis
time, at such time and date, not later than the third (or, if the Firm Shares
are priced, as contemplated by Rule 15c6-1(c)under the Securities Exchange Act
of 1934, as amended (the "EXCHANGE ACT"), after 4:30 p.m., Washington, D.C.
time, the fourth) full business day following the first date that any of the
Shares are released by the Underwriters for sale to the public, as Noyes shall
designate by at least 48 hours prior notice to the Company (the "FIRM SHARES
2
<PAGE> 3
CLOSING DATE"); provided, however, that if the Prospectus (as defined in Section
4 below) is at any time prior to the Firm Shares Closing Date recirculated to
the public, the Firm Shares Closing Date shall occur upon the later of the third
or fourth, as the case the may be, full business day following the first date
that any of the Shares are released by the Underwriters for sale to the public
or the date that is 48 hours after the date that the Prospectus has been so
recirculated. To the extent the option with respect to the Optional Shares is
exercised, delivery by the Company of the Optional Shares, and payment of the
purchase price by certified or official bank check payable in Indianapolis
Clearing House (next day) funds to the Company, shall take place at the offices
of ________ specified above at the time and on the date (which may be the Firm
Shares Closing Date) specified in the notice referred to in Section l(c) (such
time and date of delivery and payment are called the "OPTIONAL SHARES CLOSING
DATE"). The Firm Shares Closing Date and the Optional Shares Closing Date are
called, individually, a "CLOSING DATE" and, collectively, the "CLOSING DATES."
Certificates representing the Firm Shares shall be registered in such names and
shall be in such denominations as Noyes shall request at least two full business
days before the Firm Shares Closing Date or, in the case of the Optional Shares,
on the day of notice of exercise of the option as described in Section l(c), and
shall be made available to Noyes for checking and packaging, at such place as is
designated by Noyes, at least one full business day before the Closing Date.
3. PUBLIC OFFERING. The Company understands that the Underwriters propose
to make a public offering of the Shares, as set forth in and pursuant to the
Prospectus, as soon after the Effective Date as Noyes deems advisable. The
Company hereby confirms that the Underwriters and dealers have been authorized
to distribute each preliminary prospectus and are authorized to distribute the
Prospectus (as from time to time amended or supplemented).
4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents
and warrants to each of the Underwriters and agrees with each of the
Underwriters as follows:
(a) The Company has carefully prepared in conformity with the requirements
of the Securities Act of 1933, as amended (the "SECURITIES ACT") and
the rules and regulations adopted by the Securities and Exchange
Commission (the "COMMISSION") thereunder (the "RULES"), a registration
statement on Form SB-2 (Registration No. 333 - 31520), including a
preliminary prospectus, and has filed with the Commission the
registration statement and such amendments thereof as may have been
required to the date of this Agreement. Copies of such registration
statement (including all amendments thereof) and of the related
preliminary prospectus have heretofore been delivered by the Company
to you. The term "PRELIMINARY PROSPECTUS" means any preliminary
prospectus (as defined in Rule 430 of the Rules) included at any time
as a part of the registration statement. The registration statement as
amended (including any supplemental registration statement under Rule
462(b) or any amendment under Rule 462(c) of the Rules) at the time
and on the date it becomes effective (the "EFFECTIVE DATE"), including
the prospectus, financial statements, schedules, exhibits, and all
other documents incorporated by reference therein or filed as a part
thereof, is called the "REGISTRATION STATEMENT;" provided, however,
that "REGISTRATION
3
<PAGE> 4
STATEMENT" shall also include all Rule 430A Information (as defined
below) deemed to be included in such Registration Statement at the
time such Registration Statement becomes effective as provided by Rule
430A of the Rules. The term "PROSPECTUS" means the Prospectus as filed
with the Commission pursuant to Rule 424(b) of the Rules or, if no
filing pursuant to Rule 424(b) of the Rules is required, means the
form of final prospectus included in the Registration Statement at the
time such Registration Statement becomes effective. The term "RULE
430A INFORMATION" means information with respect to the Shares and the
offering thereof permitted to be omitted from the Registration
Statement when it becomes effective pursuant to Rule 430A of the
Rules. Reference made herein to any preliminary prospectus or to the
Prospectus shall be deemed to refer to and include any document
attached as an exhibit thereto or incorporated by reference therein,
as of the date of such preliminary prospectus or the Prospectus, as
the case may be. The Company will not file any amendment of the
Registration Statement or supplement to the Prospectus to which Noyes
shall reasonably object in writing after being furnished with a copy
thereof.
(b) Each preliminary prospectus, at the time of filing thereof, contained
all material statements which were required to be stated therein in
accordance with the Securities Act and the Rules, and conformed in all
material respects with the requirements of the Securities Act and the
Rules, and did not include any untrue statement of a material fact or
omit to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. The
Commission has not issued any order suspending or preventing the use
of any preliminary prospectus. When the Registration Statement shall
become effective, when the Prospectus is first filed pursuant to Rule
424(b) of the Rules, when any post-effective amendment of the
Registration Statement shall become effective, when any supplement to
or pre-effective amendment of the Prospectus is filed with the
Commission and at each Closing Date, the Registration Statement and
the Prospectus (and any amendment thereof or supplement thereto) will
comply with the applicable provisions of the Securities Act and the
Exchange Act and the respective rules and regulations of the
Commission thereunder, and neither the Registration Statement nor the
Prospectus, nor any amendment thereof or supplement thereto, will
contain any untrue statement of a material fact or will omit to state
any material fact required to be stated therein or necessary in order
to make the statements therein, in light of the circumstances under
which they were made, not misleading; provided, however, that the
Company makes no representation or warranty as to the information
contained in the Registration Statement or the Prospectus or any
amendment thereof or supplement thereto in reliance upon and in
conformity with information furnished in writing to the Company by you
or any of the Underwriters, specifically for use in connection with
the preparation thereof.
4
<PAGE> 5
(c) All contracts and other documents required to be filed as exhibits to
the Registration Statement have been filed with the Commission as
exhibits to the Registration Statement.
(d) Crowe, Chizek and Company LLP, on behalf of the Company and First
Bank, the Company's wholly-owned subsidiary (the "BANK"), whose report
is filed with the Commission as part of the Registration Statement,
are, and during the periods covered by its report were, independent
public accountants as required by the Securities Act and the Rules.
(e) Each of the Company and the Bank has been duly organized and is
validly existing as a corporation or banking corporation, as
applicable, under the laws of the State of Indiana. Neither the
Company nor the Bank has any properties or conducts any business
outside of the State of Indiana that would require either of them to
be qualified as a foreign corporation or bank, as the case may be, in
any jurisdiction outside of Indiana. Neither the Company nor the Bank
has any directly or indirectly held subsidiary other than the Bank.
The Company has all power, authority, authorizations, approvals,
consents, orders, licenses, certificates and permits needed to enter
into, deliver and perform this Agreement and to issue and sell the
Shares.
(f) No authorization, approval, consent, order, license, certificate or
permit of and from any federal, state, or local governmental or
regulatory official, body, or tribunal, is required for the Company or
the Bank to conduct their respective businesses and own their
respective properties as described in the Prospectus, except such
authorizations, approvals, consents, orders, licenses, certificates,
or permits as have been obtained by them or are not material to the
commencement or conduct of their respective businesses or to the
ownership of their respective properties.
(g) The financial statements of the Company and any related notes thereto,
included in the Registration Statement and the Prospectus, present
fairly the financial position of the Company as of the date of such
financial statements and for the period covered thereby. Such
statements and any related notes have been prepared in accordance with
generally accepted accounting principles applied on a consistent basis
and certified by the independent accountants named in subsection 4(d)
above. No other financial statements are required to be included in
the Prospectus or the Registration Statement.
(h) The Company and the Bank own adequate and enforceable rights to use
any patents, patent applications, trademarks, trademark applications,
service marks, copyrights, copyright applications and other similar
rights (collectively, "INTANGIBLES") necessary for the conduct of the
material aspects of their business as described in the Prospectus, and
neither the Company nor the Bank has infringed, is infringing, or has
received any notice of infringement of, any Intangible of any other
person.
5
<PAGE> 6
(i) The Company or the Bank owns its offices located in Morgantown and in
Trafalgar and has valid and enforceable leasehold interests in the
real property in which its branch facilities are located in Greenwood,
Bargersville, and Nashville, Indiana, which are as described in the
Prospectus and are, except as otherwise described in the Prospectus,
free and clear of all liens, encumbrances, claims, security interests
and defects except to the extent they would not have a material
adverse effect on commencement or conduct of the respective businesses
of the Company or the Bank or the ownership of their respective
properties.
(j) There are no litigation or governmental or other proceedings or
investigations pending before any court or before or by any public
body or board or threatened against the Company or the Bank, and to
the best of the Company's knowledge, there is no reasonable basis for
any such litigation, proceedings or investigations, which would have a
material adverse effect on commencement or conduct of the respective
businesses of the Company or the Bank or the ownership of their
respective properties.
(k) The Company and Bank have filed all federal, state, and local tax
returns required to be filed by them and paid all taxes shown due on
such returns as well as all other material taxes, assessments and
governmental charges which have become due; no material deficiency
with respect to any such return has been assessed or proposed.
(l) Subsequent to the respective dates as of which information is given in
the Registration Statement and the Prospectus, there has not been any
material adverse change in the condition (financial or other),
business, properties or prospects of the Company or the Bank.
(m) No default exists, and no event has occurred which with notice or
lapse of time, or both, would constitute a default, in the due
performance and observance of any material term, covenant or
condition, by the Company, the Bank or, to the best of the Company's
knowledge, any other party, of any lease, indenture, mortgage, note or
any other agreement or instrument to which the Company or the Bank is
a party or by which either of them or either of their businesses may
be bound or affected, except such defaults or events as are not
material to the commencement or conduct of their respective businesses
or ownership of their respective properties.
(n) Neither the Company nor the Bank is in violation of any term or
provision of the articles of incorporation, charter or bylaws of the
Company or the Bank. Neither the Company nor the Bank is in violation
of, nor is either of them required to take any action to avoid any
material violation of, any franchise, license, permit, judgment,
decree, order, statute, rule or regulation.
(o) Neither the execution, delivery or performance of this Agreement by
the Company nor the consummation of the transactions contemplated
hereby (including, without
6
<PAGE> 7
limitation, the issuance and sale by the Company of the Shares) will
give rise to a right to terminate or accelerate the due date of any
payment due under, or conflict with or result in the breach of any
term or provision of, or constitute a default (or an event which with
notice or lapse of time, or both, would constitute a default) under,
or require any consent under, or result in the execution or imposition
of any lien, charge or encumbrance upon any properties or assets of
the Company or the Bank pursuant to the terms of, any lease,
indenture, mortgage, note or other agreement or instrument to which
the Company or the Bank is a party or by which either of them or
either of their businesses may be bound or affected, or any franchise,
license, permit, judgment, decree, order, statute, rule or regulation
or violate any provision of the Articles of Incorporation or Bylaws of
the Company or the Bank, except those which are immaterial in amount
or effect.
(p) The Company has authorized capital stock as set forth in the
Prospectus. There are 664,512 shares of Common Stock of the Company
issued and outstanding. No shares of Preferred Stock are issued and
outstanding. The issuance, sale and delivery of the Shares have been
duly authorized by all necessary corporate action by the Company and,
when issued, sold and delivered against payment therefor pursuant to
this Agreement, will be duly and validly issued, fully paid and
nonassessable, and none of the Shares will have been issued in
violation of any preemptive or other right. There are no outstanding
options, warrants or other rights calling for the issuance of, and no
commitment, plan or arrangement to issue, any shares of stock of the
Company or the Bank or any security convertible into or exchangeable
for stock of the Company or the Bank, except for 108,000 shares of
Common Stock that will be issuable upon the exercise of outstanding
options granted under the Company's option plans. The Common Stock,
the Shares and the options conform to all statements in relation
thereto contained in the Registration Statement and the Prospectus.
(q) Subsequent to the respective dates as of which information is given in
the Registration Statement and the Prospectus, neither the Company nor
the Bank has (1) issued any securities or incurred any material
liability or obligation, direct or contingent, (2) entered into any
material transaction, or (3) declared or paid any dividend or made any
distribution on any of their stock, except for liabilities,
obligations, and transactions reasonably expected based on the
disclosures in the Prospectus.
(r) This Agreement has been duly and validly authorized, executed and
delivered by the Company and is the legal, valid and binding agreement
and obligation of the Company.
(s) The Commission has not issued any order preventing or suspending the
use of any preliminary prospectus.
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<PAGE> 8
(t) Neither the Company, nor the Bank, nor, to the Company's knowledge,
any director, officer, agent, employee or other person associated with
the Company or the Bank, acting on behalf of the Company or the Bank,
has used any corporate funds for any unlawful contribution, gift,
entertainment or other unlawful expense relating to political
activity; made any direct or indirect unlawful payment to any foreign
or domestic government official or employee from corporate funds;
violated or is in violation of any provision of the Foreign Corrupt
Practices Act of 1977; or made any bribe, rebate, payoff, influence
payment, kickback or other unlawful payment.
(u) Neither the Company nor the Bank nor any affiliate of either of them
has taken, and they will not take, directly or indirectly, any action
designed to cause or result in, or which has constituted or which
might reasonably be expected to constitute, the stabilization or
manipulation of the price of the shares of the Common Stock in order
to facilitate the sale or resale of any of the Shares.
(v) No transaction has occurred between or among the Company or the Bank
and any of their officers, directors, organizers or the Company's
shareholder or any affiliate or affiliates of any such officer,
director, organizer, or shareholder, that is required to be described
in and is not described in the Prospectus.
(w) The Company is not and will not after the offering be an "investment
company," or a company "controlled" by an "investment company," within
the meaning of the Investment Company Act of 1940, as amended.
(x) The Company has obtained from each of its executive officers and
directors his or her written agreement that (i) for a period of 365
days from the date of the Effective Date, he or she will not offer to
sell, transfer, contract to sell, or grant any option for the sale of
or otherwise dispose of, directly or indirectly, any shares of Common
Stock of the Company (or any securities convertible into or
exercisable for such shares of Common Stock), except for (1) the
exercise of Stock Options under the Stock Option Plans or (2) gifts of
Common Stock (or other securities) to a donee or donees who agree in
writing to be bound by this clause, and (ii) for a period of three
years from the one-year anniversary of the Effective Date, he or she
will not sell, transfer, assign, pledge, or hypothecate in any one
twelve month period more than ten percent of the shares of Common
Stock owned by each such executive officer and director.
5. CONDITIONS OF THE UNDERWRITERS' OBLIGATIONS. The obligation of the
several Underwriters to purchase the Shares shall be subject to the accuracy of
the representations and warranties of the Company in this Agreement as of the
date of this Agreement and as of the Firm Shares Closing Date or Optional Shares
Closing Date, as the case may be, to the accuracy of the statements of Company
officers made pursuant to the provisions of this Agreement, to the performance
by the Company of its obligations under this Agreement, and to the following
additional terms and conditions:
8
<PAGE> 9
(a) The Registration Statement shall have become effective not later than
5:00 P.M., Indianapolis time, on the date of this Agreement or on such
later date and time as shall be consented to in writing by Noyes; if
the filing of the Prospectus, or any supplement thereto, is required
pursuant to Rule 424(b) of the Rules, the Prospectus shall have been
filed in the manner and within the time period required by Rule 424(b)
of the Rules; at each Closing Date, if any, no stop order shall have
been issued or proceedings therefor initiated or threatened by the
Commission; and any request of the Commission for inclusion of
additional information in the Registration Statement, or otherwise,
shall have been complied with to the reasonable satisfaction of Noyes.
(b) At each Closing Date, Noyes shall have received the opinion of Bose
McKinney & Evans LLP, counsel for the Company, dated the Firm Shares
Closing Date or the Optional Shares Closing Date, as the case may be,
addressed to the Underwriters and in form and scope reasonably
satisfactory to counsel for Noyes to the effect that:
(i) Each of the Company and the Bank (A) is a corporation or
banking corporation, as applicable, duly organized and validly
existing under the laws of the State of Indiana, and (B) is not
required to be qualified to do business in any jurisdiction
outside Indiana, except where the failure to so qualify would
not have a material adverse effect on the Company or the Bank;
(ii) Each of the Company and the Bank has full corporate power and
authority and all material authorizations, approvals, orders,
licenses, certificates and permits of and from all governmental
regulatory officials and bodies necessary to own or lease their
respective properties and conduct their respective businesses
as described in the Registration Statement and Prospectus;
(iii) The Company has authorized capital stock as set forth in the
Prospectus; all shares of capital stock of the Company
(including the Shares) have been duly authorized and validly
issued; upon receipt by the Company of payment therefor in
accordance with the terms of this Agreement, the Shares and all
other shares of capital stock of the Company will be fully paid
and nonassessable and are not subject to preemptive rights; the
capital stock and Stock Options of the Company conform in all
material respects to the descriptions thereof contained in the
Registration Statement and the Prospectus;
(iv) The Company has no directly or indirectly held subsidiary other
than the Bank;
(v) The Company is the registered holder of all of the outstanding
capital stock of the Bank, and all such shares of stock so held
have been duly authorized
9
<PAGE> 10
and validly issued, fully paid and nonassessable and are owned
free and clear of any liens, encumbrances or other claims or
restrictions whatsoever, subject to the provisions of the
Indiana Financial Institutions Act;
(vi) The certificates evidencing the Shares are in the form approved
by the Board of Directors of the Company, comply with the
Bylaws and the Articles of Incorporation of the Company, and
comply as to form and in all other material respects with
applicable legal requirements;
(vii) This Agreement has been duly and validly authorized, executed
and delivered by the Company, and is the legal, valid and
binding agreement and obligation of the Company enforceable in
accordance with its terms, except (a) as enforcement thereof
may be limited by bankruptcy, insolvency, reorganization,
moratorium or other laws relating to or affecting enforcement
of creditors' rights or by general equity principles, whether
applied in an action at law or in equity, or by the
discretionary nature of specific performance, injunctive
relief, and other equitable remedies, including the appointment
of a receiver, and (b), with respect to provisions relating to
indemnification and contribution, to the extent they are held
by a court of competent jurisdiction to be void or
unenforceable as against public policy;
(viii) The Company is conveying to the Underwriters good and valid
title to the Shares, free and clear of any liens, encumbrances,
security interests, restrictions, and adverse claims;
(ix) To the best of such counsel's knowledge, after due inquiry,
there are (A) no contracts or other documents which are
required to be filed as exhibits to the Registration Statement
other than those filed as exhibits thereto, (B) no legal or
governmental proceedings pending or threatened against the
Company or the Bank, (C) no statutes or regulations applicable
to the Company or the Bank which are of a character required to
be disclosed in the Registration Statement and Prospectus which
have not been so disclosed and properly described therein, and
(D) no certificates, permits, grants or other consents,
approvals, orders, licenses or authorizations from regulatory
officials or bodies, which are required to be obtained or
maintained by the Company or the Bank and which are of a
character required to be disclosed in the Registration
Statement and Prospectus which have not been so disclosed and
properly described therein;
(x) The statements in the Registration Statement and the
Prospectus, insofar as they are descriptions of corporate
documents, stock option plans, contracts, agreements or other
documents specifically identified in the Registration Statement
or descriptions of laws, regulations, or regulatory
requirements, or refer to compliance with law or to statements
of law or legal conclusions, are correct in all material
respects;
10
<PAGE> 11
(xi) To the best of such counsel's knowledge, after due inquiry, the
execution, delivery and performance of this Agreement, the
consummation of the transactions herein contemplated and the
compliance with the terms and provisions hereof by the Company
will not give rise to a right to terminate or accelerate the
due date of any payment due under, or conflict with or result
in a breach of any of the terms or provisions of, or constitute
a default (or an event which, with notice or lapse of time, or
both, would constitute a default) under, or require any consent
under, or result in the execution or imposition of any lien,
charge or encumbrance upon any properties or assets of the
Company or the Bank pursuant to the terms of, any lease,
indenture, mortgage, note or other agreement or instrument to
which the Company or the Bank is a party or by which either of
them or either of their properties or businesses is or may be
bound or affected, nor will such action result in any violation
of the provisions of the articles of incorporation or bylaws of
the Company or the Bank or any statute or any order, rule, or
regulation applicable to the Company or the Bank of any court
or any federal, state, local or other regulatory authority or
other governmental body, the effect of which, in any such case,
would be expected to have a material adverse effect on the
Company or the Bank;
(xii) To the best of such counsel's knowledge, after due inquiry, no
consent, approval, authorization or order of any court or
governmental agency or body, domestic or foreign, is required
to be obtained by the Company in connection with the execution
and delivery of this Agreement or the sale of the Shares to the
Underwriters as contemplated by this Agreement, except such as
have been obtained;
(xiii) To the best of such counsel's knowledge, after due inquiry, (A)
neither the Company nor the Bank is in breach of, or in default
(and no event has occurred which, with notice or lapse of time,
or both, would constitute a default) under, any lease,
indenture, mortgage, note, or other agreement or instrument to
which the Company or the Bank is a party; or (B) neither the
Company nor the Bank is in violation of any term or provision
of either of their Articles of Incorporation or Bylaws, or of
any franchise, license, grant, permit, judgment, decree, order,
statute, rule or regulation; and (C) neither the Company nor
the Bank has received any notice of conflict with the asserted
rights of others in respect of Intangibles necessary for the
commencement or conduct of its business, the effect of which,
in any such case, would be expected to have a material adverse
effect on the Company or the Bank;
(xiv) The Registration Statement and the Prospectus and any
amendments or supplements thereto (other than financial
statement and notes, any related schedules or other financial
information contained in such Prospectus or
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<PAGE> 12
amendment or supplement thereto, as to which such counsel need
express no opinion or belief) comply as to form in all material
respects with the requirements of the Securities Act and the
Rules; and
(xv) The Registration Statement is effective under the Securities
Act, and any required filing of the Prospectus pursuant to Rule
424(b) has been made in the manner and within the time period
required by Rule 424(b) and, to the best of such counsel's
knowledge, after due inquiry, no stop order suspending the
effectiveness of the Registration Statement or any
post-effective amendment to the Registration Statement and no
order directed at any document incorporated by reference in the
Registration Statement or the Prospectus or any amendment or
supplement thereto has been issued, and no proceedings for that
purpose have been instituted or threatened or are contemplated
by the Commission.
In rendering the foregoing opinion, such counsel may rely upon
certificates of public officials (as to matters of fact and law) and
officers of the Company (as to matters of fact), and include customary
qualifications in its opinion as are acceptable to Noyes Copies of all
such certificates shall be furnished to counsel to Noyes on the
Closing Date. In addition, such counsel shall state that they have
participated in conferences with officials of the Company and its
independent auditors, and representatives of the Underwriters and its
counsel at which the content of the Registration Statement and
Prospectus and related matters were discussed, and also had
discussions with such officials of the Company with a view toward a
clear understanding on their part of the requirements of the Act with
reference to the preparation of registration statements and
prospectuses. Such counsel did not independently verify the accuracy
or completeness of the statements made in the Registration Statement
and Prospectus; however, based on such counsel's examination of the
Registration Statement and the Prospectus and on its participation in
the above-mentioned conferences, nothing has come to the attention of
such counsel that gives them reason to believe that the Registration
Statement or Prospectus (other than financial statements and notes,
any related schedules or other financial information contained in such
Registration Statement or Prospectus as to which such counsel need
express no opinion or belief), at the time the Registration Statement
became effective, contained any untrue statement of a material fact or
omitted to state any material fact required to be stated therein or
necessary to make the statements therein not misleading or that the
Prospectus (other than financial statement and notes, any related
schedules or other financial information contained in such Prospectus
or amendment or supplement thereto, as to which such counsel need
express no opinion or belief), as of the date of the opinion, contains
any untrue statement of a material fact or omits to state a material
fact necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
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(c) On or prior to each Closing Date, Noyes shall have been furnished such
documents, certificates and opinions as they may reasonably require
for the purpose of enabling them to review the matters referred to in
subsection (b) of this Section 5, and in order to evidence the
accuracy, completeness or satisfaction of the representations,
warranties or conditions herein contained.
(d) Prior to each Closing Date, (i) there shall have been no material
adverse change in the condition or prospects, financial or otherwise,
of the Company or the Bank; (ii) there shall have been no material
transaction, not in the ordinary course of business, entered into by
the Company or the Bank except as set forth in the Registration
Statement and Prospectus, other than transactions referred to or
contemplated therein or to which Noyes has given its written consent;
(iii) neither the Company nor the Bank shall be in default (nor shall
an event have occurred which, with notice or lapse of time, or both,
would constitute a default) under any provision of any material
agreement, understanding or instrument relating to any outstanding
indebtedness that is material in amount; (iv) no action, suit or
proceeding, at law or in equity, shall be pending or threatened
against the Company or the Bank before or by any court or Federal,
state or other commission, board or other administrative agency having
jurisdiction over the Company or the Bank, as the case may be, which
is expected to have a material adverse effect on the Company or the
Bank; and (v) no stop order shall have been issued under the
Securities Act and no proceedings therefor shall have been initiated
or be threatened by the Commission.
(e) At each Closing Date, Noyes shall have received a certificate signed
by the Chairman of the Board, the President, and the Treasurer of the
Company dated the Firm Shares Closing Date or Optional Shares Closing
Date, as the case may be, to the effect that the conditions set forth
in subsection (d) above have been satisfied and as to the accuracy, as
of the Firm Shares Closing Date or the Optional Shares Closing Date,
as the case may be, of the representations and warranties of the
Company set forth in Section 4 hereof.
(f) At or prior to each Closing Date, Noyes shall have received a "blue
sky" memorandum (upon which the Underwriters may rely) of Leagre
Chandler & Millard, counsel for Noyes, addressed to Noyes and in form
and scope reasonably satisfactory to Noyes concerning compliance with
the blue sky or securities laws of the states listed in Exhibit A
attached to this Agreement.
(g) All proceedings taken in connection with the sale of the Shares as
herein contemplated shall be reasonably satisfactory in form and
substance to Noyes and to counsel for Noyes, and Noyes shall have
received from counsel for Noyes a favorable opinion, dated as of each
Closing Date, with respect to such of the matters set forth under
Subsections (b) (i), (iii), (vi), (vii), and (xv) of this Section 5,
and with respect to such other related matters as Noyes may require,
if the failure to receive a favorable opinion with respect to such
other related matters would cause Noyes to deem it inadvisable to
proceed with the sale of the Shares.
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(h) There shall have been duly tendered to Noyes certificates representing
all the Shares agreed to be sold by the Company on the Firm Shares
Closing Date or the Optional Shares Closing Date, as the case may be.
(i) No order suspending the sale of the Shares prior to each Closing Date,
in any jurisdiction listed in Exhibit A, shall have been issued on the
Firm Shares Closing Date or the Optional Shares Closing Date, as the
case may be, and no proceedings for that purpose shall have been
instituted or, to Noyes's knowledge or that of the Company, shall be
contemplated.
(j) The NASD, upon review of the terms of the public offering of the
Shares, shall not have objected to the Underwriters' participation in
the same. If any condition to the Underwriters' obligations hereunder
to be fulfilled prior to or at the Firm Shares Closing Date or the
Optional Shares Closing Date, as the case may be, is not so fulfilled,
Noyes may terminate this Agreement pursuant to Section 9(c) hereof or,
if Noyes so elects, waive any such conditions which have not been
fulfilled or extend the time of their fulfillment.
6. COVENANTS. The Company covenants and agrees that it will:
(a) Use its best efforts to cause the Registration Statement to become
effective and will notify Noyes immediately, and confirm the notice in
writing, (i) when the Registration Statement and any post-effective
amendment thereto becomes effective, (ii) of the issuance by the
Commission of any stop order or of the initiation, or the threatening,
of any proceedings for that purpose and (iii) of the receipt of any
comments from the Commission. The Company will make every reasonable
effort to prevent the issuance of a stop order, and, if the Commission
shall enter a stop order at any time, the Company will make every
reasonable effort to obtain the lifting of such order at the earliest
possible moment.
(b) During the time when a prospectus is required to be delivered under
the Securities Act, comply so far as it is able with all requirements
imposed upon it by the Securities Act, as now and hereafter amended,
and by the Rules, as from time to time in force, so far as necessary
to permit the continuance of sales of or dealings in the Shares. If at
any time when a prospectus relating to the Shares is required to be
delivered under the Securities Act any event shall have occurred as a
result of which, in the reasonable opinion of counsel for the Company
or counsel for Noyes, the Registration Statement or Prospectus as then
amended or supplemented includes an untrue statement of a material
fact or omits to state any material fact required to be stated therein
or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, or if it is
necessary at any time to amend or supplement the Registration
Statement or Prospectus to comply with the Securities Act, the Company
will notify Noyes promptly and prepare and file with the Commission an
appropriate amendment or supplement in form
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<PAGE> 15
satisfactory to Noyes The cost of preparing, filing and delivering
copies of such amendment or supplement shall be paid by the Company.
(c) Deliver to the Underwriters such number of copies of each preliminary
prospectus as may reasonably be requested by them and, as soon as the
Registration Statement, or any amendment or supplement thereto,
becomes effective, deliver to them three signed copies of the
Registration Statement, including exhibits, and all post-effective
amendments thereto and deliver to the Underwriters such number of
copies of the Prospectus, the Registration Statement and supplements
and amendments thereto, if any, without exhibits, as they may
reasonably request.
(d) Endeavor in good faith, in cooperation with Noyes and its counsel, at
or prior to the time the Registration Statement becomes effective, to
qualify the Shares for offering and sale under the securities laws
relating to the offering or sale of the Shares of the states listed in
Exhibit A. In each jurisdiction where such qualification shall be
effected, the Company will, unless Noyes agrees that such action is
not at the time necessary or advisable, file and make such statements
or reports at such times as are or may reasonably be required by the
laws of such jurisdiction. The Company will advise Noyes promptly of
the suspension of the qualification of the Shares for offering, sale
or trading in any jurisdiction, or any initiation or threat of any
proceeding for such purpose, and in the event of the issuance of any
order suspending such qualification, the Company, with the cooperation
of Noyes, will use all reasonable efforts to obtain the withdrawal
thereof.
(e) Furnish its security holders as soon as practicable an earnings
statement (which need not be certified by independent certified public
accountants unless required by the Securities Act or the Rules)
covering a period of at least twelve months beginning after the
effective date of the Registration Statement, which shall satisfy the
provisions of Section 11(a) of the Securities Act and the Rules
thereunder.
(f) For a period of five years from the Effective Date, furnish to its
shareholders annual audited and quarterly unaudited consolidated
financial statements with respect to the Company including balance
sheets and income statements.
(g) For a period of five years from the Effective Date, furnish to Noyes
the following:
(i) at the time they have been sent to shareholders of the Company
or filed with the Commission one copy of each annual,
quarterly, interim, or current financial and other report or
communication sent by the Company to its shareholders or filed
with the Commission;
(ii) as soon as practicable, one copy of every press release and
every material news item and article in respect of the Company
or the affairs of the Company which was released by the
Company; and
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<PAGE> 16
(iii) all other information reasonably requested by Noyes with
respect to the Company to comply with Rule 15c2-11 of the Rules
and Section 4 of Schedule H of the NASD By-Laws.
(h) In all material respects apply the net proceeds from the offering in
the manner set forth under "Use of Proceeds" in the Prospectus.
(i) Not file any amendment or supplement to the Registration Statement or
Prospectus after the effective date of the Registration Statement to
which Noyes shall reasonably object in writing after being furnished a
copy thereof.
(j) Comply with all registration, filing and reporting requirements of the
Securities Act or the Exchange Act, which may from time to time be
applicable to the Company.
(k) Cause its Shares to be listed on the NASDAQ SmallCap Market System and
use commercially reasonable efforts to maintain such listing for not
fewer than five years.
(l) Pay, or reimburse if paid by the Underwriters, whether or not the
transactions contemplated hereby are consummated or this Agreement is
terminated, all costs and expenses incident to the performance of the
obligations of the Company under this Agreement, including those
relating to (1) the preparation, printing, filing and delivery of the
Registration Statement, including all exhibits thereto, each
preliminary prospectus, the Prospectus, all amendments of and
supplements to the Registration Statement and the Prospectus, and the
printing of the Underwriting Agreement and related agreements
including, without limitation, the Dealer Agreement; (2) the issuance
of the Shares and the preparation and delivery of certificates for the
Shares to the Underwriters; (3) the registration or qualification of
the Shares for offer and sale under the securities or "blue sky" laws
of the various jurisdictions referred to in Exhibit A, including the
fees and disbursements of counsel in connection with such registration
and qualification and the preparation and printing of preliminary,
supplemental, and final blue sky memoranda; (4) the furnishing
(including costs of shipping and mailing) to the Underwriters of
copies of each preliminary prospectus, the Prospectus and all
amendments of or supplements to the Prospectus, and of the several
documents required by this Section to be so furnished; (5) the filing
requirements and fees of the NASD in connection with its review of the
terms of the public offering and the underwriting; (6) the furnishing
(including costs of shipping and mailing) of copies of all reports and
information required by Section 6(g); (7) all transfer taxes, if any,
with respect to the sale and delivery of the Shares by the Company to
the Underwriters, (8) the inclusion of the Shares for listing, on the
NASDAQ SmallCap Market System; and (9) the Underwriters' out-of-pocket
expenses, including without limitation, road show expenses and legal
fees of counsel to Noyes.
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<PAGE> 17
(m) Not, without the prior written consent of Noyes, sell, contract to
sell or grant any option for the sale of or otherwise dispose of,
directly or indirectly, or register with the Commission, any shares of
Common Stock of the Company (or any securities convertible into or
exercisable for such shares of Common Stock) within 150 days after the
date of the Prospectus, except as provided in this Agreement and
except for grants and exercises of Stock Options under the Stock
Option Plans as described in the Prospectus.
(n) For not less than three fiscal years after the Effective Date,
maintain the Exchange Act registration of the Common Stock, unless the
Company's shareholders direct the Company to deregister the Common
Stock.
7. INDEMNIFICATION.
(a) The Company agrees to indemnify and hold harmless each of the
Underwriters and each person, if any, who controls any of the
Underwriters within the meaning of Section 15 of the Securities Act or
Section 20 of the Exchange Act against any and all losses, claims,
damages and liabilities, joint or several (including any reasonable
investigation, legal and other expenses incurred in connection with,
and any amount paid in settlement of, any action, suit or proceeding
or any claim asserted), to which they may become subject under the
Securities Act, the Exchange Act or other Federal or state statutory
law or regulation, at common law or otherwise, insofar as such losses,
claims, damages or liabilities arise out of or are based upon any
untrue statement or alleged untrue statement of a material fact
contained in any preliminary prospectus, the Registration Statement or
the Prospectus or any amendment thereof or supplement thereto, or
arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading; provided,
however, that such indemnity shall not inure to the benefit of the
Underwriters (or any person controlling the Underwriters) on account
of any losses, claims, damages or liabilities arising from the sale of
the Shares in the public offering to any person by the Underwriters if
such untrue statement or omission or alleged untrue statement or
omission was made in such preliminary prospectus, the Registration
Statement or the Prospectus, or such amendment or supplement, in
reliance upon and in conformity with information furnished in writing
to the Company by or on behalf of the Underwriters specifically for
use therein. The Company shall not be liable hereunder to the
Underwriters (or any controlling person thereof) to the extent that
any loss, claim, damage or other liability incurred by the
Underwriters arises from the Underwriters' fraudulent act or omission.
(b) Each of the Underwriters, severally, but not jointly, agrees to
indemnify and hold harmless the Company, each person, if any, who
controls the Company within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act, each director of the
Company and each officer of the Company who signs the Registration
Statement, to the same extent as the foregoing indemnity from the
Company to the
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<PAGE> 18
Underwriters, but only insofar as such losses, claims, damages or
liabilities arise out of or are based upon any untrue statement or
omission or alleged untrue statement or omission which was made in any
preliminary prospectus, the Registration Statement or the Prospectus,
or any amendment thereof or supplement thereto, in reliance upon and
in conformity with information furnished in writing to the Company by
the Underwriters specifically for use therein; provided, however, that
the obligation of the Underwriters to indemnify the Company (including
any controlling person, director or officer thereof) hereunder shall
be limited to the total underwriting discount applicable to the Shares
purchased by the Underwriters hereunder. The Underwriters shall not be
liable hereunder to the Company (including any controlling person,
director or officer thereof) to the extent that any loss, claim,
damage or other liability incurred by the Company arises from a
fraudulent act or omission by the Company.
(c) Any party that proposes to assert the right to be indemnified under
this Section will, promptly after receipt of notice of commencement of
any action, suit or proceeding against such party in respect of which
a claim is to be made against an indemnifying party or parties under
this Section, notify each such indemnifying party of the commencement
of such action, suit or proceeding, enclosing a copy of all papers
served, but the omission so to notify such indemnifying party of any
such action, suit or proceeding shall not relieve it from any
liability that it may have to any indemnified party otherwise than
under this Section. In case any such action, suit or proceeding shall
be brought against any indemnified party and it shall notify the
indemnifying parties of the commencement thereof, the indemnifying
party shall be entitled to participate in, and, to the extent that it
shall wish, jointly with any other indemnifying party similarly
notified, to assume the defense thereof, with counsel reasonably
satisfactory to such indemnified party, and after notice from the
indemnifying party to such indemnified party of its election so to
assume the defense thereof and the approval by the indemnified party
of such counsel, the indemnifying party shall not be liable to such
indemnified party for any legal or other expenses, except as provided
below and except for the reasonable costs of investigation
subsequently incurred by such indemnified party in connection with the
defense thereof. The indemnified party shall have the right to employ
its counsel in any such action, but the fees and expenses of such
counsel shall be at the expense of such indemnified party unless (1)
the employment of counsel by such indemnified party has been
authorized in writing by the indemnifying parties, (2) the indemnified
party shall have reasonably concluded that, because of the existence
of different or additional defenses available to the indemnified party
or of other reasons, there may be a conflict of interest between the
indemnifying parties and the indemnified party in the conduct of the
defense of such action (in which case the indemnifying parties shall
not have the right to direct the defense of such action on behalf of
the indemnified party), or (3) the indemnifying parties shall not have
employed counsel to assume the defense of such action within a
reasonable time after notice of the commencement thereof, in each of
which cases the fees and expenses of counsel shall be at the expense
of the indemnifying parties. An indemnifying party shall not
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<PAGE> 19
be liable for any settlement of any action, suit, proceeding or claims
effected without its written consent.
8. CONTRIBUTION. In order to provide for just and equitable contribution
in circumstances in which the indemnification provided for in Section 7(a) or
7(b) is due in accordance with its terms but for any reason is held to be
unavailable, the Company and the several Underwriters shall contribute to the
aggregate losses, claims, damages and liabilities (including any investigation,
legal and other expenses reasonably incurred in connection with, and any amount
paid in settlement of, any action, suit or proceeding or any claims asserted,
but after deducting any contribution received from other persons), to which the
Company and the Underwriters may be subject, in such proportion so that the
Underwriters are responsible for that portion represented by the percentage that
the underwriting discount appearing on the front cover page of the Prospectus
bears to the public offering price appearing thereon and the Company is
responsible for the balance; provided, however, that (a) in no case shall the
Underwriters be responsible for any amount in excess of the underwriting
discount applicable to the Shares purchased by the Underwriters hereunder and
(b) no person found guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Securities Act) shall be entitled to contribution from
any person who was guilty of such fraudulent misrepresentation. For purposes of
this Section, each person, if any, who controls the Underwriters within the
meaning of the Securities Act or the Exchange Act shall have the same rights to
contribution as the Underwriters, and each person, if any, who controls the
Company within the meaning of the Securities Act or the Exchange Act, each
officer of the Company who shall have signed the Registration Statement and each
director of the Company shall have the same rights to contribution as the
Company, subject in each case to clauses (a) and (b) of this Section. Any party
entitled to contribution will, promptly after receipt of notice of commencement
of any action, suit or proceeding against such party in respect of which a claim
for contribution may be made against another party or parties under this
Section, notify such party or parties from whom contribution may be sought, but
the omission so to notify such party or parties from whom contribution may be
sought shall not relieve the party or parties from whom contribution may be
sought from any other obligation it or they may have hereunder or otherwise than
under this Section. No party shall be liable for contribution with respect to
any action, suit, proceeding or claim settled without its written consent.
In any proceeding relating to the Registration Statement, any preliminary
prospectus, the Prospectus or any supplement thereto or amendment thereof, each
party against whom contribution may be sought under this Section 8 hereby
consents to the jurisdiction of any court in Indiana, agrees that process
issuing from such court may be served upon him or it by any other contributing
party and consents to the service of such process and agrees that any other
contributing party may join him or it as an additional defendant in any such
proceeding in which such other contributing party is a party.
9. TERMINATION. This Agreement may be terminated by Noyes by notifying
the Company at any time:
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(a) before the earlier of (1) 11:00 a.m., Indianapolis time, on the
business day following the Effective Date, or (2) the time when the
Shares are first generally offered by the Underwriters to dealers by
letter or telegram;
(b) at or before any Closing Date if, in the judgment of Noyes, payment
for and delivery of the Shares is rendered impracticable or
inadvisable because (1) additional material governmental restrictions,
not known to be in force and effect when this Agreement is signed,
shall have been imposed upon trading in securities generally or
minimum or maximum prices shall have been generally established on the
New York Stock Exchange, on the American Stock Exchange or on the
over-the-counter market, or trading in securities generally shall have
been suspended on either such Exchange or on the over-the-counter
market or a general banking moratorium shall have been established by
federal, New York or Indiana authorities, (2) a war or other calamity
shall have occurred or shall have accelerated to such an extent as to
affect adversely the marketability of the Shares, (3) the Company or
the Bank shall have sustained a material loss by fire, flood,
accident, hurricane, earthquake, theft, sabotage or other calamity or
malicious act, which, whether or not said loss shall have been
insured, will in Noyes's opinion, make it inadvisable to proceed with
the offering of the Shares, (4) there shall have been such material
change in the condition, business operations or prospects of the
Company or the market for the Shares or similar securities as in
Noyes's judgment would make it inadvisable to proceed with the
offering of the Shares; or
(c) at or before any Closing Date, if any of the conditions specified in
Section 5 or any other agreements, representations or warranties of
the Company in this Agreement shall not have been fulfilled when and
as required by this Agreement. If this Agreement is terminated
pursuant to any of its provisions, except as otherwise provided in
this Agreement, the Company shall not be under any liability to the
Underwriters (other than for obligations assumed in Section 6 hereof),
and the Underwriters shall not be under any liability to the Company;
provided, however, that if this Agreement is terminated by Noyes
because of any failure, refusal or inability on the part of the
Company to comply with the terms or to fulfill any of the conditions
of this Agreement, or for any reasons provided in subparagraphs (b)
and (c) of this Section 9, the Company will reimburse the Underwriters
for all accountable out-of-pocket expenses (including, without
limitation, road show expenses and fees and disbursements of counsel
to Noyes).
10. REPRESENTATIONS AND AGREEMENTS TO SURVIVE DELIVERY. All
representations, warranties and agreements contained in this Agreement shall be
deemed to be representations, warranties and agreements at the Closing Dates,
and such representations, warranties and agreements of the Company, including,
without limitation, the payment and reimbursement agreements contained in
Section 6 hereof and the indemnity and contribution agreements contained in
Sections 7 and 8 hereof, shall remain operative and in full force and effect
regardless of any investigation made by or on behalf of the Underwriters or any
controlling person
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<PAGE> 21
and shall survive termination of this Agreement and/or delivery of the Shares to
and payment for the Shares by the Underwriters pursuant to this Agreement.
11. MISCELLANEOUS. This Agreement has been and is made for the benefit of
the several Underwriters, the Company and their respective successors and
assigns, and, to the extent expressed herein, for the benefit of persons
controlling the Underwriters or the Company, and directors and certain officers
of the Company and their respective successors and assigns, and no other person,
partnership, association or corporation shall acquire or have any right under or
by virtue of this Agreement. The term "SUCCESSORS AND ASSIGNS" shall not include
any purchaser of Shares from the Underwriters merely because of such purchase.
If any action or proceeding shall be brought by the Underwriters or the
Company in order to enforce any right or remedy under this Agreement, the
Underwriters and the Company hereby consent to, and agree that they will submit
to, the jurisdiction of the courts of the State of Indiana and of any Federal
court sitting in the State of Indiana.
All notices and communications hereunder shall be in writing and mailed or
delivered or by telephone or facsimile, if subsequently confirmed in writing, to
Noyes, at 111 Monument Circle, Suite 300, Indianapolis, Indiana 46204,
Attention: Dana L. Hurst, Senior Vice President and Syndicate Manager (phone no.
(317-633-1717; facsimile no. (317-633-1739) (with a copy to John R. Zerkle,
Leagre Chandler & Millard LLP, 1400 First Indiana Plaza, 135 North Pennsylvania
Street, Indianapolis, Indiana 46204 (facsimile number (317-808-3100)); and to
the Company at P.O. Box 390, Greenwood, Indiana 46143, Attention: Jerry Engle,
President (facsimile No. 317-882-5903) (with a copy to David A. Butcher and Alan
W. Becker, Bose McKinney & Evans LLP, 2700 First Indiana Plaza, 135 N.
Pennsylvania St., Indianapolis, Indiana 46204 (facsimile number 317-684-5173).
This Agreement shall be construed in accordance with the laws of the state
of Indiana, without giving effect to principles of conflicts of laws. Please
confirm that the foregoing correctly sets forth the agreement between us.
Very truly yours,
FIRST SHARES BANCORP, INC.
By:_____________________________________
Jerry Engle, President and Director
Confirmed by David A. Noyes & Company
acting severally on behalf of itself and
the other several Underwriters named in
Schedule I hereto
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DAVID A. NOYES & COMPANY
By:_____________________________________
John C. Reed, Executive Vice President
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<PAGE> 23
SCHEDULE I
UNDERWRITING AGREEMENT DATED _____________, 2000
NUMBER OF
FIRM SHARES
UNDERWRITER TO BE PURCHASED
----------- ---------------
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EXHIBIT A
BLUE SKY STATES
Florida Missouri
Illinois New Jersey
Indiana New York
Kentucky Ohio
Michigan Pennsylvania
Minnesota Wisconsin
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<PAGE> 1
EXHIBIT 10.10
AMENDMENT TO
EMPLOYMENT AGREEMENT
Jerry Engle ("Engle") and First Bank (formerly known as First State
Bank of Morgantown) ("First Bank") hereby amend the Employment Agreement dated
March 3, 1999, between Engle and First Bank to delete Section 3(g)(ii).
Dated: February 11, 2000 FIRST BANK
By: ________________________
Frank A. Rogers
Chairman of the Board
------------------------
Jerry Engle
<PAGE> 1
EXHIBIT 23.1
Consent of Independent Auditors
We consent to the inclusion in this Registration Statement/Prospectus of First
Shares Bancorp, Inc. on Form SB-2 of our report, dated January 14, 2000 except
for Note 1 with respect to the equity transaction, as to which the date is
February 11, 2000, on the consolidated balance sheets as of December 31, 1999
and 1998 of First Shares Bancorp, Inc. and the related consolidated statements
of operations, changes in shareholders' equity, and cash flows for each of the
three years in the period ended December 31, 1999, and to the reference to us
under the heading of "experts" in the Prospectus, which is included in this
Registration Statement.
/s/ Crowe, Chizek and Company LLP
Crowe, Chizek and Company LLP
April 6, 2000
Indianapolis, Indiana
