As Filed with the Securities and Exchange Commission on September 11, 1998
Registration No. 333-____________
==============================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form SB-2
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
First Community Bancshares, Inc.
(Name of small business issuer in its charter)
Indiana 5035 35-1833586
(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
210 East Harriman
Bargersville, Indiana 46106
(317) 442-5171
(Address and telephone number of principal executive offices)
Albert R. Jackson, III
P.O. Box 767
298 St. Rd. 135N
Greenwood, Indiana 46142
(317) 882-5277
(Name, address and telephone number of agent for service)
With Copy To:
O. Wayne Davis, Esq.
Henderson, Daily, Withrow & DeVoe
2600 One Indiana Square
Indianapolis, Indiana 46204-2071
(317) 639-4121
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON AS
PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
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, check the following box. [ ]_______
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
- ---------------------------------------------------------------------------------------------------------------------
Title of each class of Amount to be Proposed maximum Proposed maximum Amount of
securities to be registered offering price per aggregate offering registration fee
registered unit price
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock 344,644 $12.10 $4,170,192.40 $1,230(2)
(without par value)(1)
- ---------------------------------------------------------------------------------------------------------------------
Subscription Rights
for Common Stock, no 131,000 0 0 0
par value
- ---------------------------------------------------------------------------------------------------------------------
Warrants for Common
Stock, no par value 131,000 0 0 0
- ---------------------------------------------------------------------------------------------------------------------
7% Convertible Notes $1,000,000 $10,000 $1,000,000 $295
- ---------------------------------------------------------------------------------------------------------------------
Total $1,525
- ---------------------------------------------------------------------------------------------------------------------
=====================================================================================================================
</TABLE>
- ----------
(1) Maximum number of shares of Common Stock issuable upon exercise of the
Rights and Warrants, and upon conversion of the Notes.
(2) Calculated pursuant to Rule 457 based on the highest subscription, exercise
or conversion price per share of common stock.
<PAGE>
The Company hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the Company 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 Commission, acting pursuant to said Section 8(a),
may determine.
EXPLANATORY NOTE
This Registration Statement contains a prospectus for the offer and
sale of $1 million in aggregate principal amount of 7% convertible notes (the
"Note Offering") and a separate prospectus for the issuance of rights and
warrants to existing shareholders entitling the shareholders or their
transferees to purchase shares of the Company's no par value common stock.
While the Note Offering and the distribution of the rights and warrants will
be made simultaneously, neither is dependent upon the other.
<PAGE>
SUBJECT TO COMPLETION, DATED ______________, 1998
PROSPECTUS
- ----------
FIRST COMMUNITY BANCSHARES, INC.
[LOGO]
$1,000,000
7% CONVERTIBLE NOTES
The Notes will be issued only in denominations of $10,000 and even
multiples thereof; will mature on December 31, 2008; and will bear interest from
the date of issuance at the rate of 7% per annum, payable quarterly in arrears
on the last day of March, June, September and December of each year, commencing
December 31, 1998. The Notes are convertible at any time at the option of the
holder into shares of the Company's common stock (the "Common Stock") at the
rate of $12.10 per share, subject to adjustment.
The Notes are redeemable, at the option of First Community Bancshares,
Inc. (the "Company"), at any time on or after December 31, 2003 or earlier in
the event of a sale of assets, merger or change of control in the Company. See
"Description of Securities - Notes." The Notes do not provide for any sinking
fund payments or principal payments prior to maturity. The Notes will not be
listed on any securities exchange or the Nasdaq Stock Market and it is unlikely
that an active public market for the Notes will develop or be maintained after
this Offering.
The Notes are unsecured general obligations of the Company and are not,
by their terms, subordinated to any present or future indebtedness of the
Company. However, because the Notes are unsecured, they are subject to the prior
claim of secured creditors of the Company to the extent of the value of the
collateral pledged to secure such indebtedness, and may be deemed effectively
subordinate thereto to that extent. Upon completion of this Offering, the
Company will have approximately $2,834,000 of outstanding secured indebtedness
but there is no limitation on the amount of additional secured indebtedness the
Company may incur. See "Risk Factors" and "Description of Securities - Notes."
SEE "RISK FACTORS" AT PAGE 7 FOR A DISCUSSION OF RISK FACTORS THAT
SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE NOTES OFFERED
HEREBY.
----------
THE SECURITIES OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR TIME
DEPOSITS OR OTHER OBLIGATIONS OF A BANK AND ARE NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
==============================================================================================
Price to Underwriting Proceeds to
Public Discounts and Commissions (1) Company (2)
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Note.................. $ 10,000 $ 0 $ 10,000
- ----------------------------------------------------------------------------------------------
Total..................... $1,000,000 $ 0 $ 1,000,000
==============================================================================================
</TABLE>
(1) The Notes are being offered and sold through certain officers and full-time
employees of the Company who will not be separately compensated therefor. See
"Plan of Distribution."
(2) Before deducting estimated expenses of the Offering payable by the Company
of approximately $36,750.
--------------------
The Date of this Prospectus is October __, 1998.
---------------------
<PAGE>
Information contained herein is subject to completion or amendment.
A registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of
any such State.
<PAGE>
AVAILABLE INFORMATION
The Company files reports and other information with the Securities and
Exchange Commission (the "Commission") under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), which may be inspected and copied at the
public reference facilities maintained by the Commission at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the Commission's
regional offices located at Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661-2511; and at 7 World Trade Center, Suite 1300, New
York, New York 10048. A copy of such material also can be obtained from the
Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington,
D.C. 20549, at prescribed rates. In addition, the Commission maintains a web
site (http://www.sec.gov) that contains reports, proxy statements and other
information statements filed electronically by the Company.
The Company has filed a Registration Statement on Form SB-2 (together
with all amendments and exhibits thereto, the "Registration Statement") with the
Commission under the Securities Act of 1933, as amended (the "Act"), with
respect to the Notes offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement, certain parts of which are
omitted in accordance with the rules and regulations of the Commission.
Reference is made to the Registration Statement which can be inspected at the
public reference facilities of the Commission and copies of which can be
obtained from the Commission at prescribed rates, as set forth above or at the
Commission's web site (http://www.sec.gov).
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more
detailed information appearing elsewhere in this Prospectus. Prospective
investors should carefully consider the information set forth under the heading
"Risk Factors." Unless the context otherwise indicates, "Company" includes
First Community Bancshares, Inc. and its subsidiaries.
THE COMPANY
GENERAL
First Community Bancshares, Inc. (the "Company") is a one bank holding
Company headquartered in Bargersville, Indiana. Through its subsidiary, First
Community Bank and Trust, a commercial bank organized under the laws of the
State of Indiana ("First Community"), the Company operates 8 offices in three
central and southern Indiana counties. The Company is also the sole
shareholder of First Community Real Estate Management, Inc. ("FCREM"), which
owns and leases two branch offices to First Community. The principal executive
offices of the Company are located at 210 East Harriman, Bargersville, Indiana
46106 and its telephone number is (317) 442-5171.
The Company operates in predominantly rural and suburban markets and
embraces a community banking philosophy that emphasizes personal service and
convenience, community involvement, local decision making authority, quick
responses to loan requests, and customized services.
The Company endeavors to provide its branch managers, lending
officers, tellers, and deposit service personnel with the authority to act
promptly in service of its customers within the scope of Company policies. This
highly responsive service attitude is enhanced by an efficient corporate
support staff and an investment in technology.
The Company believes the benefits of this operating philosophy
contributes to its success while providing improved operating efficiencies,
sound internal controls, and high credit underwriting standards.
THE OFFERING
Issue.............................. $1,000,000 of 7% Convertible Notes Due
December 31, 2008 (the "Notes").
Payment of Interest................ On the last day of March, June, September
and December of each year, commencing
December 31, 1998.
Interest Rate...................... 7% per annum.
Denominations ..................... The Notes will be issued in denominations
of $10,000 and even multiples thereof.
Redemption at the Company's Option. Redeemable at any time on or after December
31, 2003 at the option of the Company or in
the event of certain transactions, at par.
Sinking Fund....................... No sinking fund payments.
3
<PAGE>
Ranking............................ Unsecured general obligations of the
Company. Upon completion of this Offering,
the Company will have approximately
$2,834,000 of secured indebtedness. The
Company may incur additional secured debt
in an unlimited amount. There is also no
limitation on the amount of pari passu debt
that may be incurred by the Company. See
"Description of Securities - Notes."
Use of Proceeds.................... To provide additional capital to First
Community to support asset growth and to
provide capital to FCREM to acquire and
lease branch facilities to First Community.
No Trust Indenture................. The Notes will not be issued pursuant to an
indenture of trust and hence each
noteholder will be responsible for
monitoring and enforcing the terms of the
Notes. See "Description of Securities -
Notes."
Convertibility..................... Convertible at the option of the holder at
any time prior to redemption or maturity at
a conversion rate of $12.10 per share,
subject to adjustment.
Risk Factors....................... An investment in the Notes involves a
significant degree of risk. The Notes are
unsecured general obligations of the
Company, may effectively be deemed
subordinated to secured indebtedness to the
extent of the value of the collateral
pledged to secure such indebtedness, and do
not contain provisions for sinking fund
payments. See "Risk Factors" for a
discussion of factors that should be
considered in connection with an investment
in the Notes.
4
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The Consolidated Financial Data below summarizes historical
consolidated financial information of the Company for the periods indicated and
should be read in conjunction with the financial statements and other
information included elsewhere in this Prospectus and in the Company's annual
report on Form 10-K for the year ended December 31, 1997. The Unaudited
Consolidated Financial Data below for the interim periods indicated has been
derived from the Company's quarterly report on Form 10-Q for the six-month
period ended June 30, 1998, and should be read in conjunction with the Unaudited
Financial Statements and other information for such interim periods included
elsewhere in this Prospectus. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Index to Consolidated
Financial Statements." All adjustments considered necessary for a fair
presentation have, in the opinion of management, been included in the unaudited
interim data. Interim results for the six months ended June 30, 1998, are not
necessarily indicative of results that may be expected for future periods
including the year ending December 31, 1998.
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEARS ENDED
JUNE 30, DECEMBER 31,
---------------- -----------------------------------------------
1998 1997 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
(DOLLARS IN 000'S EXCEPT SELECTED RATIOS AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Selected Results of Operations:
Interest income............ $4,096 $3,477 $7,361 $6,158 $5,074 $3,255 $2,583
Interest expense........... 2,215 1,796 3,807 3,166 2,953 1,699 1,308
----- ----- ----- ----- ----- ----- -----
Net interest income........ 1,881 1,681 3,554 2,992 2,121 1,556 1,275
Provision for loan losses.. 129 111 255 219 208 418 92
----- ----- ----- ----- ----- ----- -----
Net interest income after..
provision for loan losses 1,752 1,570 3,299 2,773 1,913 1,138 1,183
Non-interest income........ 198 140 305 249 237 127 96
Non-interest expense....... 1,374 1,225 2,490 2,565 1,863 1,723 1,085
----- ----- ----- ----- ----- ----- -----
Income (loss) before income
tax expense............. 576 485 1,114 457 287 (458) 194
Income tax expense (benefit) 188 162 376 116 11 (281) 30
----- ----- ----- ----- ----- ----- -----
Net income (loss).......... $388 $323 $738 $341 $276 $(177) $164
===== ===== ===== ===== ===== ===== =====
Selected Ratios and Per Share Data*:
Basic earnings per share... $0.18 $0.16 $0.75 $0.35 $0.29 $(0.26) $0.25
Diluted earnings per share. $0.18 $0.16 $0.74 $0.34 $0.28 $(0.26) $0.24
Dividends per share........ $0.10 $0.10
Return on average assets... .76% .77% .85% .46% .44% (.38%) .46%
Return on average equity... 10.02 9.25 10.02 5.04 4.54 (4.48) 4.35
Average equity to average..
assets.................. 7.66 8.35 8.45 9.14 9.64 8.57 10.53
Dividend payout ratio...... 62.50 13.33
JUNE 30, DECEMBER 31,
-------- ------------------------------------------------
1998 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ----
(DOLLARS IN 000'S)
Selected Balance Sheet Data:.
Assets.................... $104,147 $98,740 $80,079 $71,393 $57,857 $43,617
Loans..................... 86,995 80,001 65,108 54,636 39,508 27,041
Allowance for loan losses 912 848 644 518 362 161
Deposits.................. 92,755 87,695 70,552 59,163 46,184 36,616
Federal Home Loan Bank
advances............... 2,930 2,930 2,379 4,603 5,314 2,507
Total shareholders' equity 7,931 7,550 6,886 6,442 6,145 3,818
</TABLE>
* Per share data has been restated to reflect the 1994 stock dividend, the 1995
stock split and the stock dividend declared in 1997.
5
<PAGE>
SIMULTANEOUS OFFERING
The Company is also issuing to its shareholders the right to purchase
up to 131,000 shares of Common Stock (the "Rights") and warrants to purchase up
to 131,000 shares of Common Stock (the "Warrants"), in each case with an
exercise price of $11.00 per share. The Rights will expire at 5:00 p.m. on [ ],
1998. Proceeds from the exercise of the Rights, if any, will be used for
general corporate purposes and for additional capital for First Community. The
Warrants will be exercisable for a 90 day period commencing on September 15,
1999 and ending at 5:00 p.m. on December 13, 1999. The offering of the Notes and
issuance of the Rights and Warrants are not conditioned upon each other.
6
<PAGE>
RISK FACTORS
Prospective investors should carefully consider, together with the
other information contained in this Prospectus, the following risk factors in
evaluating the Company and its business before purchasing any Notes offered
hereby. Certain statements in this Prospectus constitute "forward looking
statements" within the meaning of Section 27A of the Securities Act and Section
21E of the Exchange Act. Such forward looking statements involve known and
unknown risks, uncertainties, and other factors that may cause actual results,
performance, or achievements of the Company or First Community to differ
materially from any future results, performance, or achievements expressed or
implied by such forward looking statements. Certain of those risks and
uncertainties are set forth below.
NOTES ARE NOT INSURED
The Notes are not deposits or other obligations of a bank nor are they
insured by the Federal Deposit Insurance Corporation (the "FDIC") or by any
other governmental agency.
NO TRUST INDENTURE
The Notes are not being issued pursuant to a trust indenture and
consequently each holder will be responsible for individually giving and
receiving notices pursuant to the Notes and taking action if an Event of
Default occurs. Holders will not have the same protections they would have if
the Notes were being issued pursuant to a trust indenture qualified under the
Trust Indenture Act. See "Description of Securities - Notes."
STATUS OF THE COMPANY AS A BANK HOLDING COMPANY
The Company is a legal entity separate and distinct from First
Community although the principal source of the Company's cash revenues is
derived from First Community. The ability of the Company to pay interest on and
principal of the Notes will be significantly dependent upon the ability of
First Community to pay dividends to the Company and the ability of the Company
to realize a return on its investments in amounts sufficient to service the
Company's debt obligations. Payment of dividends by First Community is
restricted by various legal and regulatory limitations. See "Market for Common
Stock and Related Shareholder Matters" and "Description of Securities - Common
Stock."
The right of the Company to participate in the assets of any
subsidiary upon the latter's liquidation, reorganization, or otherwise (and
thus the ability of the holders of the Notes to benefit indirectly from any
such distribution) will be subject to the claims of the subsidiary's creditors,
which will have priority except to the extent that the Company may itself be a
creditor with a recognized claim.
First Community is subject to restrictions under federal law that
limit the transfer of funds by it to the Company whether in the form of loans,
extensions of credit, investments, asset purchases, or otherwise. Such
transfers by First Community to the Company or any non-bank subsidiary of the
Company is limited in amount to ten percent (10%) of First Community's capital
and surplus and with respect to the aggregate transfers to the Company and its
non-bank subsidiary, to an aggregate of 20% of First Community's capital and
surplus. Furthermore, any such loans and extensions of credit are required to
be secured in specified amounts. Federal law also prohibits First Community
from purchasing "low quality" assets from affiliates.
ADEQUACY OF ALLOWANCE FOR LOAN LOSSES
The risk of loan losses varies with, among other things, general
economic conditions, the type of loan being made, the credit worthiness of the
borrower over the term of the loan, and in the case of a collateralized loan,
the value of the collateral for the loan. Management maintains an allowance for
loan losses based upon, among other things, historical experience, an
evaluation of economic conditions, and regular review of delinquencies and loan
portfolio quality. Based upon such factors, management makes various
assumptions and judgments about the ultimate collectability of the loan
portfolio and provides an allowance for loan losses based upon a percentage of
the aggregate balance of outstanding loans and specific loans for which
ultimate collectability is considered questionable. If management's assumptions
and judgment prove to be incorrect and the allowance for loan losses is
inadequate to absorb future credit losses, or if the bank regulatory
authorities require First
7
<PAGE>
Community to increase the allowance for loan losses, First Community's earnings
(and consequently the Company's earnings) may be significantly and adversely
affected. Because certain lending activities involve greater risk, the
percentage applied to specific loan types may vary.
First Community actively manages its non-performing loans in an effort
to minimize credit losses and monitors its asset quality to maintain an
adequate allowance for loan losses. Although management believes its allowance
for loan losses is adequate, there can be no assurances that the allowance will
prove sufficient to cover future credit losses. Further, although management
uses the best information available to make determinations with respect to the
allowance for losses, future adjustments may be necessary if economic
conditions differ substantially from the assumptions used or if adverse
developments arise with respect to First Community's non-performing or
performing loans. Material additions to First Community's allowance for loan
losses would result in a decrease in First Community's net income, possibly its
capital, and could result in the inability to pay dividends among other adverse
consequences. See "Business - Nonperforming Assets and Allowance for Loan
Losses" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
EFFECT OF INTEREST RATE FLUCTUATIONS AND ECONOMIC CONDITIONS
The Company's consolidated results of operations depend to a large
extent on the level of its net interest income which is the difference between
interest income from interest earning assets (such as loans and investments)
and interest expense on interest bearing liabilities (such as deposits and
borrowings). If interest rate fluctuations cause its cost of deposits and
borrowings to increase faster than the yield on its interest earning assets,
net interest income will be reduced. The Company measures its interest rate
risk monthly using static gap analysis. The difference between an institution's
interest rate sensitive assets and its interest rate sensitive liabilities at a
point in time is its gap position. A negative gap indicates that the cumulative
interest rate sensitive liabilities exceed cumulative interest rate sensitive
assets for that period. A positive gap indicates that cumulative interest rate
sensitive assets exceed interest rate sensitive liabilities for that period.
Fluctuations in interest rates are not predictable or controllable.
The Company endeavors to structure its asset and liability strategies to
mitigate the impact of changes in market interest rates on net interest income.
However, there can be no assurances that the Company will be able to manage
interest rate risk so as to avoid significant adverse effects in net interest
income. At June 30, 1998 and December 31, 1997, the Company had a one-year
cumulative interest-rate gap of a negative 23.52 and 24.26 percent
respectively. This negative interest-rate gap may have a negative impact on
earnings in a rising interest rate environment. While the Company uses various
monitors of interest rate risk, it is unable to predict future fluctuations in
interest rates or the specific impact thereof. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
COMPETITION
Banking institutions operate in a highly competitive environment. The
Company and First Community compete with other banks and thrift holding
companies, commercial banks, credit unions, savings institutions, finance
companies, mortgage companies, mutual funds, and other financial institutions,
many of which have substantially greater financial resources than the Company
and First Community. Certain of these competitors offer products and services
that are not offered by First Community and certain competitors are not subject
to the same extensive laws and regulations as the Company and First Community.
Federal and state legislation and regulations also affect the Company's
competitiveness in the financial services business. It is impossible to predict
the competitive impact on the Company and First Community of certain federal
and state legislation and/or regulations relating to the banking industry and
interstate banking.
ECONOMIC CONDITIONS AND MONETARY POLICY
The operating results of the Company depend to a great extent upon the
rate differentials that result from the difference from the income it receives
from its loans, securities, and other interest earning assets and the interest
expense it pays on its deposits and other interest bearing liabilities. These
rate differentials are highly sensitive to many factors beyond the control of
the Company, including general economic conditions and the policies of various
governmental and regulatory authorities, in particular the Federal Reserve.
Like other depository institutions, the Company is affected by the
monetary policies implemented by the Federal Reserve. The primary instrument of
monetary policy employed by the Federal Reserve is the restriction
8
<PAGE>
of the expansion of the money supply through open market operations, including
the purchase and sale of government securities and the adjustment of reserve
requirements. These actions may at times result in significant fluctuations in
interest rates, which could have adverse effects on the operations of the
Company. In particular, the Company's ability to make loans and attract
deposits, as well as public demand for loans, could be adversely affected.
LOCAL ECONOMIC CONDITIONS
The success of the Company is dependent to a certain extent on the
general economic conditions in the geographical market served by First
Community. Although the Company expects that economic conditions will continue
to be favorable in these markets, no assurance can be given that favorable
economic conditions will continue to prevail. Adverse changes in economic
conditions in the geographic markets that First Community serves could result
in lower lending activity, impair First Community's ability to collect existing
loans, or otherwise have a negative effect on the operating results and
financial condition of the Company.
RISKS OF GROWTH
The Company has experienced steady growth over the past five years in,
among other things, assets, loans and deposits. Such growth places a strain on
management to recruit, train and retain employees, maintain prescribed loan
underwriting practices and generate or obtain adequate capital. The Company
also plans to open one additional office during the fourth quarter of 1998 and
another one during the first half of 1999. The Company's inability to
effectively manage such growth could have a negative impact upon the financial
results and condition of the Company.
GOVERNMENT REGULATION
The Company and First Community are each subject to extensive state
and federal governmental supervision, regulation, and control. Future
legislation and government policy could adversely affect the banking industry
and the operations of the Company and First Community. See "Business -
Regulation and Supervision of the Company" and "- Regulation and Supervision of
First Community."
MARKET FOR NOTES
The Notes will not be listed or quoted on any stock exchange or the
Nasdaq Stock Market and it is unlikely that a public market for the Notes will
develop. Accordingly, there can be no assurance as to whether or how quickly a
Note may be resold or the price for which a holder may resell a Note.
LIMITED MARKET FOR SHARES
The shares of Common Stock issuable upon conversion of the Notes are
not listed for trading on any stock exchange or the Nasdaq Stock Market and
there is only a limited market for the Common Stock. There can be no assurance
that any significant market will develop in the future. There is one market
maker in the Common Stock and the holders of Common Stock may experience
difficulty in reselling significant numbers of shares if they need to liquidate
their holdings.
YEAR 2000 COMPLIANCE
The Company, like most companies, faces a potentially serious
information systems (computer) problem because many software applications and
operational programs written in the past may not properly recognize calendar
dates beginning in the year 2000. This problem could force computers to either
shut down or provide incorrect data or information. The Company has begun the
process of identifying the changes required to computer programs hardware.
While the Company believes it is taking all appropriate steps to assure year
2000 compliance, it is dependent on vendor compliance. The bulk of the
Company's computer processing is provided under contract by Computer Services,
Inc. ("CSI"). CSI has advised the Company that it expects to be in year 2000
compliance by December 31, 1998. The Company is requiring all software and
systems vendors to represent that the services and products provided are, or
will be, year 2000 compliant, and will be testing compliance. The Company
expects to complete testing by March 31, 1999.
9
<PAGE>
USE OF PROCEEDS
The net proceeds of the Offering, after deduction of estimated
offering expenses, will aggregate approximately $963,250, assuming all of the
Notes are sold. Approximately $100,000 will be used by FCREM for the
acquisition of branch locations that will be leased to First Community.
Substantially all of the remaining net proceeds of the Offering, approximately
$863,250, will be contributed as additional capital to First Community to
support asset growth. Pending such uses, the Company will invest the net
proceeds temporarily in short and medium-term securities eligible for
investment by financial institutions.
MARKET FOR COMMON STOCK AND RELATED SHAREHOLDER MATTERS
The following table sets forth the high and low bid prices for the
Company's Common Stock for the periods indicated, based upon information
obtained by management of the Company from the only broker known by the Company
to make a market in the Company's Common Stock, and on other price information
made available to management of the Company. Management of the Company has not
verified the accuracy of the following information. There is no established
public trading market for the Company's Common Stock. The common stock is
traded on a limited basis and many trades have involved privately negotiated
transactions. As a result, the Company is not always aware of the price at
which trades occur. The referenced prices may not reflect an actual trading
range and may reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
BID PRICE PER SHARE
1998 1997 1996
------------------- ------------------- --------------------
QUARTER HIGH LOW HIGH LOW HIGH LOW
------- ---- --- ---- --- ---- ---
<S> <C> <C> <C> <C> <C> <C>
First Quarter $10.50 $10.00 $11.43 $10.48 $10.48 $9.52
Second Quarter $11.00 $10.50 $11.43 $10.48 $10.48 $9.52
Third Quarter* $11.00 $10.50 $11.43 $10.48 $11.43 $9.52
Fourth Quarter $11.43 $10.48 $11.43 $10.48
</TABLE>
* Through August 31, 1998.
The Company paid its first cash dividend of $.10 per share on March
15, 1997 to shareholders of record on January 1, 1997. On November 19, 1997,
the Board of Directors declared a 5% stock dividend payable on February 1,
1998. Any future dividend payments by the Company will be dependent upon
dividends paid by First Community and subject to regulatory limitations. The
price per share in the above table has been restated to reflect the 1997 stock
dividend.
The dividends which the Company may pay are restricted by Indiana law
to retained earnings. The ability of the Company to pay dividends to
shareholders is dependent on dividends received from First Community. Without
prior approval, current regulations allow First Community to pay dividends to
the Company not exceeding net profits (as defined) for the current year plus
retained net profits for the previous two years. First Community is also
restricted by the office of Thrift Supervision for the amount of the liquidation
account established at the time of its stock conversion. First Community
normally restricts dividends to a lesser amount because of the need to maintain
an adequate capital structure. At June 30, 1998, the stockholder's equity of
First Community was $7,746,000, of which a minimum of $1,460,000 was available
for dividends.
The number of record holders of the Company's Common Stock as of
August 31, 1998 was 283.
10
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at
June 30, 1998, both actual and as adjusted to reflect (i) the sale of all of the
Notes offered hereby and (ii) the sale of all shares in the Rights Offering (and
before deducting estimated offering expenses). The "as adjusted" information
does not reflect the sale of any shares of Common Stock pursuant to the exercise
of the Warrants or conversion of the Notes. Both the Notes and Rights are being
offered on a best-efforts basis and there can be no assurance as to how many, if
any, will be sold. The information set forth below should be read in conjunction
with the consolidated financial statements and related notes included elsewhere
in this Prospectus.
ACTUAL AS ADJUSTED
---------- -----------
Secured obligations.............................. $2,929,789 $2,929,789
Notes............................................ -0- 1,000,000
---------- ----------
Total borrowings................................. 2,929,789 3,929,789
---------- ----------
Stockholders' Equity
Preferred Stock, no par value:
1,000,000 shares authorized, none issued.... -0- -0-
Common stock, no par value:
4,000,000 shares authorized,
989,848 shares issued (actual),
and 1,120,848 shares (as adjusted).......... 6,722,251 8,163,251
Retained earnings and contributed capital 1,182,482 1,182,482
Accumulated other comprehensive income ........ 25,958 25,958
---------- ----------
Stockholders' Equity........................ 7,930,691 9,371,691
---------- ----------
Total Borrowings and Stockholders' Equity $10,860,480 $13,301,480
=========== ===========
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
First Community is a subsidiary of the Company and operates as an
Indiana commercial bank. As a bank holding Company, the Company depends upon
the operations of its subsidiaries for substantially all revenue and reports
its results of operations on a consolidated basis with its subsidiaries
First Community's profitability depends primarily upon the difference
between income on its loans and investments and the cost of its deposits and
borrowings. This difference is referred to as the spread or net interest
margin. The difference between the amount of interest earned on loans and
investments and the interest incurred on deposits and borrowings is referred to
as net interest income. Interest income from loans and investments is a
function of the amount of loans and investments outstanding during the period
and the interest rates earned. Interest expense related to deposits and
borrowings is a function of the amount of deposits and borrowings outstanding
during the period and the interest rates paid.
On May 26, 1998, the Company formed a new subsidiary, First Community
Real Estate Management, Inc. whose purpose is to purchase and lease back to
First Community properties currently owned by First Community thereby allowing
First Community to redeploy its capital to other uses. To that end, on July 15,
1998, FCREM borrowed $800,000 at a rate of 1.125% under prime, adjustable every
5 years for a term of 30 years, from another financial institution in order to
purchase the land and building of First Community's Bargersville branch office
at 210 E. Harriman Ave. in Bargersville, Indiana and the land and building of
its Banta Street office at 597 Banta Street in Franklin, Indiana. First
Community will make monthly lease payments to FCREM as lessee of these
locations. These lease payments will be sufficient to service the debt.
11
<PAGE>
RESULTS OF OPERATIONS
Three and Six Months Ended June 30, 1998 and 1997
- -------------------------------------------------
Net income increased from $322,506 to $387,686 for the six months, and
from $159,265 to $179,692 for the three months ending June 30, 1997 and 1998,
respectively. Basic earnings per share increased from $.33 to $.39 for the six
month period, and from $.16 to $.18 for the three month period ended June 30,
1997 and 1998, respectively. Net interest income increased from $1,681,205 to
$1,880,546 for the six months, and from $866,127 to $965,058 for the three
months, ended June 30, 1997 and 1998, respectively.
The increase in net income for both periods was primarily due to the
increase in net interest income offset by general increases in other expense.
The increase in net interest income for both periods was primarily due to
increases in income on loans and short-term interest-bearing time deposits
offset by an increase in interest expense on deposits. These increases in
interest income and expense resulted primarily from increases in the volume of
these interest-earning assets and interest-bearing liabilities. Income from
service charges on deposit accounts increased from $111,746 to $148,956 for the
six months, and from $56,236 to $76,328 for the three months, ended June 30,
1997 and 1998, respectively. This increase was primarily due to an increase in
the number of deposit accounts. The increases in other expenses were a direct
result of the overall growth of First Community. Income taxes increased $25,889
for the six months ended June 30, 1998, when compared to the same period in
1997, because of the increase in the Company's income before taxes of $91,069.
Year Ended December 31, 1997, 1996 and 1995
- -------------------------------------------
Net income for the year ended December 31, 1997 was $738,000 compared
to $341,000 and $276,000 for the years ended December 31, 1996 and 1995,
respectively. Earnings increased from 1995 to 1997 primarily as a result of
growth in First Community's loans and certain other items discussed more fully
below.
The increase in net interest income of $562,000 in 1997 resulted
primarily from an increase in lending and the income derived therefrom. Net
loans outstanding increased $14,688,000 in 1997, with the most significant
areas of growth being in mortgage and construction loans. The increase in
provision for loan losses from $219,000 to $255,000 is a reflection of an
increase in the loan portfolio and not a deterioration of the same. The
increase in income from service fees of $69,000 resulted from a significant
increase in the number of deposit accounts and fees associated with the same.
The decrease in deposit insurance expense of $408,000 was due to the FDIC
special assessment for all institutions with SAIF insured deposits which the
Bank incurred in 1996 only. The assessment amounted to additional expense in
1996 of $344,000. Income taxes increased $260,000 because of an increase in
First Community's overall taxable income.
The increase in net interest income of $871,000 in 1996 resulted
primarily from an increase in lending and the income derived therefrom. Net
loans outstanding increased $10,346,000 in 1996, with growth in the majority of
the lending areas. The increase in provision for loan losses from $208,000 to
$219,000 is a reflection of an increase in the loan portfolio and not a
deterioration of the same. The increase in income from service fees of $51,000
resulted from a significant increase in the number of deposit accounts and fees
associated with the same. The increase in other expenses is primarily
attributable to the signing of the omnibus appropriations bill on September 30,
1996, which imposed a FDIC special assessment for all institutions with SAIF
insured deposits. This assessment amounted to $344,000 and is included in
deposit insurance expense for the year ending December 31, 1996. Other expenses
also increased due to overall growth. Income taxes increased $105,000 in 1996
due to an increase in First Community's overall taxable income.
Net interest income increased $565,000 in 1995 due primarily to an
increase in loans. The increase in net interest income resulted primarily from
an increase in lending and the income derived therefrom. Net loans outstanding
increased $14,971,000 in 1995, with the most significant areas of growth being
in commercial and installment lending. The decrease in provision for loan loss
from $418,000 to $208,000 is a reflection of the increase in the quality of the
loan portfolio and a decrease in loan chargeoffs. The increase in income from
other service fees of $55,000 resulted from a significant increase in the
number of deposit accounts and fees associated with the same. In addition,
other income increased $43,000 due to the settlement of a suit with a former
provider of services. First Community owned a parcel of land in Trafalgar,
Indiana and sold this for a gain of $22,000 in March of 1995. The increases in
other expenses are a direct result of the overall growth of First Community.
Legal and professional fees decreased $124,000 due to a decrease in the number
and scope of legal matters in
12
<PAGE>
1995. Income taxes increased $292,000 in 1995 because of an increase in First
Community's overall taxable income.
The following table sets forth the average balance sheet amounts, the
related interest income or expense and average rates earned or paid for the
years ended December 31, 1997 and 1996.
<TABLE>
<CAPTION>
1997 1996
-------------------------------------- ------------------------------------
INTEREST/ INTEREST/
AVERAGE INCOME AVERAGE AVERAGE INCOME AVERAGE
BALANCE EXPENSE RATE BALANCE EXPENSE RATE
--------- --------- ------- ------- --------- -------
(DOLLARS IN 000'S ON FULLY TAXABLE EQUIVALENT BASIS)
<S> <C> <C> <C> <C> <C> <C>
Assets:
Interest-bearing deposits $ 5,848 $ 230 3.9% $ 5,287 $ 208 3.9%
Investment securities: (1)
Taxable 2,604 245 9.4 2,972 259 8.7
Tax-exempt 2,505 143 5.7 2,959 168 5.7
---------- ------------ ----------- ----------
Total investment securities 5,109 388 7.6 5,931 427 7.2
---------- ------------ ----------- ----------
Loans: (2)
Commercial.................... 25,794 2,589 10.0 20,989 2,112 10.1
Real estate mortgage.......... 21,043 1,887 9.0 17,807 1,592 8.9
Installment................... 23,825 2,161 9.1 19,052 1,748 9.2
Tax-exempt loans and leases... 2,386 192 8.0 2,013 151 7.5
---------- ------------ ----------- ----------
Total loans...................... 73,048 6,829 9.3 59,861 5,603 9.4
---------- ------------ ----------- ----------
Total earning assets............. 84,005 7,447 8.9 71,079 6,238 8.8
------------ ----------
Allowance for loan losses........ (720) (569)
Cash and due from banks.......... 985 838
Premises and equipment........... 1,876 1,458
Other assets..................... 980 1,192
---------- -----------
Total assets..................... $ 87,126 $ 73,998
========== ===========
Liabilities:
Interest-bearing deposits:
NOW accounts..................... $ 9,281 $ 243 2.6 $ 7,719 $ 202 2.6
Savings.......................... 15,655 694 4.4 14,322 638 4.5
Certificates of deposit and
other time deposits........... 46,958 2,758 5.9 36,480 2,106 5.8
---------- ------------ ----------- ----------
Total interest-bearing deposits.. 71,894 3,695 5.1 58,521 2,946 5.0
FHLB advances.................... 1,830 112 6.1 3,503 220 6.3
---------- ------------ ----------- ----------
Total interest-bearing liabilities 73,724 3,807 5.2 62,024 3,166 5.1
------------ ----------
Noninterest-bearing demand
deposits...................... 5,587 4,875
Other liabilities................ 451 337
---------- -----------
Total liabilities................ 79,762 67,236
Stockholders' equity............. 7,364 6,762
---------- -----------
Total liabilities and stockholders'
equity........................ $ 87,126 $ 73,998
========== ===========
Net interest income.............. $ 3,640 4.3%(3) $ 3,072 4.3%(3)
============ ==========
Adjustments to convert tax-exempt
investment securities to fully
taxable equivalent basis, using
marginal rate of 34% after
adjustment for effect of
non-deductible interest expense
attributed to such assets........ $ 86 $ 80
============ ============
</TABLE>
- -------------------
(1) The average balances of investment securities, including available for
sale securities, are computed on historical cost and do not include any
fair value adjustments.
(2) Nonaccruing loans have been included in the average balances.
(3) Net interest income divided by total earning assets.
13
<PAGE>
CHANGES IN INTEREST INCOME AND EXPENSE COMPARING DECEMBER 31, 1997 AND
1996 AND DECEMBER 31, 1996 AND 1995. The following tables analyze the changes
in interest income and interest expense comparing the years ended December 31,
1997 and 1996 and December 31, 1996 and 1995. It distinguishes between the
changes due to differences in volume (outstanding balances), the changes due to
changes in interest rates, and changes attributable to both rate and volume,
which cannot be separately identified and have been allocated proportionately
to the change due to volume and the change due to rate.
<TABLE>
<CAPTION>
INCREASE (DECREASE) IN NET INTEREST INCOME
---------------------------------------------------------
YEAR ENDED DECEMBER 31, 1997
COMPARED TO YEAR NET DUE TO DUE TO
ENDED DECEMBER 31, 1996 CHANGE RATE VOLUME
------ ---- ------
(DOLLARS IN 000'S)
<S> <C> <C> <C>
Interest-earning assets:
Loans...................................... $1,226 $ (7) $1,233
Investment securities...................... (39) 23 (62)
Interest-bearing deposits.................. 22 22
------ ------ ------
Total.................................. 1,209 16 1,193
------ ------ ------
Interest-bearing liabilities:
Savings.................................... 56 (3) 59
Interest-bearing checking.................. 41 41
Certificates of deposit.................... 652 37 615
FHLB advances.............................. (108) (5) (103)
------ ------ ------
Total................................... 641 29 612
------ ------ ------
Net change in net interest income.......... $ 568 $ (13) $ 581
------ ------ ------
INCREASE (DECREASE) IN NET INTEREST INCOME
---------------------------------------------------------
YEAR ENDED DECEMBER 31, 1996
COMPARED TO YEAR NET DUE TO DUE TO
ENDED DECEMBER 31, 1995 CHANGE RATE VOLUME
------ ---- ------
(DOLLARS IN 000'S)
Interest-earning assets:
Loans...................................... $1,131 $ (94) $1,225
Investment securities...................... (145) 93 (238)
Interest-bearing deposits.................. 38 0 38
------ ------ ------
Total................................... 1,024 (1) 1,025
------ ------ ------
Interest-bearing liabilities:
Savings.................................... 152 (28) 180
Interest-bearing checking.................. 46 (5) 51
Certificates of deposit.................... (8) (105) 97
FHLB advances.............................. 22 (24) 46
------ ------ ------
Total................................... 212 (162) 374
------ ------ ------
Net change in net interest income.......... $ 812 $ 161 $ 651
====== ====== ======
</TABLE>
FINANCIAL CONDITION
ASSET/DEPOSIT BASE. First Community has experienced significant
growth in assets and deposits. Management believes this growth can be
attributed to several factors, none of which can be singled out as the
predominant reason for the growth, but each of which is believed to have
contributed to the increase in assets from $43,617,000 at December 31, 1993 to
$98,740,000 at December 31, 1997 to $104,147,000 at June 30, 1998 and deposits
from $36,616,000 at December 31, 1993 to $87,695,000 at December 31, 1997 to
$92,755,430 at June 30, 1998. These factors include: (i) increased population
in the geographic area serviced; (ii) increased per-household disposable income
in the geographic area serviced; (iii) movement of the home office of one of
the locally owned banks away from the city in which the Company is located;
(iv) the acquisition of certain local
14
<PAGE>
financial institutions by larger metropolitan area banks and the preference of
certain individuals in the service area for dealing with a locally owned
institution; and (v) the expansion into new communities with the opening of the
Franklin, Indianapolis and Trafalgar branches in 1992 and the opening of the
North Vernon branch in 1993. First Community also opened a second branch in
Franklin, Indiana on October 31, 1996.
First Community currently classifies loans as substandard, doubtful
and loss to assist management in addressing collection risks and pursuant to
regulatory requirements which are not necessarily consistent with generally
accepted accounting principles. Substandard loans represent credits
characterized by the distinct possibility that some loss will be sustained if
deficiencies are not corrected. Doubtful loans possess the characteristics of
substandard loans, but collection or liquidation in full is doubtful based upon
existing facts, conditions and values. A loan classified as a loss is
considered uncollectible. As of June 30, 1998, First Community had $785,881 of
loans classified as substandard, none as doubtful and none as loss. At
December 31, 1997, First Community had $388,752 of loans classified as
substandard, none as doubtful and none as loss. The allowance for loan losses
was $912,357 or 1.1% of net loans receivable at June 30, 1998 compared to
$848,085 or 1.1% of net loans receivable at December 31, 1997. A portion of
classified loans are non-accrual loans. First Community had non-accrual loans
totaling $236,241 at June 30, 1998 compared to $204,070 at December 31, 1997.
ASSET/LIABILITY MANAGEMENT. One of the actions undertaken by First
Community's management has been to adopt asset/liability management policies in
an attempt to reduce the susceptibility of First Community's net interest
spread to the adverse impact of volatile interest by attempting to match
maturities (or time-to-repricing) of assets with maturities or repricing of
liabilities and then actively managing any mismatch. Accomplishing this
objective requires attention to both the asset and liability sides of the
balance sheet. The difference between maturity of assets and maturity of
liabilities is measured by the interest-rate gap.
First Community's one-year cumulative interest-rate gap as a percent
of total assets was a negative 23.52% and 24.26% at June 30, 1998 and December
31, 1997, respectively. This interest-rate gap represents substantial risk for
First Community in an environment of rising interest rates. A negative
interest-rate gap means First Community's earnings are vulnerable to periods of
rising interest rates because during such periods the interest expense paid on
liabilities will generally increase more rapidly than the interest income
earned on assets. Conversely, in a falling interest-rate environment, the
total expense paid on liabilities will generally decrease more rapidly than the
interest income earned on assets. A positive interest-rate gap would have the
opposite effect.
Asset management goals have been directed toward obtaining a suitable
balance of asset quality, liquidity and diversification in order to stabilize
and improve earnings. The asset management strategy has concentrated on
shortening the maturity of its loan portfolio by increasing adjustable-rate
loans and short-term installment and commercial loans. At December 31, 1997,
First Community had $40,779,000 or 51.04% of its total loan portfolio invested
in installment and commercial loans as compared to $36,485,000 or 56.10% of
total loans invested in installment and commercial loans at December 31, 1996.
Increasing short-term installment and commercial loans increases the overall
risk of the loan portfolio. Such risk relates primarily to collection and to
the loans that often are secured by rapidly depreciating assets. First
Community's ratio of non-performing assets to total assets was .77% and .42% at
June 30, 1998 and December 31, 1997, respectively.
The primary goal in the management of liabilities has been to increase
core deposit relationships and therefore improve the stability of deposit
accounts. Management has attempted to combine a policy for controlled growth
with a strong, loyal customer base to control interest expense.
15
<PAGE>
The following tables illustrate the interest-rate sensitivity of
interest-earning assets and interest-bearing liabilities at June 30, 1998 and
December 31, 1997. Mortgages which have adjustable or renegotiable interest
rates are shown as subject to change every one to three years based upon the
contracted-for adjustment period. This schedule does not reflect the effects
of possible prepayments on enforcement of due-on-sale clauses.
<TABLE>
<CAPTION>
AT JUNE 30, 1998 MATURING OR REPRICING
--------------------------------------
ONE YEAR 1 - 3 3 - 5 OVER 5
OR LESS YEARS YEARS YEARS TOTAL
-------- ----- ----- ------ -----
(DOLLARS IN 000'S)
<S> <C> <C> <C> <C> <C>
Interest-bearing assets:
Adjustable rate mortgages........ $ 13,329 $ 3,595 $ 4,711 $ 110 $ 21,745
Fixed rate mortgages............. 4,493 2,226 2,166 10,511 19,396
Commercial loans................. 13,124 1,645 825 573 16,167
Consumer loans................... 8,733 11,697 4,883 1,125 26,438
Tax-exempt loans and leases...... 28 -0- -0- 3,221 3,249
Investments...................... 1,622 1,362 744 1,544 5,272
FHLB stock....................... 778 -0- -0- -0- 778
Interest-bearing deposits........ 7,198 -0- -0- -0- 7,198
---------- ----------- ----------- ----------- ------------
Total interest-earning assets.. 49,305 20,525 13,329 17,084 100,243
---------- ----------- ----------- ----------- ------------
Interest-bearing liabilities:
Fixed maturity deposits.......... 43,557 10,292 2,179 26 56,054
Other deposits................... 30,064 -0- -0- -0- 30,064
FHLB advances.................... 177 794 1,725 234 2,930
---------- ----------- ----------- ----------- ------------
Total interest-bearing liabilities 73,798 11,086 3,904 260 89,048
---------- ----------- ----------- ----------- ------------
Excess (deficiency) of
interest-earning assets over
interest-bearing
liabilities........................ $ (24,493) $ 9,439 $ 9,425 $ 16,824 $ 11,195
========== =========== =========== =========== ============
Cumulative excess (deficiency)
of interest-earning assets over
interest-bearing liabilities $ (24,493) $ (15,054) $ (5,629) $ 11,195
Cumulative ratio at June 30,
1998 as a percent of total assets.. (23.52)% (14.45)% (5.40)% 10.75%
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997 MATURING OR REPRICING
ONE YEAR 1 - 3 3 - 5 OVER 5
OR LESS YEARS YEARS YEARS TOTAL
-------- ----- ----- ------ -----
(DOLLARS IN 000'S)
<S> <C> <C> <C> <C> <C>
Interest-bearing assets:
Adjustable rate mortgages........ $ 13,323 $ 4,316 $ 4,615 $ -0- $ 22,254
Fixed rate mortgages............. 3,992 1,971 1,901 $ 7,222 15,086
Commercial loans................. 11,622 1,309 687 639 14,257
Consumer loans................... 9,383 10,813 4,023 707 24,926
Tax-exempt loans and leases...... 24 -0- -0- 3,353 3,377
Investments...................... 1,295 1,893 238 1,054 4,480
FHLB stock....................... 778 -0- -0- -0- 778
Interest-bearing deposits........ 10,298 -0- -0- -0- 10,298
----------- ----------- ------------ ---------- ------------
Total interest-earning assets.. 50,715 20,302 11,464 12,975 95,456
----------- ----------- ------------ ----------- ------------
Interest-bearing liabilities:
Fixed maturity deposits.......... 38,544 11,283 1,919 -0- 51,746
Other deposits................... 25,949 -0- -0- -0- 35,949
FHLB advances.................... 177 794 1,725 234 2,930
----------- ----------- ------------ ----------- ------------
Total interest-bearing liabilities 74,670 12,077 3,644 234 90,625
----------- ----------- ------------ ----------- ------------
Excess (deficiency) of
interest-earning assets over
interest-bearing
liabilities........................ $ (23,955) $ 8,225 $ 7,820 $ 12,741 $ 4,831
=========== =========== ============ =========== ============
Cumulative excess (deficiency)
of interest-earning assets over
interest-bearing liabilities $ (23,955) $ (15,730) $ (7,910) $ 4,831
Cumulative ratio at December 31,
1997 as a percent of total assets.. (24.26)% (15.93)% (8.01)% 4.89%
</TABLE>
17
<PAGE>
The following tables provide information about the Company's
significant financial instruments at June 30, 1998 and December 31, 1997 that
are sensitive to changes in interest rates. The table presents principal cash
flows and related weighted average interest rates (on a tax equivalent basis)
by expected maturity dates.
<TABLE>
<CAPTION>
MATURING IN YEARS ENDING JUNE 30,
------------------------------------------------------------------------------------------
FAIR
1999 2000 2001 2002 2003 THEREAFTER TOTAL VALUE
---- ---- ---- ---- ---- ---------- ----- -----
(DOLLARS IN 000'S)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Investment securities
available for sale
Fixed rate $ 1,066 $ 820 $ 222 $ 309 $ 435 $ 1,252 $ 4,104 $ 4,104
Average interest rate 9.74% 9.27% 7.65% 7.03% 7.06% 8.28% 8.06%
Investment securities held
to maturity
Fixed rate $ 556 $ 215 $ 105 $ 292 $ 1,168 $ 1,192
Average interest rate 5.84% 6.72% 6.86% 6.85% 6.35%
Loans
Fixed rate $ 16,213 $ 8,035 $ 6,785 $ 4,766 $ 2,634 $ 14,947 $ 53,380 $ 54,129
Average interest rate 9.51% 9.24% 9.01% 8.80% 8.60% 7.52% 8.74%
Variable rate $ 8,774 $ 2,223 $ 2,037 $ 1,909 $ 1,119 $ 17,553 $ 33,615 $ 33,972
Average interest rate 10.14% 9.55% 9.37% 9.73% 9.64% 8.78% 9.30%
Liabilities
Deposits
NOW, Money Market and
Savings Deposits
Variable rate $ 30,064 $ 30,064 $ 30,064
Average interest rate 3.75% 3.75%
Certificates of Deposit
Fixed rate $ 43,557 $ 8,714 $ 1,578 $ 514 $ 1,665 $ 26 $ 56,054 $ 56,263
Average interest rate 5.87% 5.99% 5.89% 6.03% 6.07% 6.10% 5.90%
FHLB Advances
Fixed rate $ 177 $ 156 $ 638 $ 122 $ 1,603 $ 234 $ 2,930 $ 2,932
Average interest rate 6.01% 6.01% 6.05% 6.01% 5.77% 5.85% 5.87%
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
MATURING IN YEARS ENDING DECEMBER 31,
------------------------------------------------------------------------------------------
FAIR
1998 1999 2000 2001 2002 THEREAFTER TOTAL VALUE
---- ---- ---- ---- ---- ---------- ----- -----
(DOLLARS IN 000'S)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Investment securities
available for sale
Fixed rate $ 620 $ 1,043 $ 113 $ 109 $ 125 $ 761 $ 2,771 $ 2,771
Average interest rate 8.8% 10.3% 8.7% 9.6% 9.5% 10.3% 9.8%
Investment securities held
to maturity
Fixed rate $ 675 $ 632 $ 105 $ 5 $ 292 $ 1,709 $ 1,734
Average interest rate 5.4% 5.9% 6.9% 7.1% 7.2% 6.0%
Loans
Fixed rate $ 14,389 $ 7,760 $ 6,324 $ 4,135 $ 2,365 $ 11,921 $ 46,894 $ 47,800
Average interest rate 9.7% 9.4% 9.1% 8.9% 8.7% 8.0% 9.0%
Variable rate $ 8,676 $ 2,275 $ 923 $ 1,771 $ 927 $ 18,434 $ 33,006 $ 33,350
Average interest rate 10.3% 10.2% 9.6% 10.0% 9.6% 9.0% 9.5%
Liabilities
Deposits
NOW, Money Market and
Savings Deposits
Variable rate $ 28,325 $ 28,325 $ 28,325
Average interest rate 3.6% 3.6%
Certificates of Deposit
Fixed rate $ 38,544 $ 8,711 $ 2,572 $ 1,120 $ 799 $ 51,746 $ 52,997
Average interest rate 5.9% 6.0% 6.1% 5.9% 6.2% 6.0%
FHLB Advances
Fixed rate $ 177 $ 156 $ 638 $ 122 $ 1,603 $ 234 $ 2,930 $ 2,908
Average interest rate 6.0% 6.0% 6.1% 6.0% 5.8% 5.9% 5.9%
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Liquidity refers to the ability of a financial institution to generate
sufficient cash to fund current loan demand, meet savings deposit withdrawals
and pay operating expenses. The primary sources of liquidity are cash,
interest-bearing deposits in other financial institutions, marketable
securities, loan repayments, increased deposits and total institutional
borrowing capacity.
Management believes that it has adequate liquidity for the Company's
short- and long-term needs. Short-term liquidity needs resulting from normal
deposit/withdrawal functions are provided by the Company retaining a portion of
cash generated from operations in a Federal Home Loan Bank ("FHLB") daily
investment account. This account acts as a short-term liquidity source while
providing interest income to the Company. Long-term liquidity and other
liquidity needs are provided by the ability of the Company to borrow up to
$26,348,732 from the FHLB. The balance of its borrowings was $2,929,789 at
June 30, 1998 and December 31, 1997.
Cash and interest-bearing deposits, when combined with investments,
have decreased as a percentage of total assets primarily due to a shift to
higher yielding loans to improve margins. Management's goal is to maintain
cash, interest-bearing deposits and investments at a level sufficient to satisfy
needs for liquidity and other short-term obligations.
Liquidity, represented by cash and cash equivalents, is a result of its
operating, investing and financing activities. These activities are discussed
below for the years ended December 31, 1997 and December 31, 1996.
During 1997 and 1996, cash and cash equivalents which are defined as
cash and due from banks and interest-bearing time deposits increased $4,196,000
and $1,384,000, respectively. Cash was provided primarily from a net increase
in deposit accounts of $17,143,000 in 1997 and $11,389,000 in 1996. Cash was
used primarily to fund a net increase in loans of $15,062,000 in 1997 and
$10,587,000 in 1996.
At December 31, 1997 and 1996, commitments to fund loan originations
were approximately $5,606,000 and $9,022,000, respectively. In the opinion of
management, First Community has sufficient cash flow and borrowing capacity to
meet funding commitments and to maintain proper liquidity levels based upon
First Community's favorable liquidity ratio and the ability to borrow from the
FHLB.
At June 30, 1998, the Company had a capital to asset ratio of 7.62%. At
June 30, 1998, First Community had core capital of approximately 7.66% and had
risk-based capital in excess of 8.0%. The regulatory core and risk-based
capital requirements for First Community are 4.0% and 8.0% respectively.
ACCOUNTING MATTERS
During 1997, The Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, Reporting
Comprehensive Income, establishing standards for the reporting of comprehensive
income and its components in financial statements. SFAS No. 130 is applicable
to all entities that provide a full set of financial statements. Enterprises
that have no items of other comprehensive income in any period presented are
excluded from the scope of this Statement.
SFAS No. 130 is effective for interim and annual periods beginning
after December 15, 1997. Earlier application is permitted. The Company
adopted SFAS No. 130 during the first quarter of 1998.
19
<PAGE>
Also in 1997, the FASB issued SFAS No. 131, Disclosures About Segments
of an Enterprise and Related Information, which supersedes SFAS No. 14,
Financial Reporting for Segments of a Business Enterprise. It establishes
standards for the way that public enterprises report information about
operating segments in annual financial statements and requires reporting of
selected information about operating segments in interim financial statements
issued to the public. It also establishes standards for disclosures regarding
products and services, geographic areas and major customers. SFAS No. 131
defines operating segments as components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision-maker in deciding how to allocate resources an in assessing
performance.
This standard is effective for financial statement periods beginning
after December 15, 1997, and requires comparative information for earlier years
to be restated. Due to recent issuance of this standard, management has been
unable to fully evaluate the impact, if any, it may have on the Company's
future financial statement disclosures.
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and related data presented herein have been
prepared in accordance with generally accepted accounting principles. These
principles require the measurement of financial position and operating results
in terms of historical dollars, without considering changes in the relative
purchasing power of money over time due to inflation.
The primary assets and liabilities of the Company are monetary in
nature. Consequently, interest rates generally have a more significant impact
on performance than the effects of inflation. Interest rates, however, do not
necessarily move in the same direction or with the same magnitude as the price
of goods and services. In a period of rapidly rising interest rates, the
liquidity and the maturity structure of the Company's assets and liabilities
are critical to the maintenance of acceptable performance levels.
YEAR 2000 COMPLIANCE
The Company, like most companies, faces a potentially serious
information systems (computer) problem because many software applications and
operational programs written in the past may not properly recognize calendar
dates beginning in the year 2000. This problem could force computers to either
shut down or provide incorrect data or information. The Company has begun the
process of identifying the changes required to computer programs hardware.
While the Company believes it is taking all appropriate steps to assure year
2000 compliance, it is dependent on vendor compliance. The bulk of the
Company's computer processing is provided under contract by Computer Services,
Inc. ("CSI"). CSI has advised the Company that it expects to be in year 2000
compliance by December 31, 1998. The Company is requiring all software and
systems vendors to represent that the services and products provided are, or
will be, year 2000 compliant, and will be testing compliance. The Company
expects to complete testing by March 31, 1999.
Based on a preliminary study, the Company expects to spend
approximately $15,000 to $25,000 from 1998 through 1999 to modify its computer
information systems enabling proper processing of transactions relating to the
year 2000 and beyond. The Company continues to evaluate appropriate courses of
corrective action, including replacement of certain systems whose associated
costs would be recorded as assets and amortized. Accordingly, the Company does
not expect the amounts required to be expended over the next two years to have
a material effect on its financial position or results of operations. The
amount expensed in 1997 was immaterial. The Company has also begun to require
all significant commercial borrowers to certify their own year 2000 compliance
status as a part of the loan documentation and underwriting process.
20
<PAGE>
BUSINESS
GENERAL
The Company is a one-bank holding company incorporated in August 1991.
The Company's primary asset is its wholly-owned banking subsidiary, First
Community, an Indiana-chartered commercial bank formerly known as Bargersville
Federal Savings Bank. The Company recently formed FCREM as a wholly-owned
subsidiary to own and lease banking facilities to First Community.
At June 30, 1998, the Company had approximately $104.1 million of
assets, deposits of approximately $92.8 million and shareholders' equity of
approximately $7.9 million. First Community's primary business consists of
attracting deposits from the general public and originating real estate,
commercial and consumer loans and purchasing investments through its offices
located in Bargersville, Greenwood, Franklin, Indianapolis, Trafalgar, and
North Vernon, Indiana. As of June 30, 1998, First Community had 65 employees
of which 51 were full-time. The Company and FCREM have no employees.
First Community's deposits are insured to the maximum extent permitted
by law by the Savings Association Insurance Fund ("SAIF") of the Federal
Deposit Insurance Corporation ("FDIC"). First Community is a member of the
Federal Home Loan Bank ("FHLB") of Indianapolis. First Community is subject to
comprehensive regulation, examination and supervision by the Indiana Department
of Financial Institutions ("DFI") and the FDIC. The Company is subject to
regulation by the Federal Reserve Board. The Federal Reserve Board, as a
condition of the acquisition of First Community, required the Company to make a
commitment not to incur debt in excess of a 30% debt-to-equity ratio on an
unconsolidated basis.
The business of First Community consists primarily of attracting
deposits from the general public, originating residential real estate,
commercial and consumer loans and purchasing other types of investments. In
addition, First Community originates first mortgage income-producing property
real estate loans, second mortgage one-to-four family home loans, secured home
improvement loans, and savings deposit secured loans. Consumer loans include,
among others, new and used automobile and other secured and unsecured personal
loans. First Community offers small commercial loans to area businesses in
addition to new home construction loans and business lines of credit. First
Community also invests in various US Treasury, federal agency, state, municipal
and other investment securities permitted by applicable laws and regulations.
The principal sources of funds for First Community's lending activities include
deposits received from the general public, amortization and repayment of loans,
maturity of investment securities and FHLB advances.
First Community's primary sources of income are interest on loans,
investment securities and interest-bearing deposits in other financial
institutions and service charges on deposit accounts. Its principal expenses
are interest paid on deposit accounts and borrowings, salaries and employee
benefits, premises and equipment expenses and other overhead expenses incurred
in the operation of First Community.
21
<PAGE>
LENDING ACTIVITIES
The following table sets forth information concerning the composition
of First Community's loan portfolio in dollar amounts and percentages.
<TABLE>
<CAPTION>
AT DECEMBER 31,
1997 1996
------------------------ ------------------------
PERCENT OF PERCENT OF
AMOUNT TOTAL AMOUNT TOTAL
------ ---------- ------ ----------
TYPE OF LOAN (DOLLARS IN 000'S)
<S> <C> <C> <C> <C>
Real estate loans
Residential mortgages
(1-4 single family homes) $28,971 36.60% $22,675 35.17%
Multi-family residential mortgages 335 .52
Construction and land development 6,773 8.55 3,621 5.62
Commercial loans 17,883 22.59 17,401 26.99
Installment loans 22,896 28.93 19,084 29.60
Tax-exempt loans and leases 3,377 4.27 1,922 2.99
------- ------ ------- ------
Loans 79,900 100.94 65,038 100.89
Allowance for losses (848) (1.07) (644) (1.00)
Deferred loan origination costs 100 .13 70 .11
------- ------ ------- ------
Loans, net $79,152 100.00% $64,464 100.00%
======= ====== ======= ======
</TABLE>
The following table sets forth certain information at December 31,
1997, regarding the dollar amount of loans maturing in First Community's loan
portfolio based on contractual maturities. Demand loans having no stated
schedule of repayments and no stated maturity and overdrafts are reported as
due in one year or less. This schedule does not reflect the effects of possible
prepayments or enforcement of due-on-sale clauses. Management expects
prepayments will cause actual maturities to be shorter. Certain mortgage loans
such as construction loans and second mortgage loans are included in the
commercial and installment loan totals below. In addition, commercial real
estate loans are included in real estate loans below.
<TABLE>
<CAPTION>
REMAINING MATURITIES
--------------------------------------------------------------------
BALANCE
OUTSTANDING AT
DECEMBER 31, ONE YEAR OVER ONE YEAR
1997 OR LESS TO FIVE YEARS OVER FIVE YEARS
--------------------------------------------------------------------
(DOLLARS IN 000'S)
<S> <C> <C> <C> <C>
Real estate loans $37,340 $ 7,719 $ 8,151 $ 21,470
Commercial loans 14,257 7,902 3,307 3,048
Installment loans 24,926 7,420 15,022 2,484
Tax-exempt loans and leases 3,377 24 0 3,353
------- -------- -------- --------
Total $79,900 $ 23,065 $ 26,480 $ 30,355
======= ======== ======== ========
</TABLE>
22
<PAGE>
The following table sets forth, as of December 31, 1997, the dollar
amount of all loans maturing after December 31, 1998 showing those having a
fixed interest rate and floating or adjustable interest rates.
FLOATING OR
FIXED RATE ADJUSTABLE RATE
---------- ---------------
TYPE OF LOAN (DOLLARS IN 000'S)
Real estate loans $15,086 $22,254
Commercial loans 5,616 8,641
Installment loans 22,815 2,111
Tax-exempt loans and leases 3,377 0
------- -------
46,894 33,006
Less amount due within one year 14,389 8,676
------- -------
Loans due after one year $32,505 $24,330
======= =======
The original contractual loan payment period for adjustable interest
rate residential loans originated by First Community normally ranges from 15 to
20 years. Current fixed rate mortgage originations may not exceed a 20-year
term. Because borrowers may refinance or prepay their loans, however, such
loans normally remain outstanding for a substantially shorter period of time.
Origination, Purchase and Sale of Loans. Interest rates charged by
First Community on its loans are affected primarily by loan demand and the
supply of funds available for lending. These factors are in turn affected by
general economic conditions and monetary policies of the federal government,
including the Federal Reserve Board, the general supply of money in the
economy, legislative tax policies and governmental budgetary matters.
Loan originations are derived from a number of sources. Residential
loan originations are attributable primarily to solicitation by First
Community's staff, referrals from real estate brokers, builders and walk-in
customers. Multifamily and other commercial real estate loan originations are
obtained from previous borrowers and direct contact with First Community. All
property securing real estate loans made by First Community is appraised in
accordance with applicable regulations of the FDIC and includes an actual
inspection of such property by designated fee appraisers. To supplement loan
demand, First Community has also purchased participations in tax-exempt leases.
First Community typically has not sold loans or loan participations in
the secondary market and services substantially, all loans which it originates
and retains.
All mortgage loans in excess of $300,000 are approved by the full
Board of Directors or the loan committee of the Board. Loan limits are
reviewed and changed from time to time to reflect current market conditions.
Fire and casualty insurance is required on all mortgage loans as well as
abstracts of title or title insurance.
Residential Mortgage Loans. Residential mortgage loans have been
predominantly secured by single-family homes. To reduce its exposure to
changes in interest rates, First Community currently originates adjustable rate
mortgages ("ARMs") along with long term, fixed-rate mortgages.
First Community offers residential construction mortgage loans with
maturities of six months or less at interest rates which vary with current
market rates. The application process includes the same items which are
required for other residential mortgage loans and include a submission of
accurate plans, specifications and costs of the property to be constructed.
These items are used as a basis to determine the appraised value of the subject
property. Appraisal reports are completed by designated fee appraisers, and
loans are based on the current appraised value. Loans of up to 80% of such
amount may be offered for a maximum period of six months for the construction
of the properties securing the loans. Extensions are permitted, when
circumstances warrant, if construction has continued satisfactorily and the
loan is current.
23
<PAGE>
Installment and Commercial Lending. First Community makes various
types of installment loans including loans to depositors secured by pledges of
their deposit accounts, new and used automobile loans, both direct and
indirect, and secured and unsecured personal loans. Although installment and
commercial loans are considered by management to involve more risk than
residential mortgage loans, such loans have shorter maturities and typically
have higher yields than mortgage loans.
Commercial loans include loans secured by commercial real estate or
deposits, single-payment loans, construction loans and loans for business
purchases, operations, inventory and lines of credit. All non-residential
mortgage loans are at a greater interest rate than single-family residential
loans.
All installment and commercial loans in excess of $300,000 are
approved by the full Board of Directors or the loan committee of First
Community. A loan officer's approval is required for installment or commercial
loans up to certain amounts. First Community has established policies
regarding financial statement requirements, credit verifications procedures and
other matters intended to minimize underwriting risk.
The most recent loan approval limits were adopted by the Board of
Directors in 1997. The limits vary from officer to officer with a range of
$2,500 to $70,000 for unsecured loans, and a range of $7,500 to $200,000 for
secured loans. Loans in excess of the above-mentioned limits must be approved
by a committee of loan officers or the board of directors loan committee.
Installment Loan Underwriting. First Community has adopted
underwriting guidelines that apply to all loans made by First Community.
However, the underwriting policies and practices are particularly important in
the installment lending area. Installment loans present risks beyond those
presented by other types of loans because the collateral is usually movable and
subject to rapid depreciation. Such factors increase the importance of
properly documenting such loans and assessing the risks associated with each
loan based upon such documentation.
The documentation required by First Community's underwriting
guidelines include an application, employment income verified by pay stubs,
direct verification with employers when deemed necessary, and may include tax
returns or audited financial statements and evidence of security. The
application must include the minimum loan amount requested, the term requested,
monthly payment, purpose of loan, job history, income, financial statement, and
security offered if applicable. The application must be signed by all
borrowers obligated for the loan. First Community also requires current credit
reports from credit bureaus as part of the underwriting procedure for all loans
including indirect automobile lending. First Community also reviews the
applicant's ability to maintain a stable monthly income and other required
monthly payments.
NONPERFORMING ASSETS AND ALLOWANCE FOR LOAN LOSSES
Nonperforming assets consist of nonaccrual loans, restructured loans,
past-due loans, real estate owned (acquired in foreclosure), and other
repossessed assets. Nonaccrual loans are loans on which interest recognition
has been suspended because they are 90 days past due as to interest or
principal or because there is a question about First Community's ability to
collect all principal and interest. Restructured loans are loans where the
terms have been modified to provide a reduction or deferral of interest or
principal because of deterioration in the borrower's financial position.
Past-due loans are accruing loans that are contractually past due 90 days or
more as to interest or principal payments, and the amount of the loan is no
greater than 80% of the fair market value of the collateral securing the loan
or First Community has a reasonable expectation of collecting all past-due
interest and principal.
24
<PAGE>
The following table summarizes nonperforming assets as of the dates
indicated.
AT DECEMBER 31,
------------------
1997 1996
------ ------
(DOLLARS IN 000'S)
Nonaccrual loans $204 $ 99
Restructured loans
Past-due loans 90 days
or more (interest accruing) 120
---- ----
Total non-performing assets 324 99
Real estate owned 79 140
Other repossessed assets 9 14
==== ====
Total non-performing assets $412 $253
==== ====
Ratio of non-performing assets to total
assets .42% .32%
Interest on non-performing loans that
would have been included in income $ 19 $ 24
==== ====
Interest on non-performing loans that was
included in income $ 0 $ 0
==== ====
At December 31, 1997, no loans were identified as impaired by
management. Loans are considered to be impaired when it becomes probable that
First Community will be unable to collect all amounts due according to the
contractual terms of the loan agreement.
In banking, loan losses are one of the costs of doing business.
Although First Community's management emphasizes the early detection and
chargeoff of loan losses, it is inevitable that at any time certain losses
exist in the portfolio which have not been specifically identified.
Accordingly, the provision for loan losses is charged to earnings on an
anticipatory basis, and recognized loan losses are deducted from the allowance
so established. Over time, all net loan losses must be charged to earnings.
During the year, an estimate of the loss experience for the year serves as a
starting point in determining the appropriate level for the provision. However,
the amount actually provided in any period may be greater or less than net loan
chargeoffs, based on management's judgment as to the appropriate level of the
allowance for loan losses. The determination of the adequacy of the allowance
for loan loss is based on management's continuing review and evaluation of the
loan portfolio, and its judgment as to the impact of current economic
conditions on the portfolio. The evaluation by management includes
consideration of past loan loss experience, changes in the composition of the
loan portfolio and the current condition and amount of loans outstanding.
The allowance for loan losses increased during the year ended December
31, 1997 compared to the year ended December 31, 1996 primarily because of the
growth in loans and a change in the composition of the loan portfolio. During
1997, First Community made a $255,000 provision for loan losses due primarily
to growth in loans and a change in the mix of the loan portfolio.
25
<PAGE>
Allocation of the Allowance for Loan Losses:
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------------------------------------------
1997 1996
-------------------------------- --------------------------------
PERCENTAGE PERCENTAGE
OF LOANS TO OF LOANS TO
TOTAL TOTAL
AMOUNT LOANS AMOUNT LOANS
------------- ------------- -------------- --------------
(DOLLARS IN 000'S)
<S> <C> <C> <C> <C>
Real estate mortgage loans $162 36.3% $139 35.4%
Construction and land development 68 8.5 32 5.6
Commercial loans 196 22.4 171 26.7
Installment loans 418 28.6 300 29.3
Tax-exempt loans and leases 4 4.2 2 3.0
--------- -------- --------- --------
$848 100.0% $644 100.0%
========= ======== ========= ========
</TABLE>
Summary of Loan Loss Experience:
YEAR ENDED DECEMBER 31,
--------------------------
1997 1996
-------- --------
(DOLLARS IN 000'S)
Balance at January 1 $ 644 $ 518
Chargeoffs:
Real estate mortgage loans (16) (2)
Commercial loans (20) (30)
Installment loans (44) (79)
-------- --------
Total Chargeoffs (80) (111)
Recoveries:
Commercial 17 8
Installment 12 10
-------- --------
Total Recoveries 29 18
-------- --------
Net Chargeoffs (51) (93)
-------- --------
Provision for loan losses 255 219
-------- --------
Balance at December 31 $ 848 $ 644
======== ========
Average loans during the year $ 73,048 $ 59,861
Ratio of net chargeoffs to total
average loans outstanding during
the year .07% .16%
26
<PAGE>
INVESTMENT ACTIVITIES
The following table sets forth the carrying value of First Community's
investment portfolio and FHLB stock as of the dates indicated:
YEAR ENDED DECEMBER 31,
--------------------------
1997 1996
-------- --------
(DOLLARS IN 000'S)
Available for sale at fair value:
State and municipal obligations $1,371 $1,756
Corporate obligations 1,400 630
-------- --------
2,771 2,386
-------- --------
Held to maturity at amortized cost:
Federal agency mortgage pools 174
State and municipal obligations 1,709 2,367
-------- --------
1,709 2,541
FHLB stock 778 778
-------- --------
Total $5,258 $5,705
======== ========
At December 31, 1997, the amortized cost of securities available for
sale was $2,716,000 and the related gross unrealized gains were $55,000. At
December 31, 1997, the fair value of securities held to maturity was $1,734,000
and the related gross unrealized gains were $25,000. There were no unrealized
losses on securities at December 31, 1997.
As of December 31, 1997, there were no state and municipal obligations
representing more than 10% of shareholders' equity included in securities.
27
<PAGE>
The following table sets forth the maturities of investment securities
at December 31, 1997 and the weighted-average yield (on a tax equivalent basis)
on such securities.
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------------------------------------
CORPORATE STATE AND MUNICIPAL
OBLIGATIONS OBLIGATIONS
-------------------------------- --------------------------------
AMOUNT YIELD AMOUNT YIELD
------------- -------------- -------------- --------------
(DOLLARS IN 000'S)
<S> <C> <C> <C> <C>
Available for Sale: (1)
Maturities:
One year or less $ 450 10.00% $ 170 5.63%
Over 1 year to 5 years 950 10.32 425 9.33
Over 5 years to 10 years 180 10.63
Over 10 years 541 10.25
------------- --------------
Total available for sale 1,400 10.21 1,316 9.41
--------------
Held to Maturity:
Maturities:
One year or less 675 5.44
Over 1 year to 5 years 742 6.04
Over 5 years to 10 years 292 7.18
Over 10 years
--------------
Total held to maturity 1,709 6.00
--------------
Total securities $ 1,400 10.21% $ 3,025 7.48%
============= ==============
</TABLE>
- ----------
(1) Available for sale amounts shown in the maturity distribution table are at
amortized cost for computation of yields.
SOURCES OF FUNDS
Deposits are the primary source of First Community's funds for use in
lending and for other general business purposes. In addition to deposits, FHLB
advances represent a significant source of funds to First Community, as well as
funds derived from loan repayments. Loan repayments are a relatively stable
source of funds, while savings inflows and outflows are significantly
influenced by general interest rates and money market conditions.
Deposit Activities. First Community offers several types of deposit
programs designed to attract both short-term and long-term savings by providing
a wide assortment of accounts and rates. See the average balance sheet included
in "Management's Discussion and Analysis of Financial Condition and Results of
Operations" for a breakdown of the average amount and average rate paid on
First Community's deposit categories. First Community does not rely on brokered
deposits as funding sources.
The following table indicates the amount of certificates of deposit of
$100,000 or more by time remaining until maturity at December 31, 1997 (in
000's).
MATURITY PERIOD
Three months or less $ 1,808
Greater than three months through six months 1,524
Greater than six months through twelve months 5,273
Over twelve months 1,914
-------
Total $10,519
=======
28
<PAGE>
Interest earned on statement savings accounts is paid from the date of
deposit to the date of withdrawal, compounded and credited monthly. Interest
earned on money market demand deposit accounts is compounded and credited
monthly. The interest rate on these accounts is established by First Community.
In recent years, many deposits in long-term fixed-rate accounts have
been withdrawn prior to maturity or such certificates have not been renewed at
maturity due to the more attractive rates offered on various money market
accounts. Early withdrawal penalties are 30 days' interest on accounts maturing
in one year or less and 90 days interest on accounts maturing in greater than
one year.
Borrowings. The FHLB of Indianapolis functions as a central credit
facility providing credit for member financial institutions. As a member, First
Community is required to own capital stock in the FHLB and is authorized to
apply for advances on the security of such stock and certain of its home
mortgages and other assets (principally, securities which are obligations of,
or guaranteed by, the United States) provided certain standards related to
creditworthiness have been met. Advances are made pursuant to several different
credit programs. Each credit program has its own interest rate and range of
maturities. The FHLB prescribes the acceptable uses to which the advances
pursuant to each program may be made as well as limitations on the amounts of
advances. Acceptable uses prescribed by the FHLB have included expansion of
residential mortgage lending and meeting short-term liquidity needs. Depending
on the program, limitation on the amounts of advances are based either on a
fixed percentage of a member's net worth or on the FHLB's assessment of the
member's creditworthiness. The FHLB is required to review its credit
limitations and standards at least once every six months. First Community had
outstanding borrowings of $2,929,789 from the FHLB as of June 30, 1998 and
December 31, 1997.
SERVICE AREA
First Community's primary service areas are Johnson County and
Jennings County, Indiana. These areas are among the most affluent and rapidly
growing areas of Indiana. The major portion of First Community's customers
reside in Johnson County, particularly in the Bargersville, Franklin and
Greenwood areas, which account for about one-half of the county's population,
according to the 1990 U.S. Census. First Community has branches in Trafalgar,
Franklin, and Greenwood, Indiana in Johnson County, a branch at a retirement
center in Indianapolis, Indiana, and two branches in North Vernon, Indiana in
Jennings County. First Community anticipates opening a branch in Whiteland
(Johnson County) and Taylorsville (Bartholomew County) within the next 12
months.
DESCRIPTION OF PROPERTY
First Community currently leases its home office in Bargersville,
Indiana and one of its branches in Franklin, Indiana from FCREM, leases
branches in Indianapolis, Trafalgar and Franklin from third parties, and owns
branch offices in Greenwood and North Vernon, Indiana. The leases with
third-parties expire between 1999 and 2003. The Company plans for FCREM to
eventually own substantially all of the branch properties and lease them to
First Community.
COMPETITION
The banking business is highly competitive in Johnson County, which is
First Community's primary market, where it competes with 14 commercial banks, 3
savings banks, and 2 credit unions. In Jennings County, First Community
competes with 5 commercial banks, one savings bank and 2 credit unions. To a
lesser extent, First Community competes with mortgage banking companies,
consumer finance companies, and certain governmental agencies.
REGULATION AND SUPERVISION OF THE COMPANY
The Company is a bank holding company within the meaning of the Bank
Holding Company Act of 1956, as amended ("BHCA"), and is registered as such
with the Board of Governors of the Federal Reserve System ("Federal Reserve").
The Company is examined, regulated and supervised by the Federal Reserve and is
required to file annual reports and other information regarding its business
and operations and the business and operations of its subsidiaries with the
Federal Reserve. The Federal Reserve has the authority to issue cease and
29
<PAGE>
desist orders against a bank holding company if it determines that activities
represent an unsafe and unsound practice or a violation of law.
Under the BHCA, a bank holding company is, with limited exceptions,
prohibited from acquiring direct or indirect ownership or control of voting
stock of any company which is not a bank and from engaging in any activity
other than managing or controlling banks. A bank holding company may, however,
own shares of a Company engaged in activities which the Federal Reserve has
determined to be so closely related to banking or managing or controlling banks
as to be a proper incident thereto.
Acquisitions by the Company of banks and savings associations are also
subject to regulation. Any acquisition by the Company of more than five percent
of the voting stock of any bank requires prior approval of the Federal Reserve.
Acquisitions of savings associations are also subject to the approval of the
Office of Thrift Supervision ("OTS"). Indiana law permits the Company to be
acquired by bank holding companies, located in any state in the United States
provided that the Company's subsidiary bank has been in existence and
continuously operated for five (5) or more years.
A bank holding company and its subsidiaries are prohibited from
engaging in certain tie-in arrangements in connection with the extension of
credit or the provision of any property or service. With certain exceptions, a
bank holding company, a bank, and a subsidiary or affiliate thereof, may not
extend credit, lease or sell property or furnish any services or fix or vary
the consideration for the foregoing on the condition that (i) the customer must
obtain or provide some additional credit, property or services from, or to, any
of them, or (ii) the customer may not obtain some other credit, property or
service from a competitor, except to the extent reasonable conditions are
imposed to assure the soundness of credit extended.
Under the BHCA, bank holding companies may acquire savings
associations without geographic restrictions. However, under the Homeowner's
Loan Act ("HOLA"), the OTS is prohibited from approving any acquisition that
would result in a multiple savings and loan holding company controlling savings
institutions in more than one state, unless approval is for interstate
supervisory acquisitions by savings and loan holding companies, and the
acquisition of a savings institution in another state is under laws of the
state of the target savings institutions specifically permitting such
acquisition. Although the conditions imposed upon acquisitions in those states
which have enacted such legislation vary, most such statutes are of the
"regional reciprocity" type which require that the acquiring holding company be
located (as defined by the location of its subsidiary savings institutions) in
a state within a defined geographic region and that the state in which the
acquiring holding company is located has enacted reciprocal legislation
allowing savings institutions in the target state to purchase savings
institutions in the acquirer's home state on terms no more restrictive than
those imposed by the target state on the acquirer. Indiana law permits
reciprocal interstate savings institution acquisitions within a region
consisting of Indiana and contiguous states.
The Company's income is principally derived from dividends paid on the
common stock of its subsidiaries. The payment of dividends by First Community
is subject to certain regulatory restrictions. Additionally, under Federal
Reserve policy, the Company is expected to act as a source of financial
strength to, and commit resources to support, First Community. As a result of
such policy, the Company may be required to commit resources to First Community
in circumstances where it might not otherwise do so.
REGULATION AND SUPERVISION OF FIRST COMMUNITY
First Community is supervised, regulated and examined by the DFI and,
as a state nonmember bank by the FDIC. A cease or desist order may be issued by
the DFI and FDIC against First Community if the respective agency finds that
the activities of First Community represent an unsafe and unsound banking
practice or violation of law. The deposits of First Community are insured by
the SAIF of the FDIC.
Branching by banks in Indiana is subject to the jurisdiction, and
requires the prior approval of, the Bank's primary federal regulatory authority
and the DFI. Under Indiana law, First Community may branch anywhere in the
state.
The Company is a legal entity separate and distinct from First
Community. There are various legal limitations on the extent to which First
Community can supply funds to the Company. The principal source of the
Company's funds consists of dividends from First Community. State and federal
laws restrict the amount of
30
<PAGE>
dividends which may be paid by banks. In addition, First Community is subject
to certain restrictions imposed by the Federal Reserve on extensions of credit
to the Company or any of its subsidiaries, on investments in the stock or other
securities of the Company and in taking such stock or securities as collateral
for loans.
While First Community is not a member of the Federal Reserve, the
commercial banking business is affected not only by general economic conditions
but also by the monetary policies of the Federal Reserve. The instruments of
monetary policy employed by the Federal Reserve include the discount rate on
member bank borrowing and changes in reserve requirements against member bank
deposits. Federal Reserve monetary policies have had a significant effect on
the operating results of commercial banks in the past and are expected to
continue to do so in the future. In view of changing conditions in the national
economy and in the money markets, as well as the effect of actions by monetary
fiscal authorities, including the Federal Reserve, no prediction can be made as
to possible future changes in interest rates, deposit levels, loan demand or
the business and earnings of the Company and First Community.
FDICIA
On December 19, 1991, the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA") was enacted into law. FDICIA provides for,
among other things, enhanced federal supervision of depository institutions
including greater authority for the appointment of a conservator or receiver
for undercapitalized institutions, the adoption of safety and soundness
standards by the federal banking regulators on matters such as loan
underwriting and documentation, interest rate risk exposure, compensation and
other employee benefits, the establishment of risk-based deposit insurance
premiums, liberalization of the qualified thrift lender test, greater
restrictions on transactions with affiliates, and mandated consumer protection
disclosures with respect to deposit accounts.
CAPITAL REQUIREMENTS
First Community must meet certain minimum capital requirements
mandated by the FDIC and the DFI. These regulatory agencies require financial
institutions to maintain certain minimum ratios of primary capital to total
assets and total capital to total assets. The Company is not required to comply
with Federal Reserve capital requirements because it has consolidated assets of
less than $150,000,000.
First Community must maintain a leverage ratio of at least 4.0%, and a
total capital to risk-based assets ratio of at least 8.0%. First Community had
a leverage ratio and tangible equity ratio of 7.66% based on leverage and
tangible capital of $7,720,000 at June 30, 1998. First Community had a total
capital to risk-based assets ratio of 9.56%.
LEGAL PROCEEDINGS
The Company and First Community are parties to certain lawsuits from
time to time arising in the ordinary course of business. The Company and First
Community believe that none of their current lawsuits would, if adversely
determined, have a material adverse effect on the Company or First Community.
31
<PAGE>
MANAGEMENT
<TABLE>
<CAPTION>
NAME AGE PRINCIPAL OCCUPATION DIRECTOR SINCE TERM TO EXPIRE
- ---- --- -------------------- --------------- --------------
<S> <C> <C> <C> <C>
Merrill M. Wesemann, M.D. 63 Chairman of the Board 1991 2000
of the Company-Physician
Albert R. Jackson, III 38 President & CEO 1997 2000
Frank D. Neese 60 Investment Banker 1996 1999
Roy Martin Umbarger 51 President, Roy Umbarger & 1996 1999
Sons, Inc.
Albert R. Jackson, Jr. 63 Retired Bank President 1997 2001
Eugene W. Morris 72 President of Farmers 1991 2001
-Mutual Fire Insurance
</TABLE>
Merrill M. Wesemann, M.D. was a Director of Bargersville Federal
Savings Bank ("Bargersville") from January 1979 until completion of the
acquisition of Bargersville by the Company. Dr. Wesemann is on the Board of
Directors of First Community and has been a Director of the Company since
August 1991. Dr. Wesemann has practiced medicine since 1961 and is a past
Treasurer of the Indiana State Medical Association. Dr. Wesemann's current
term as a Director of the Company expires at the 2000 Annual Meeting.
Albert R. Jackson, III has been CEO and CFO for both First Community
and the Company since 1996 and President of First Community since 1994. He is
also on the Board of Directors of First Community. Before that he was senior
vice president of National City Bank. Mr. Jackson has also served as senior
vice president and cashier of The Seymour National Bank & Trust Company and as
vice president for First National Bank of North Vernon, Indiana and as
treasurer and chief financial officer of that bank's holding Company, North
Vernon 1st Financial Corporation. Mr. Jackson's current term as a Director of
the Company expires at the 2000 Annual Meeting. He is the son of Albert R.
Jackson, Jr.
Roy Martin Umbarger has been the President and co-owner of Roy
Umbarger & Sons, Inc., a feed mill, grain elevator and fertilizer distributor
located in Bargersville, Indiana, since 1986. Mr. Umbarger received a degree
in Business Marketing from the University of Evansville and is a lifetime
resident of Johnson County. Mr. Umbarger's current term as a Director of the
Company expires at the 1999 Annual Meeting. Mr. Umbarger is also on the Board
of Directors of First Community and is the son-in-law of Eugene W. Morris.
Frank D. Neese is President of Indiana Securities, LLC an investment
banking firm since January 1, 1998. Mr. Neese served as Senior Vice President
of Traub and Company a registered broker-dealer from 1979 until December 31,
1997. Mr. Neese has served as a financial advisor to First Community since
1991. Mr. Neese's current term as a Director of the Company expires at the
1999 Annual Meeting. Mr. Neese is Secretary and a Director of First Community.
Mr. Neese also serves as President of the Pines of Deerfield, a real estate
development Company.
Albert R. Jackson, Jr. was the President of First National Bank of
North Vernon, Indiana from 1971 to 1989 and a Senior Executive Vice President
of The Seymour National Bank of Seymour, Indiana from 1989 to his retirement in
1994. Mr. Jackson was appointed as a Director in May 1997 and his current term
expires in 2001. He is also on the Board of Directors of First Community and is
the father of Albert R. Jackson, III.
Eugene W. Morris was a director of Bargersville from October 1974, and
was Vice Chairman of the Board of Directors from January 1988 until
Bargersville was acquired by the Company. Mr. Morris is currently President of
the Company and has been a board member since August 1991. Mr. Morris is also
on the Board of
32
<PAGE>
Directors of First Community. Mr. Morris is currently self-employed as a
farmer and also serves as President of Farmers-Mutual Fire Insurance Company of
Johnson and Shelby Counties, a mutual casualty and property insurance Company.
Mr. Morris current term as a Director of the Company expires at the 2001 Annual
Meeting. Mr. Morris is the father-in-law of Roy Martin Umbarger.
EXECUTIVE COMPENSATION
The following Summary Compensation Table provides compensation
information paid by First Community to the Chief Executive Officer for services
rendered in all capacities during the years ended December 31, 1997, 1996, and
1995. No executive officers of the Company received compensation from the
Company during the year ended December 31, 1997.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
-----------------------------
NAME AND PRINCIPAL ALL OTHER
POSITION YEAR SALARY($) BONUS($) COMPENSATION($) (1)
-------- ---- --------- -------- -------------------
Albert R. Jackson, III 1997 67,500 -0- 697
Chief Executive 1996 62,293 5,000 661
Officer and Chief 1995 58,782 -0- 500
Financial Officer
- -------------------
(1) Contributions by the Company to the employee's 401(k) retirement plan.
There were no awards or payouts of restricted stock, options, SAR's,
or long term incentive plan payments during the last 3 fiscal years to the
named chief executive officer.
CASH COMPENSATION
A Director of the Company is not compensated for service as a member
of the Board of Directors or any committee of the Board. However, all Directors
of the Company are also Directors of First Community, and for the fiscal year
ended December 31, 1997 cash compensation for non-employee Directors of First
Community was $1,000 per month. The Chairman's compensation was $1,150 per
month for 1997. First Community provides each of First Community's Directors
with Directors' and Officers' liability insurance. Directors may also be
reimbursed for reasonable expenses incurred in attending Board and committee
meetings. Directors otherwise employed by the Company or First Community are
not separately compensated for serving as a Director. Mr. Jackson, Jr. is also
paid a consulting fee of $600 per month for providing advisory services to
First Community and Dr. Wesemann participates in a deferred compensation
program pursuant to which his director fees are deferred and the deferral
amounts earn interest at the rate of 8% per annum.
OPTIONS
The 1992 Stock Option Plan (the "1992 Plan") was adopted by the Board
of Directors on January 1, 1992 and amended and restated by the Board on
February 15, 1993 and May 15, 1995. The shareholders approved an amendment to
the 1992 Plan on May 15, 1996. The 1992 Plan covers 66,771 shares of Common
Stock.
The number of shares available under the 1992 Plan and the amount and
exercise price of options granted are subject to adjustment in the event of a
combination, merger, reorganization, stock split, stock dividend or similar
event affecting the Common Stock. The 1992 Plan will terminate ten years from
the date of its adoption and no further options shall thereafter be granted
thereunder.
Options granted to non-employee directors under the 1992 Plan are not
intended to constitute "incentive stock options" within the meaning of Section
422 of the Internal Revenue Code. Optionees generally are not subject to
federal income taxation at the time the options are granted. Taxable income is
recognized by optionees upon the exercise of an option in the amount of the
difference between the exercise price paid and the market
33
<PAGE>
value of the shares received at the time of exercise or the date restrictions
on the sale of such shares lapse. An optionee's basis in the shares received
upon the exercise of an option is equal to the exercise price paid plus any
income recognized for income tax purposes. The Company is entitled to a tax
deduction equal to the amount of income recognized by the optionees.
There are outstanding options under the 1992 Plan to purchase 15,420
shares of Common Stock with an exercise price of $5.54 per share each to Dr.
Wesemann and Eugene Morris.
On May 15, 1996, the shareholders approved the 1996 Stock Option Plan
(the "1996 Plan") for the issuance of 105,000 shares of Common Stock. The 1996
Plan provides, among other items, that nonstatutory options for 1,000 shares of
Common Stock are automatically granted to directors not otherwise employed by
the Company on a yearly basis in order to provide an incentive to outside
directors of the Company. The options have a term of ten years from the date of
grant, are exercisable only during the time the optionee remains a director or
within one year thereafter (but not beyond expiration of the option term) and
the exercise price is the fair market value of the shares on the date of grant.
In the event of changes in outstanding Common Stock of the Company by
reason of stock dividends, mergers, split-ups, consolidations,
recapitalizations, reorganizations or like events (as determined by the Board
of Directors or a committee thereof (the "Committee"), an appropriate
adjustment will be made by the committee in the number of shares of Common
Stock reserved under the 1996 Plan and in the number of shares of Common Stock
and option price per share specified in any stock option agreement with respect
to any unpurchased shares.
The Company has granted and there are outstanding options under the
1996 Plan to purchase 1,050 shares of common stock with an exercise price of
$11.43 per share and 1,000 shares of Common Stock with an exercise price of
$11.00 per share each to Dr. Wesemann, Eugene Morris, Frank Neese, Albert R.
Jackson, Jr., and Roy Martin Umbarger. In February 1998 the Board granted an
option to purchase 5,000 shares of common stock to Albert R. Jackson, III with
an exercise price of $11.50 per share and an aggregate of 6,000 shares to three
(3) other officers with an exercise price of $11.50 per share. All options
vested at the time of grant and expire ten years after the date of grant or one
(1) year after the date the optionee terminates his or her performance of
services for the Company, if earlier.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
As permitted by the Indiana Business Corporation Law ("IBCL"), the
Company may indemnify its officers and directors under certain circumstances,
The IBCL permits the Company, among other things, to indemnify such officers
and directors against certain liabilities that may arise by reason of their
status or service as directors or officers (other than liabilities arising
from willful misconduct of a culpable nature), to advance their expenses
incurred as a result of any proceeding against them as to which they could be
indemnified, and to obtain directors' and officers' insurance if available on
reasonable terms, which the Company has done. At present, the Company is not
aware of any pending or threatened litigation or proceeding involving a
director, officer, employee or agent of the Company in which indemnification
would be required or permitted. The Company believes that these provisions are
necessary to attract and retain qualified persons as directors and officers.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers, or persons controlling
the Company pursuant to the foregoing provisions, the Company has been informed
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is therefore unenforceable.
34
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
Company's Common Stock beneficially owned as of August 31, 1998 by (i) each
person known by the Company to own beneficially more than 5% of the Company's
Common Stock; (ii) each director of the Company; (iii) each of the executive
officers of the Company named in the Summary Compensation Table; and (iv) all
directors and executive officers of the Company as a group:
SHARES BENEFICIALLY
-------------------
OWNED BEFORE OFFERINGS
----------------------
NAME NUMBER PERCENT
- ---- ------ -------
Albert R. Jackson, III 18,169(1) 1.83%
5675 N County Rd. 200 W
North Vernon, Indiana 47265
Albert R. Jackson, Jr. 8,116(2) *
5745 N County Rd. 200W
North Vernon, Indiana 47265
Eugene W. Morris 24,957(3) 2.48%
5471 West CR 350 N.
Bargersville, Indiana 46106
Merrill M. Wesemann, M.D. 90,404(4) 8.97%
251 E Jefferson Street
Franklin, Indiana 46131
Roy Martin Umbarger 29,814(5) 3.01%
5180 W Road 300N
Bargersville, Indiana 46106
Frank D. Neese 58,378(6) 5.89%
320 North Meridian Street
Indianapolis, Indiana 46204
All Executive Officers and Directors 227,476 21.96%
as a group (6 persons)
- -------------------
* Denotes less than 1%
(1) Includes 2,362 shares that Mr. Jackson owns as a joint tenant with his
father, brother, and sister as to which he disclaims voting and
dispositive power and currently exercisable options for 5,000 shares
granted under the 1996 Stock Option Plan. Mr. Jackson, III is the son of
Mr. Jackson, Jr.
(2) Includes 2,362 shares held as a joint tenant with his two sons and a
daughter, 525 shares owned by Mr. Jackson's spouse and currently
exercisable options for 2,050 shares granted under the 1996 Stock Option
Plan. Mr. Jackson, Jr. is the father of Mr. Jackson, III.
(3) Includes currently exercisable options for 17,470 shares granted under the
1992 and 1996 Stock Option Plans. Mr. Morris is Mr. Umbarger's
father-in-law.
(4) Includes 8,087 shares owned by Dr. Wesemann's spouse and currently
exercisable options for 17,470 shares granted under the 1992 and 1996
Stock Option Plans.
(5) Includes 1,365 shares owned by Mr. Umbarger's spouse, 721 shares owned as
joint-tenant with a minor son, 1,356 shares owned by his minor son, 107
shares owned by his spouse jointly with each of two daughters, 13 shares
owned by a daughter, and currently exercisable options for 2,050 shares
granted under the 1996 Stock Option Plan. Mr. Umbarger is Mr. Morris'
son-in-law.
(6) Includes currently exercisable options for 2,050 shares granted under the
1996 Stock Option Plan.
35
<PAGE>
CERTAIN TRANSACTIONS
Certain of the Company's Directors and Executive Officers were
customers of or had various transactions with First Community in the ordinary
course of business during 1996 and 1997. These transactions cover a range of
banking services. All such services were provided at market rates consistent
with published fee schedules. Similar additional transactions may be expected
to take place in the ordinary course of business in the future. Although
various laws and regulations governing First Community allow First Community to
make loans to a limited extent to its Directors and Executive Officers, all
loans involving such Directors, Executive Officers, or their affiliates were
made on substantially the same terms, including interest rates and collateral,
as those prevailing at that time for comparable transactions with other persons
and did not involve more than the normal risk of collectability or other
unfavorable features.
PLAN OF DISTRIBUTION
The Notes are being offered and sold on a best efforts basis through
certain officers and full-time employees of the Company who will not be
separately compensated therefor and who have substantial duties with the
Company or First Community unrelated to the sale of securities. The Offering is
not conditioned upon the sale of any minimum amount of Notes and funds paid by
purchasers will be immediately accepted or rejected by the Company and, if
accepted, a Note will promptly be registered and sent to the purchaser.
This Offering will remain open until all of the Notes are sold unless
earlier terminated by the Company.
DESCRIPTION OF SECURITIES
NOTES
The Notes are limited to an aggregate principal amount of $1,000,000
and will be issued in denominations of $10,000. The Notes represent unsecured,
general obligations of the Company, mature on December 31, 2008, and will bear
interest at the rate of 7% per annum payable quarterly, in arrears, on the last
day of March, June, September, and December commencing December 31, 1998, to the
holders of record on the fifth day preceding the interest payment date.
Unless otherwise determined by the Company, payment of principal and
interest will be made by check mailed to the address of the person entitled
thereto as it appears on the Note Register.
The Notes are not obligations of First Community, are not insured by
the FDIC or otherwise protected from loss of investment, and are not secured by
the assets of the Company. In the event of liquidation of the Company,
Noteholders will be repaid after holders of secured debt but before
shareholders. There is no limitation on either the amount or type of
indebtedness the Company may incur in the future.
REDEMPTION AT THE COMPANY'S OPTION. The Notes are callable in whole or
in part at the option of the Company (i) at any time after December 31, 2003
upon 30 days written notice and (ii) in the event of certain mergers, or other
similar business combination, a sale of all or substantially all of the assets
of the Company, or a sale or exchange in one transaction of 51% or more of the
outstanding shares of the Company, at par plus accrued and unpaid interest to
the extent not converted prior to redemption.
CONVERSION. The Notes are convertible at the option of the holder into
shares of Common Stock of the Company at the rate of $12.10 per share. The
conversion price is subject to adjustment for stock splits, stock dividends,
reorganizations, mergers, and similar capital modifications of the Company.
NO SINKING FUND. No principal payments are due with respect to the
Notes prior to their maturity, nor is there any requirement for the Company to
make payments to a sinking fund or otherwise periodically set aside funds for
the retirement of the Notes. Retirement of the Notes will, therefore, be
dependent upon the Company generating sufficient excess cash flow or obtaining
other financing at the time the Notes mature, neither of which can be assured.
36
<PAGE>
EVENTS OF DEFAULT. Failure by the Company to pay any installment of
interest within 30 days of the due date, to pay principal within five days of
the due date or to comply with any other covenant of the Note which is not
cured within 30 days of the Company receiving written notice thereof from the
holder will result in an Event of Default and the holders of the Notes in
addition to other rights and remedies will be entitled to demand immediate
payment of all principal and interest.
NO TRUST INDENTURE. The Notes are not being issued pursuant to a trust
indenture and consequently each holder will be responsible for individually
giving and receiving notices pursuant to the Notes and taking action to enforce
the Note if an Event of Default occurs. Holders will not receive the benefits
and protection which would be afforded if the Notes were being issued pursuant
to a trust indenture qualified under the Trust Indenture Act.
TRANSFER AGENT AND REGISTRAR. The Transfer Agent and Registrar for
the Notes is First Community Bank & Trust.
CAPITAL STOCK
The authorized capital stock of the Company consists of four million
shares of Common Stock, no par value, and one million shares of preferred
stock.
As of August 31, 1998, there were 989,848 shares of Common Stock
outstanding held of record by 283 shareholders. Each of the $10,000 Notes
offered hereby is convertible to 826 shares of Common Stock (82,644 shares if
all of the Notes offered hereby are sold and converted). Concurrently with
this Offering the Company is distributing to its shareholders Rights and
Warrants to purchase an aggregate of 262,000 additional shares of Common
Stock.
Holders of Common Stock are entitled to one vote per share on all
matters to be voted upon by the shareholders. The holders of Common Stock are
entitled to receive ratably such dividends, if any, as may be declared from
time to time by the Board of Directors out of funds legally available therefor.
See "Market for Common Stock and Related Shareholder Matters." In the event of
a liquidation, dissolution or winding up of the Company, the holders of Common
Stock are entitled to share ratably in all assets remaining after payment of
liabilities. The Common Stock has no preemptive or conversion rights or other
subscription rights. There are no redemption or sinking fund provisions
applicable to the Common Stock. All outstanding shares of Common Stock are, and
the shares of Common Stock issued upon conversion of the Notes will be, fully
paid and non-assessable.
The Board of Directors has the authority to issue the preferred stock
in one or more series and to fix the rights, voting rights, terms of
redemption, redemption prices, liquidation preferences and the number of shares
constituting any series or the designation of such series, without further vote
or action by the shareholders. The issuance of preferred stock may have the
effect of delaying, deferring or preventing a change in control of the Company
without further action by the shareholders and may adversely effect the voting
and other rights of the holders of Common Stock. At present the Company has no
plans to issue any of the preferred stock.
Certain provisions of Indiana law applicable to the Company may delay,
deter or prevent a merger, tender offer or other takeover attempt of the
Company.
Under Indiana law, no business combination (generally defined to
include certain mergers, sales of assets, sales of 5% or more of outstanding
stock, loans, recapitalizations or liquidations or dissolutions) involving the
Company and an interested shareholder (defined to include any holder of 10% or
more of the Company's voting stock) may be entered into unless (1) approved by
the Board of Directors of the Company or (2)(a) five years have expired since
the acquisition of shares of the Company by the interested stockholder, (b) all
requirements of the Articles of Incorporation relating to business combinations
are satisfied and (c) either (i) a majority of shareholders of the Company
(excluding the interested shareholder) approve the business combination or (ii)
all shareholders are paid fair value (as defined in the statute) for their
stock. However, such law does not restrict any offer to purchase all of the
Company's shares.
Under Indiana law, when a target corporation (such as the Company)
incorporated in Indiana and having its principal place of business, principal
office, or substantial assets in Indiana, has a certain threshold of
37
<PAGE>
ownership by Indiana residents, any acquisition which, along with previous
holdings, gives the acquirer at least 20%, 33-1/3% or 50% of the target's voting
stock triggers a shareholder approval mechanism. If the acquirer files a
statutory disclosure statement, the target's management has 50 days within which
to hold a special meeting of shareholders at which all disinterested
shareholders of the target (those not affiliated with the acquirer or any
officer or inside director of the target) consider and vote upon whether the
acquirer shall have voting rights with respect to the control shares of the
target held by it. Without shareholder approval, the control shares acquired by
the acquirer have no voting rights. If the acquirer fails to file the statutory
disclosure statement, or the shareholders fail to grant voting rights to the
control shares, the target can redeem the acquirer's shares at a price to be
determined according to procedures devised by the target.
TRANSFER AGENT AND REGISTRAR. The Transfer Agent and Registrar for the Common
Stock is First Community Bank & Trust.
LEGAL MATTERS
The validity of the Notes offered hereby will be passed upon for the
Company by Henderson, Daily, Withrow & DeVoe of Indianapolis, Indiana.
EXPERTS
The consolidated financial statements of First Community Bancshares,
Inc. as of December 31, 1997 and 1996, and for each of the three years in the
period ended December 31, 1997 appearing in the Prospectus and Registration
Statement have been audited by Olive, LLP (formerly Geo. S. Olive & Co., LLC),
independent auditors as set forth in their report thereon appearing elsewhere
herein and in the Registration Statement and are included in reliance upon such
report given under the authority of such firm as experts in accounting and
auditing.
38
<PAGE>
FIRST COMMUNITY BANCSHARES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
AUDITED FINANCIAL STATEMENTS:
- -----------------------------
Independent Auditor's Report...................................... F-1
Consolidated Balance Sheet as of
December 31, 1997 and 1996.................................... F-2
Consolidated Statement of Income for the Years Ended
December 31, 1997, 1996 and 1995.............................. F-3
Consolidated Statement of Comprehensive Income
for the Years Ended December 31, 1997, 1996 and 1995.......... F-4
Consolidated Statement of Changes in Stockholders' Equity
for the Years Ended December 31, 1997, 1996 and 1995.......... F-5
Consolidated Statement of Cash Flows for the
Years Ended December 31, 1997, 1996 and 1995.................. F-6
Notes to Consolidated Financial Statements........................ F-7
UNAUDITED FINANCIAL STATEMENTS:
- -------------------------------
Consolidated Condensed Balance Sheet as of June 30, 1998 and
December 31, 1997............................................. F-24
Consolidated Condensed Statement of Income for the Three and
Six Months Ended June 30, 1998 and 1997....................... F-25
Consolidated Condensed Statement of Comprehensive Income
for the Three and Six Months Ended June 30, 1998 and 1997..... F-26
Consolidated Condensed Statement of Changes in Stockholders'
Equity for the Six Months Ended June 30, 1998................. F-27
Consolidated Condensed Statement of Cash Flows for the Six Months
Ended June 30, 1998 and 1997.................................. F-28
Notes to Unaudited Condensed Consolidated Financial Statements.... F-29
39
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Stockholders and
Board of Directors
First Community Bancshares, Inc.
Bargersville, Indiana
We have audited the accompanying consolidated balance sheet of First Community
Bancshares, Inc. and subsidiary as of December 31, 1997 and 1996, and the
related consolidated statements of income, comprehensive income, changes in
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated 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 described above present fairly, in
all material respects, the consolidated financial position of First Community
Bancshares, Inc. and subsidiary as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the three years
in the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
/s/ Geo. S. Olive & Co. LLC
Indianapolis, Indiana
February 6, 1998
F-1
<PAGE>
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 933,574 $ 1,059,473
Short-term interest-bearing deposits 10,297,654 5,975,098
-------------------------
Cash and cash equivalents 11,231,228 7,034,571
Investment securities
Available for sale 2,771,058 2,386,358
Held to maturity 1,708,679 2,540,803
-------------------------
Total investment securities 4,479,737 4,927,161
Loans 80,000,575 65,108,481
Allowance for loan losses (848,085) (644,132)
-------------------------
Net loans 79,152,490 64,464,349
Premises and equipment 1,944,779 1,791,873
Federal Home Loan Bank of
Indianapolis stock, at cost 777,800 777,800
Foreclosed real estate 78,636 139,500
Interest receivable 700,079 526,186
Other assets 374,965 417,268
-------------------------
Total assets $98,739,714 $80,078,708
=========================
LIABILITIES
Deposits
Noninterest bearing $ 7,623,814 $ 5,833,251
Interest bearing 80,071,501 64,719,018
-------------------------
Total deposits 87,695,315 70,552,269
Federal Home Loan Bank of
Indianapolis advances 2,929,789 2,378,830
Interest payable 250,617 187,083
Other liabilities 313,987 74,570
-------------------------
Total liabilities 91,189,708 73,192,752
-------------------------
COMMITMENTS AND CONTINGENT LIABILITIES
STOCKHOLDERS' EQUITY
Preferred stock, no-par value
Authorized and unissued-1,000,000 shares
Common stock, no-par par value
Authorized-4,000,000 shares
Issued and outstanding-989,848
and 942,825 shares 6,722,251 6,181,486
Retained earnings and contributed capital 794,796 692,760
Accumulated other comprehensive income 32,959 11,710
-------------------------
Total stockholders' equity 7,550,006 6,885,956
-------------------------
Total liabilities and stockholders' equity $98,739,714 $80,078,708
=========================
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE>
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1997 1996 1995
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Loans, including fees $6,779,091 $5,564,766 $4,416,698
Securities
Taxable 183,260 202,022 188,212
Tax exempt 106,252 125,814 253,979
Deposits with financial institutions 230,410 207,940 170,432
Dividends 62,136 57,153 44,834
------------------------------------------
Total interest income 7,361,149 6,157,695 5,074,155
------------------------------------------
INTEREST EXPENSE
Deposits 3,695,491 2,945,818 2,755,847
Federal Home Loan Bank advances 111,425 219,980 197,750
------------------------------------------
Total interest expense 3,806,916 3,165,798 2,953,597
------------------------------------------
NET INTEREST INCOME 3,554,233 2,991,897 2,120,558
Provision for loan losses 255,000 219,000 207,500
------------------------------------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 3,299,233 2,772,897 1,913,058
------------------------------------------
OTHER INCOME
Fiduciary activities 26,509 27,353 21,453
Service charges on deposit accounts 253,207 184,400 132,926
Net realized gains (losses)
on securities 5,630 (13,553)
Other operating income 25,522 31,722 96,373
------------------------------------------
Total other income 305,238 249,105 237,199
------------------------------------------
OTHER EXPENSES
Salaries and employee benefits 1,236,794 1,012,761 838,495
Premises and equipment 301,262 212,847 178,143
Advertising 131,989 122,429 114,790
Data processing fees 232,797 191,698 175,822
Deposit insurance expense 45,178 453,368 106,781
Printing and office supplies 64,925 81,541 68,995
Legal and professional fees 97,843 135,068 108,879
Telephone expense 69,197 61,770 50,064
Other operating expenses 310,433 293,853 220,889
------------------------------------------
Total other expenses 2,490,418 2,565,335 1,862,858
------------------------------------------
INCOME BEFORE INCOME TAX 1,114,053 456,667 287,399
Income tax expense 375,609 115,401 11,046
------------------------------------------
NET INCOME $ 738,444 $ 341,266 $ 276,353
==========================================
BASIC EARNINGS PER SHARE $.75 $.35 $.29
DILUTED EARNINGS PER SHARE .74 .34 .28
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1997 1996 1995
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET INCOME $ 738,444 $ 341,266 $ 276,353
------------------------------------------
Other comprehensive income, net of tax
Unrealized gains (losses) on securities
available for sale
Unrealized holding gains (losses)
arising during the period, net of
tax expense (benefit) of $14,166,
($4,427) and $9,044 21,249 (6,641) 13,566
Less: Reclassification adjustment
for gains (losses) included in
net income, net of tax expense
(benefit) of $2,267 and ($5,457) 3,400 (8,185)
------------------------------------------
21,249 (10,041) 21,751
------------------------------------------
Comprehensive income $ 759,693 $ 331,225 $ 298,104
==========================================
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
RETAINED
COMMON STOCK EARNINGS ACCUMULATED
---------------------- AND OTHER
SHARES CONTRIBUTED COMPREHENSIVE
OUTSTANDING AMOUNT CAPITAL INCOME TOTAL
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCES, JANUARY 1, 1995 738,715 $6,068,970 $ 76,017 $6,144,987
Net income for 1995 276,353 276,353
Five-for-four stock split 184,576
Cash dividends in lieu of issuing
fractional shares (876) (876)
Net change in unrealized gain on
securities available for sale $21,751 21,751
-----------------------------------------------------------------
BALANCES, DECEMBER 31, 1995 923,291 6,068,970 351,494 21,751 6,442,215
Net income for 1996 341,266 341,266
Stock options exercised 19,534 112,516 112,516
Net change in unrealized gain on
securities available for sale (10,041) (10,041)
-----------------------------------------------------------------
BALANCES, DECEMBER 31, 1996 942,825 6,181,486 692,760 11,710 6,885,956
Net income for 1997 738,444 738,444
Cash dividends ($.10 per share) (94,282) (94,282)
5% stock dividend 47,023 540,765 (540,765)
Cash dividends in lieu of issuing
fractional shares (1,361) (1,361)
Net change in unrealized gain on
securities available for sale 21,249 21,249
-----------------------------------------------------------------
BALANCES, DECEMBER 31, 1997 989,848 $6,722,251 $794,796 $32,959 $7,550,006
=================================================================
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1997 1996 1995
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 738,444 $ 341,266 $ 276,353
Adjustments to reconcile net
income to net cash provided
by operating activities
Provision for loan losses 255,000 219,000 207,500
Depreciation and amortization 137,713 82,860 71,926
Deferred income tax 498 10,278 (20,419)
Investment securities amortization 4,362 7,215 62,383
Gain on disposal of premises and equipment (20,716)
Investment securities (gains) losses (5,630) 13,553
Net change in
Interest receivable (173,893) 91,485 (126,381)
Interest payable 63,534 12,988 52,542
Other assets 27,866 89,746 (23,718)
Other liabilities 238,056 (27,278) 9,732
------------------------------------------
Net cash provided by operating
activities 1,291,580 821,930 502,755
------------------------------------------
INVESTING ACTIVITIES
Purchases of securities available for sale (1,000,000) (1,670,000)
Proceeds from maturities of securities
available for sale 650,000 677,750 230,000
Proceeds from sales of securities
available for sale 2,176,965 622,021
Proceeds from maturities and paydowns
of securities held to maturity 828,248 608,936 1,542,787
Proceeds from sales of securities held
to maturity 125,000
Net change in loans (15,062,301) (10,587,119) (15,317,327)
Purchases of premises and equipment (290,617) (533,467) (25,746)
Proceeds from disposal of premises
and equipment 64,663
Purchase of stock of Federal Home
Loan Bank of Indianapolis (177,300) (87,600)
Proceeds from sale of other real estate
and repossessions 180,024 26,992 50,908
Other investing activities (4,803)
------------------------------------------
Net cash used by investing activities (14,694,646) (7,807,243) (14,470,097)
------------------------------------------
FINANCING ACTIVITIES
Net change in
Noninterest-bearing, NOW, and savings
deposits 6,597,456 5,023,029 8,518,439
Certificates of deposit 10,545,590 6,366,136 4,460,633
Short-term borrowings (908,138) 908,138
Proceeds from Federal Home Loan
Bank advances 1,750,000 3,000,000
Repayment of Federal Home Loan Bank advances (1,199,041) (2,224,485) (3,711,098)
Cash dividends (94,282)
Cash dividends in lieu of issuing fractional
shares (876)
Stock options exercised 112,516
------------------------------------------
Net cash provided by financing activities 17,599,723 8,369,058 13,175,236
------------------------------------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 4,196,657 1,383,745 (792,106)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 7,034,571 5,650,826 6,442,932
------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $11,231,228 $7,034,571 $5,650,826
==========================================
ADDITIONAL CASH FLOWS INFORMATION
Interest paid $ 3,743,382 $3,526,976 $2,901,055
Income tax paid (refunded) 187,406 110,000 (40,921)
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
- - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of First Community Bancshares, Inc.
("Company") and its wholly owned subsidiary, First Community Bank and Trust
("Bank"), conform to generally accepted accounting principles and reporting
practices followed by the banking industry. The more significant of the
policies are described below.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The Company is a bank holding company whose principal activity is the
ownership and management of the Bank. The Bank operates under a state bank
charter and provides full banking services, including trust services. As a
state bank, the Bank is subject to regulation by the Department of Financial
Institutions, State of Indiana and the Federal Deposit Insurance Corporation.
DESCRIPTION OF BUSINESS-The Bank generates commercial, mortgage and consumer
loans and receives deposits from customers located primarily in Johnson and
Jennings Counties, Indiana and surrounding counties. The Bank's loans are
generally secured by specific items of collateral including real property,
consumer assets and business assets.
CONSOLIDATION-The consolidated financial statements include the accounts of
the Company and the Bank after elimination of all material intercompany
transactions.
INVESTMENT SECURITIES-Debt securities are classified as held to maturity when
the Company has the positive intent and ability to hold the securities to
maturity. Securities held to maturity are carried at amortized cost. Debt
securities not classified as held to maturity are classified as available for
sale. Securities available for sale are carried at fair value with unrealized
gains and losses reported separately through stockholders' equity, net of tax.
Amortization of premiums and accretion of discounts are recorded as interest
income from securities. Realized gains and losses are recorded as net security
gains (losses). Gains and losses on sales of securities are determined on the
specific-identification method.
F-7
<PAGE>
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
LOANS are carried at the principal amount outstanding. A loan is impaired
when, based on current information or events, it is probable that the Bank
will be unable to collect all amounts due (principal and interest) according
to the contractual terms of the loan agreement. Payments with insignificant
delays not exceeding 90 days outstanding are not considered impaired. Certain
nonaccrual and substantially delinquent loans may be considered to be
impaired. The Bank considers its investment in one-to-four family residential
loans and consumer loans to be homogeneous and therefore excluded from
separate identification for evaluation of impairment. Interest income is
accrued on the principal balances of loans. The accrual of interest on
impaired and nonaccrual loans is discontinued when, in management's opinion,
the borrower may be unable to meet payments as they become due. When interest
accrual is discontinued, all unpaid accrued interest is reversed when
considered uncollectible. Interest income is subsequently recognized only to
the extent cash payments are received. Certain loan fees and direct costs are
being deferred and amortized as an adjustment of yield on the loans over the
contractual lives of the loans. When a loan is paid off or sold, any
unamortized loan origination fee balance is credited to income.
ALLOWANCE FOR LOAN LOSSES is maintained to absorb potential loan losses based
on management's continuing review and evaluation of the loan portfolio and its
judgment as to the impact of economic conditions on the portfolio. The
evaluation by management includes consideration of past loan loss experience,
changes in the composition of the portfolio, and the current condition and
amount of loans outstanding, and the probability of collecting all amounts
due. Impaired loans are measured by the present value of expected future cash
flows, or the fair value of the collateral of the loan, if collateral
dependent.
The determination of the adequacy of the allowance for loan losses is based on
estimates that are particularly susceptible to significant changes in the
economic environment and market conditions. Management believes that as of
December 31, 1997, the allowance for loan losses is adequate based on
information currently available. A worsening or protracted economic decline
in the area within which the Company operates would increase the likelihood of
additional losses due to credit and market risks and could create the need for
additional loss reserves.
PREMISES AND EQUIPMENT are carried at cost net of accumulated depreciation.
Depreciation is computed using the straight-line method based principally on
the estimated useful lives of the assets. Maintenance and repairs are expensed
as incurred while major additions and improvements are capitalized. Gains and
losses on dispositions are included in current operations.
FEDERAL HOME LOAN BANK STOCK is a required investment for institutions that
are members of the Federal Home Loan Bank ("FHLB") system. The required
investment in the common stock is based on a predetermined formula.
FORECLOSED REAL ESTATE is carried at the lower of cost or fair value less
estimated selling costs. When foreclosed real estate is acquired, any
required adjustment is charged to the allowance for loan losses. All
subsequent activity is included in current operations.
STOCK OPTIONS are granted for a fixed number of shares to employees with an
exercise price equal to the fair value of the shares at the date of grant. The
Company accounts for and will continue to account for stock option grants in
accordance with Accounting Principle Board Opinion ("APB") No. 25, Accounting
for Stock Issued to Employees, and, accordingly, recognizes no compensation
expense for the stock option grants.
F-8
<PAGE>
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
INCOME TAX in the consolidated statement of income includes deferred income
tax provisions or benefits for all significant temporary differences in
recognizing income and expenses for financial reporting and income tax
purposes. The Company files consolidated income tax returns with its
subsidiary.
EARNINGS PER SHARE have been computed based upon the weighted average common
shares and potential common shares outstanding during each year.
- - RESTRICTION ON CASH AND DUE FROM BANKS
The Bank is required to maintain reserve funds in cash and/or on deposit with
the Federal Reserve Bank ("FRB"). The reserve required at December 31, 1997,
was $360,000.
- - INVESTMENT SECURITIES
1997
------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
DECEMBER 31 COST GAINS LOSSES VALUE
- ------------------------------------------------------------------------------
Available for sale
State and municipal $1,316 $55 $1,371
Corporate obligations 1,400 1,400
-----------------------------------------
Total available for sale 2,716 55 2,771
Held to maturity-state and municipal 1,709 25 1,734
-----------------------------------------
Total investment securities $4,425 $80 $0 $4,505
=========================================
F-9
<PAGE>
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
1996
------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
DECEMBER 31 COST GAINS LOSSES VALUE
- ------------------------------------------------------------------------------
Available for sale
State and municipal $1,737 $24 $ (5) $1,756
Corporate obligations 630 630
-----------------------------------------
Total available for sale 2,367 24 (5) 2,386
-----------------------------------------
Held to maturity
State and municipal 2,367 2 (44) 2,325
Mortgage-backed securities 174 (1) 173
-----------------------------------------
Total held to maturity 2,541 2 (45) 2,498
-----------------------------------------
Total investment securities $4,908 $26 $(50) $4,884
=========================================
The amortized cost and fair value of securities held to maturity and available
for sale at December 31, 1997, by contractual maturity, are shown below.
Expected maturities will differ from contractual maturities because issuers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
1997
---------------------------------------
AVAILABLE FOR SALE HELD TO MATURITY
---------------------------------------
AMORTIZED FAIR AMORTIZED FAIR
MATURITY DISTRIBUTION AT DECEMBER 31 COST VALUE COST VALUE
- ------------------------------------------------------------------------------
Due in one year or less $ 620 $ 620 $ 675 $ 675
Due after one through five years 1,375 1,389 742 750
Due after five through ten years 180 187 292 309
Due after ten years 541 575
-------------------------------------
Totals $2,716 $2,771 $1,709 $1,734
=====================================
No securities were pledged at December 31, 1997. Securities with a carrying
value of $174,000 were pledged at December 31, 1996 to secure FHLB advances.
Proceeds from sales of securities available for sale during 1996 were
$183,000. Gross gains of $3,000 were realized on those sales.
Proceeds from securities held to maturity called at a premium during 1996 were
$278,000. Gross gains of $3,000 were realized on those calls.
F-10
<PAGE>
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
Proceeds, including due from broker of $1,994,000, from sales of securities
available for sale during 1995 were $2,616,000. Gross gains of $4,000 and
gross losses of $18,000 were realized on those sales.
During 1995, the Company sold two securities held to maturity with an
amortized cost of $125,000 due to substandard credit worthiness. No gains or
losses were realized on these sales.
- - LOANS AND ALLOWANCE
DECEMBER 31 1997 1996
- --------------------------------------------------------------------------
Commercial, commercial real estate
and industrial loans $17,883 $17,401
Real estate loans 28,971 23,010
Construction loans 6,773 3,621
Individuals' loans for household
and other personal expenditures 22,896 19,084
Tax-exempt loans and leases 3,377 1,922
-----------------------
79,900 65,038
Deferred loan origination costs 101 70
-----------------------
Total loans $80,001 $65,108
=======================
DECEMBER 31 1997 1996 1995
- --------------------------------------------------------------------------
Allowance for loan losses
Balances, January 1 $644 $518 $362
Provision for losses 255 219 208
Recoveries on loans 29 18 36
Loans charged off (80) (111) (88)
-----------------------------------
Balances, December 31 $848 $644 $518
===================================
At December 31, 1997, the Company had no impaired loans. At December 31,
1996, the Company had an impaired loan of $67,000 and had recorded an
allowance for losses of $7,000. The average balance of impaired loans for the
years ended December 31, 1997, 1996 and 1995 were $25,000, $112,000 and
$26,000. The Company had no interest income or cash receipts on impaired
loans during the years ended December 31, 1997, 1996 and 1995.
F-11
<PAGE>
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
The Company had no commitments to loan additional funds to the borrowers of
impaired loans.
The Bank has entered into transactions with certain directors, executive
officers, significant stockholders of the Company and their affiliates or
associates (related parties). Such transactions were made in the ordinary
course of business on substantially the same terms and conditions, including
interest rates and collateral, as those prevailing at the same time for
comparable transactions with other customers, and did not, in the opinion of
management, involve more than normal credit risk or present other unfavorable
features.
The aggregate amount of loans, as defined, to such related parties were as
follows:
- --------------------------------------------------------------------------
Balances, January 1, 1997 $649
New loans, including renewals 429
Payments, etc., including renewals (333)
----
Balances, December 31, 1997 $745
====
- - PREMISES AND EQUIPMENT
DECEMBER 31 1997 1996
- --------------------------------------------------------------------------
Land $ 432 $ 264
Buildings 853 786
Leasehold improvements 285 343
Equipment 751 686
-----------------------
Total cost 2,321 2,079
Accumulated depreciation (376) (287)
-----------------------
Net $1,945 $1,792
=======================
F-12
<PAGE>
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
- - DEPOSITS
DECEMBER 31 1997 1996
- --------------------------------------------------------------------------
Demand deposits $16,992 $14,212
Savings deposits 18,957 15,139
Certificates and other time
deposits of $100,000 or more 10,519 7,355
Other certificates and time deposits 41,227 33,846
-----------------------
Total deposits $87,695 $70,552
=======================
Certificates and other time deposits maturing in years ending December 31:
1998 $38,544
1999 8,711
2000 2,572
2001 1,120
2002 799
-------
$51,746
=======
- - FHLB ADVANCES
INTEREST
AMOUNT RATE
- --------------------------------------------------------------------------
Maturities in years ending December 31
1998 $ 177 6.01%
1999 156 6.01
2000 638 6.05
2001 122 6.01
2002 1,603 5.77
2003 234 5.85
------
$2,930 5.87%
======
The FHLB advances are secured by first mortgage loans totaling $21,259,000.
Advances are subject to restrictions or penalties in the event of prepayment.
The Bank has an available line of credit with the FHLB totaling $2,000,000.
The line of credit expires May 7, 1998 and bears interest at a rate equal to
the then current variable advance rate. There were no drawings on this line
of credit at December 31, 1997.
F-13
<PAGE>
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
- - INCOME TAX
YEAR ENDED DECEMBER 31 1997 1996 1995
- --------------------------------------------------------------------------
Income tax expense
Currently payable
Federal $270 $ 54 $15
State 106 51 16
Deferred
Federal 8 20 (31)
State (8) (10) 11
-------------------
Total income tax expense $376 $115 $11
===================
Reconciliation of federal statutory to actual tax expense
Federal statutory income tax at 34% $379 $155 $98
Tax exempt interest (69) (66) (108)
Effect of state income taxes 65 27 18
Other 1 (1) 3
--------------------
Actual tax expense $376 $115 $11
====================
A cumulative net deferred tax asset is included in other assets. The
components of the asset are as follows:
DECEMBER 31 1997 1996
- --------------------------------------------------------------------------
ASSETS
Allowance for loan losses $312 $227
Net operating loss carryforward 20
Alternative minimum tax credit carryforward 38 54
Other 9
--------------------
Total assets 359 301
--------------------
LIABILITIES
Depreciation 103 75
State income tax 16 13
Loan fees 35 8
Securities available for sale 22 8
--------------------
Total liabilities 176 104
--------------------
$183 $197
====================
F-14
<PAGE>
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
At December 31, 1997, the Company had an alternative minimum tax credit
carryforward of $38,000 available to offset future regular federal income tax
liabilities which has an unlimited carryover period.
Tax expense (benefit) applicable to investment security gains and losses for
the years ended December 31, 1996 and 1995 was $2,230 and $(5,400).
- - COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business there are outstanding commitments and
contingent liabilities, such as commitments to extend credit and standby
letters of credit, which are not included in the accompanying financial
statements. The Bank's exposure to credit loss in the event of nonperformance
by the other party to the financial instruments for commitments to extend
credit and standby letters of credit is represented by the contractual or
notional amount of those instruments. The Bank uses the same credit policies
in making such commitments as it does for instruments that are included in the
consolidated balance sheet.
Financial instruments whose contract amount represents credit risk as of
December 31 were as follows:
1997 1996
- --------------------------------------------------------------------------
Commitments to extend credit $5,606 $9,022
Standby letters of credit 640 401
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected
to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Bank evaluates each
customer's credit worthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Bank upon extension of credit, is based
on management's credit evaluation. Collateral held varies but may include
accounts receivable, inventory, property and equipment, and income-producing
commercial properties.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party.
The Company and Bank are also subject to claims and lawsuits which arise
primarily in the ordinary course of business. It is the opinion of management
that the disposition or ultimate resolution of such claims and lawsuits will
not have a material adverse effect on the consolidated financial position of
the Company.
In connection with the approval of its bank holding company application, the
Company must obtain Federal Reserve approval prior to incurring debt which
would cause its debt to equity ratio to exceed 30 percent. The Company is in
compliance with this commitment at December 31, 1997.
F-15
<PAGE>
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
- - Stockholders' Equity
On April 26, 1995, the Board of Directors declared a 5-for-4 stock split
effective June 1, 1995. Net income per share and weighted average shares
outstanding have been restated to reflect the stock split.
On November 19, 1997, the Board of Directors declared a 5% stock dividend
payable on February 1, 1998. Net income per share and weighted average shares
outstanding have been restated to reflect the 5% stock dividend.
The dividends which the Company may pay are restricted by Indiana law to the
amount of retained earnings. The ability of the Company to pay dividends to
stockholders is dependent on dividends received from the Bank. Without prior
approval, current regulations allow the Bank to pay dividends to the Company not
exceeding net profits (as defined) for the current year plus those for the
previous two years. The Bank is also restricted by the Office of Thrift
Supervision for the amount of the liquidation account established at the time of
its stock conversion. The Bank normally restricts dividends to a lesser amount
because of the need to maintain an adequate capital structure. At December 31,
1997, stockholder's equity of the Bank was $7,324,000, of which a minimum of
$1,080,000 was available for payment of dividends.
- - Regulatory Capital
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies and are assigned to a capital category. The
assigned capital category is largely determined by three ratios that are
calculated according to the regulations: total risk adjusted capital, Tier 1
capital, and Tier 1 leverage ratios. The ratios are intended to measure
capital relative to assets and credit risk associated with those assets and
off-balance sheet exposures of the entity. The capital category assigned to
an entity can also be affected by qualitative judgments made by regulatory
agencies about the risk inherent in the entity's activities that are not part
of the calculated ratios.
There are five capital categories defined in the regulations, ranging from
well capitalized to critically undercapitalized. Classification of a bank in
any of the undercapitalized categories can result in actions by regulators
that could have a material effect on a bank's operations. At December 31,
1997 and 1996, the Bank is categorized as well capitalized and met all subject
capital adequacy requirements. There are no conditions or events since
December 31, 1997 that management believes have changed the Bank's
classification.
F-16
<PAGE>
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
The Bank's actual and required capital amounts and ratios are as follows:
<TABLE>
<CAPTION>
1997
----------------------------------------------------
REQUIRED FOR TO BE WELL
ACTUAL ADEQUATE CAPITAL(1) CAPITALIZED(1)
----------------------------------------------------
DECEMBER 31 AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total capital(1) (to risk-weighted assets) $7,291 10.1% $5,789 8.0% $7,236 10.0%
Tier 1 capital(1) (to risk-weighted assets) 8,139 11.3% 2,895 4.0 4,342 6.0
Tier 1 capital(1) (to average assets) 8,139 8.7% 3,758 4.0 5,638 6.0
</TABLE>
(1) As defined by regulatory agencies
<TABLE>
<CAPTION>
1996
----------------------------------------------------
REQUIRED FOR TO BE WELL
ACTUAL ADEQUATE CAPITAL(1) CAPITALIZED(1)
----------------------------------------------------
DECEMBER 31 AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total capital(1) (to risk-weighted assets) $6,665 10.9% $4,885 8.0% $6,106 10.0%
Tier 1 capital(1) (to risk-weighted assets) 7,309 12.0% 2,443 4.0 3,664 6.0
Tier 1 capital(1) (to average assets) 7,309 9.4% 3,125 4.0 3,906 5.0
</TABLE>
(1) As defined by regulatory agencies
- - Employee Benefits
Effective January 1, 1995, the Bank adopted a retirement savings 401(k) plan
in which substantially all employees may participate. The Bank matches
employees' contributions as determined each year by the Bank's Board of
Directors. The Bank's expense for the plan was $8,000, $6,000 and $4,000 for
1997, 1996 and 1995.
The Company adopted a stock option plan in 1992 whereby 46,921 shares of
common stock, after restatement for stock dividends and splits, were reserved
for the granting of options to certain officers, directors and key employees.
The options were exercisable within five years from the date of grant, and the
right to purchase shares under such options vested at a rate of 40% after the
first year and 20% each year thereafter with the options being fully vested
after four years. Additional options to purchase common shares may be granted
not to exceed 10% of the Company's outstanding shares of common stock, less
previously granted options.
F-17
<PAGE>
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands, Except Per Share Data)
On February 15, 1993, the 1992 stock option plan, which is accounted for in
accordance with APB No. 25, Accounting for Stock Issued to Employees, and
related interpretations, was amended to increase the aggregate number of
shares under the plan from 46,921 to 66,771 shares. In addition, the
amendment provided for immediate vesting of all outstanding stock options and
stock options granted pursuant to the agreement. On May 15, 1996, the 1992
stock option plan was amended to extend the exercise period from five years to
ten years from the date of grant.
On May 15, 1996, the stockholders approved the 1996 stock option plan,
reserving 105,000 shares of Company stock for the granting of options to
certain key employees, directors and advisors. The exercise price of the
shares may not be less than the fair market value of the shares upon the grant
of the option. Options granted to key employees and advisors require approval
of the Compensation Committee of the Board of Directors ("Committee"). Options
granted to key employees and advisors become 25% exercisable one year from the
date of the grant and continue to vest 25% each year thereafter until fully
vested. Without any action by the Committee, each outside director will be
automatically granted an option to purchase 1,000 shares of Company stock on
each anniversary date of service on the Board of Directors beginning with
their 1997 anniversary. These options vest at the date of grant. Each option
granted under the plan shall expire no later than ten years from the date the
option is granted.
Although the Company has elected to follow APB No. 25, Standard Financial
Accounting Standards ("SFAS") No. 123 requires pro forma disclosures of net
income and earnings per share as if the Company had accounted for its employee
stock options under that Statement. The fair value of each option grant was
estimated on the grant date using an option-pricing model with the following
assumptions:
1997
--------------
Risk-free interest rates 6.67%
Dividend yields .73%
Volatility factors of expected market price of common stock 8.00%
Weighted-average expected life of the options 9 years
Under SFAS No. 123, compensation cost is recognized in the amount of the
estimated fair value of the options and amortized to expense over the options'
vesting period. The pro forma effect on net income and earnings per share of
this statement are as follows:
1997
--------------
Net income As reported $738
Pro forma 726
Basic Earnings per share As reported .75
Pro forma .73
Diluted earnings per share As reported .74
Pro forma .72
F-18
<PAGE>
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands, Except Per Share Data)
The following is a summary of the status of the Company's stock option plans
and changes in the plans as of and for the years ended December 31, 1997, 1996
and 1995.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
OPTIONS SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year 46,261 $5.54 66,771 $5.54 66,771 $5.54
Granted 5,250 11.43
Exercised 20,510 5.54
------- ------- -------
Outstanding, end of year 51,511 $6.14 46,261 $5.54 66,771 $5.54
======= ======= =======
Options exercisable at year end 51,511 46,261 66,771
Weighted-average fair value of
options granted during the year $4.00
</TABLE>
As of December 31, 1997, options outstanding of 46,261 and 5,250 have exercise
prices of $5.54 and $11.43 and weighted-average remaining contractual lives of
4.5 and 9.4 years.
- - EARNINGS PER SHARE
Earnings per share ("EPS") were computed as follows:
YEAR ENDED DECEMBER 31, 1997
-------------------------------
WEIGHTED
AVERAGE PER SHARE
INCOME SHARES AMOUNT
-------------------------------
BASIC EARNINGS PER SHARE
Income available to common stockholders $738 989,848 $.75
EFFECT OF DILUTIVE STOCK OPTIONS 13,803 ====
-----------------
DILUTED EARNINGS PER SHARE
Income available to common stockholders
and assumed conversions $738 1,003,651 $.74
===============================
F-19
<PAGE>
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands, Except Per Share Data)
Options to purchase 5,250 shares of common stock at $11.43 per share were
outstanding at December 31, 1997, but were not included in the computation of
diluted EPS because the options' exercise price was greater than the average
market price of the common shares.
YEAR ENDED DECEMBER 31, 1996
-------------------------------
WEIGHTED
AVERAGE PER SHARE
INCOME SHARES AMOUNT
-------------------------------
BASIC EARNINGS PER SHARE
Income available to common stockholders $341 986,043 $.35
EFFECT OF DILUTIVE STOCK OPTIONS 14,757 ====
-----------------
DILUTED EARNINGS PER SHARE
Income available to common stockholders
and assumed conversions $341 1,000,800 $.34
===============================
YEAR ENDED DECEMBER 31, 1995
-------------------------------
WEIGHTED
AVERAGE PER SHARE
INCOME SHARES AMOUNT
-------------------------------
BASIC EARNINGS PER SHARE
Income available to common stockholders $276 969,455 $.29
EFFECT OF DILUTIVE STOCK OPTIONS 21,174 ====
-----------------
DILUTED EARNINGS PER SHARE
Income available to common stockholders
and assumed conversions $276 990,629 $.28
===============================
- - FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument:
CASH AND CASH EQUIVALENTS-The fair value of cash and cash equivalents
approximates carrying value.
INVESTMENT SECURITIES-Fair values are based on quoted market prices.
LOANS-The fair value for loans are estimated using discounted cash flow
analyses, using interest rates currently being offered for loans with similar
terms to borrowers of similar credit quality.
F-20
<PAGE>
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
FHLB STOCK-Fair value of FHLB stock is based on the price at which it may be
resold to the FHLB.
INTEREST RECEIVABLE/PAYABLE-The fair values of interest receivable/payable
approximate carrying values.
DEPOSITS-The fair values of noninterest-bearing and interest-bearing demand
accounts are equal to the amount payable on demand at the balance sheet date.
Fair values for certificates of deposit are estimated using a discounted cash
flow calculation that applies interest rates currently being offered on
certificates to a schedule of aggregated expected monthly maturities on such
time deposits.
FHLB ADVANCES-The fair value of advances is estimated using a discounted cash
flow calculation, based on current rates for similar debt.
The estimated fair values of the Company's financial instruments are as
follows:
1997 1996
---------------------------------
CARRYING FAIR CARRYING FAIR
DECEMBER 31 VALUE VALUE VALUE VALUE
- ---------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $11,231 $11,231 $7,035 $7,035
Investment securities available
for sale 2,771 2,771 2,386 2,386
Investment securities held to maturity 1,709 1,734 2,541 2,498
Loans, net 79,152 80,403 64,464 65,305
Stock in FHLB 778 778 778 778
Interest receivable 700 700 526 526
LIABILITIES
Deposits 87,695 87,806 70,552 70,633
FHLB advances 2,930 2,908 2,379 2,351
Interest payable 251 251 187 187
F-21
<PAGE>
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
- - CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY)
Presented below is condensed financial information as to financial position,
results of operations and cash flows of the Company:
CONDENSED BALANCE SHEET
DECEMBER 31 1997 1996
- --------------------------------------------------------------------------
ASSETS
Cash on deposit $ 88 $ 64
Investment in subsidiary 7,324 6,665
Other assets 139 161
----------------------
Total assets $7,551 $6,890
======================
LIABILITIES-other liabilities $ 1 $ 4
STOCKHOLDERS' EQUITY 7,550 6,886
----------------------
Total liabilities and stockholders' equity $7,551 $6,890
======================
CONDENSED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31 1997 1996 1995
- --------------------------------------------------------------------------
Income
Dividends from subsidiary $165 $ 30
Other interest income and dividends 1 $ 1 1
----------------------
Total income 166 1 31
----------------------
Expenses
Salaries and employee benefits 44 20 19
Professional fees 46 55 20
Other expenses 18 12 22
----------------------
Total expenses 108 87 61
----------------------
Income (loss) before income tax benefit
and equity in undistributed income of
subsidiary 58 (86) (30)
Income tax benefit (42) (34) (24)
----------------------
Income (loss) before equity in
undistributed income of subsidiary 100 (52) (6)
Equity in undistributed income of subsidiary 638 393 282
----------------------
NET INCOME $738 $341 $276
======================
F-22
<PAGE>
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
CONDENSED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31 1997 1996 1995
- --------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $738 $341 $276
Adjustments to reconcile net income to
net cash provided (used) by operating
activities (620) (421) (296)
----------------------
Net cash provided (used) by
operating activities 118 (80) (20)
----------------------
FINANCING ACTIVITIES
Cash dividends (94)
Cash dividends in lieu of issuing
fractional shares (1)
Stock options exercised 113
----------------------
Net cash provided (used) by
financing activities (94) 113 (1)
----------------------
NET CHANGE IN CASH ON DEPOSIT 24 33 (21)
CASH ON DEPOSIT AT BEGINNING OF YEAR 64 31 52
----------------------
CASH ON DEPOSIT AT END OF YEAR $ 88 $ 64 $ 31
======================
F-23
<PAGE>
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARY
Consolidated Condensed Balance Sheet
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
----------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 1,242,973 $ 933,574
Short-term interest-bearing deposits 7,198,167 10,297,654
----------------------------------
Cash and cash equivalents 8,441,140 11,231,228
Investment securities
Available for sale 4,103,895 2,771,058
Held to maturity 1,168,029 1,708,679
----------------------------------
Total investment securities 5,271,924 4,479,737
Loans 86,995,467 80,000,575
Allowance for loan losses (912,357) (848,085)
----------------------------------
Net Loans 86,083,110 79,152,490
Premises and equipment 2,353,113 1,944,779
Federal Home Loan Bank of Indianapolis stock, at cost 777,800 777,800
Foreclosed real estate 14,550 78,636
Interest receivable 756,106 700,079
Other assets 449,063 374,965
----------------------------------
Total assets $104,146,806 $98,739,714
==================================
LIABILITIES
Deposits
Noninterest-bearing $ 6,636,970 $ 7,623,814
Interest-bearing 86,118,460 80,071,501
----------------------------------
Total deposits 92,755,430 87,695,315
Federal Home Loan Bank of Indianapolis advances 2,929,789 2,929,789
Interest payable 334,343 250,617
Other liabilities 196,553 313,987
----------------------------------
Total liabilities 96,216,115 91,189,708
----------------------------------
COMMITMENTS AND CONTINGENT LIABILITIES
STOCKHOLDERS' EQUITY
Preferred stock, no-par value
Authorized and unissued - 1,000,000 shares
Common stock, no-par value
Authorized - 4,000,000 shares
Issued and outstanding - 989,848 shares 6,722,251 6,722,251
Retained earnings and contributed capital 1,182,482 794,796
Accumulated other comprehensive income 25,958 32,959
----------------------------------
Total stockholders' equity 7,930,691 7,550,006
----------------------------------
Total liabilities and stockholders' equity $104,146,806 $98,739,714
==================================
</TABLE>
See notes to consolidated condensed financial statements.
F-24
<PAGE>
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARY
Consolidated Condensed Statement of Income
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------------------------------------------
1998 1997 1998 1997
---------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest Income:
Loans, including fees $1,879,631 $1,649,483 $3,680,570 $3,181,392
Investment securities
Taxable 75,013 39,933 132,608 85,177
Tax exempt 19,443 29,067 37,045 58,450
Interest-bearing time deposits 112,308 79,219 213,462 121,110
Dividends 15,513 15,223 32,182 31,471
---------------------------------------------------------------
Total interest income 2,101,908 1,812,925 4,095,867 3,477,600
---------------------------------------------------------------
Interest Expense:
Deposits 1,091,937 909,858 2,128,026 1,724,352
FHLB advances 44,913 36,940 87,295 72,043
---------------------------------------------------------------
Total interest expense 1,136,850 946,798 2,215,321 1,796,395
---------------------------------------------------------------
Net Interest Income 965,058 866,127 1,880,546 1,681,205
Provision for loan losses 69,000 57,000 129,000 111,000
---------------------------------------------------------------
Net Interest Income After Provision for Loan Losses 896,058 809,127 1,751,546 1,570,205
---------------------------------------------------------------
Other Income
Trust fees 6,058 6,936 28,653 17,776
Service charges on deposit accounts 76,328 56,236 148,956 111,746
Other operating income 11,073 3,082 20,076 10,357
---------------------------------------------------------------
Total other income 93,459 66,254 197,685 139,879
---------------------------------------------------------------
Other Expenses
Salaries and employee benefits 344,073 298,820 651,932 586,534
Premises and equipment 79,189 72,763 155,459 140,450
Advertising 36,942 32,412 63,237 60,517
Data processing fees 63,749 56,693 128,871 111,671
Deposit insurance expense 13,369 11,237 25,877 21,527
Printing and office supplies 28,633 17,967 56,200 35,566
Legal and professional fees 40,369 41,197 63,934 80,044
Telephone expense 16,711 17,013 33,560 34,331
Other operating expense 103,785 83,873 194,615 154,967
---------------------------------------------------------------
Total other expenses 726,820 631,975 1,373,685 1,225,607
---------------------------------------------------------------
Income Before Income Tax 262,697 243,406 575,546 484,477
Income tax expense 83,005 84,141 187,860 161,971
---------------------------------------------------------------
Net Income $ 179,692 $ 159,265 $ 387,686 $ 322,506
===============================================================
Basic earnings per share $ .18 $ .16 $ .39 $ .33
Diluted earnings per share .18 .16 .39 .32
</TABLE>
See notes to consolidated condensed financial statements.
F-25
<PAGE>
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARY
Consolidated Condensed Statement of Comprehensive Income
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------------------------------------
1998 1997 1998 1997
------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Income $ 179,692 $ 159,265 $ 387,686 $ 322,506
Other comprehensive income, net of tax
Holding gains (losses) on securities available
for sale, net of tax expense (benefit) of
($712), $13,614, ($4,667) and $6,595 (1,069) 20,421 (7,001) 9,893
============================================================
Comprehensive income $ 178,623 $ 179,686 $ 380,685 $ 332,399
============================================================
</TABLE>
See notes to consolidated condensed financial statements.
F-26
<PAGE>
FIRST COMMUNITY BANCSHARES, INC AND SUBSIDIARY
Consolidated Condensed Statement of Changes in Stockholders' Equity
For the Six Months Ended June 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
Retained
Common Stock Earnings Accumulated
----------------------------- and Other
Shares Contributed Comprehensive
Outstanding Amount Capital Income Total
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCES, JANUARY 1, 1998 989,848 $6,722,251 $ 794,796 $ 32,959 $7,550,006
387,686 387,686
Net income for the period
Holding losses on securities
available for sale (7,001) (7,001)
---------------------------------------------------------------------------------
BALANCES, JUNE 30, 1998 989,848 $6,722,251 $ 1,182,482 $ 25,958 $7,930,691
=================================================================================
</TABLE>
See notes to consolidated condensed financial statements.
F-27
<PAGE>
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARY
Consolidated Condensed Statement of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
---------------------------------
1998 1997
---------------------------------
<S> <C> <C>
Operating Activities:
Net income $ 387,686 $ 322,506
Adjustments to reconcile net income to net cash provided (used) by
operating activities:
Provision for loan losses 129,000 111,000
Depreciation and amortization 67,212 62,496
Investment securities amortization 699 3,243
Net change in:
Interest receivable (56,027) (46,902)
Interest payable 83,726 9,509
Other assets (69,506) (20,222)
Other liabilities (117,434) 147,916
---------------------------------
Net cash provided by operating activities 425,356 589,546
---------------------------------
Investing Activities:
Proceeds from maturities of securities available for sale 70,000 515,000
Proceeds from paydowns and maturities of securities held to maturity 540,000 95,060
Purchases of securities available for sale (1,414,479)
Net changes in loans (7,052,170) (8,031,105)
Proceeds from sale of foreclosed real estate 56,636 123,167
Purchases of property and equipment (475,546) (202,709)
---------------------------------
Net cash used by investing activities (8,275,559) (7,500,587)
---------------------------------
Financing Activities:
Net change in:
Noninterest-bearing, NOW and savings deposits 752,392 412,476
Certificates of Deposit 4,307,723 7,504,421
Repayment of FHLB advances (1,000,000)
Cash dividends (94,282)
---------------------------------
Net cash provided by financing activities 5,060,115 6,822,615
---------------------------------
Net Decrease in Cash and Cash equivalents (2,790,088) (88,426)
Cash and Cash equivalents, Beginning of period 11,231,228 7,034,571
---------------------------------
Cash and Cash equivalents, End of period $ 8,441,140 $ 6,946,145
=================================
Supplemental cash flow disclosures:
Interest paid $ 2,131,595 $ 1,786,886
Income taxes paid 135,550 113,904
</TABLE>
See notes to consolidated condensed financial statements.
F-28
<PAGE>
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Condensed Financial Statements
June 30, 1998
(Unaudited)
Note 1: Basis of Presentation
- -----------------------------
The consolidated financial statements include the accounts of First Community
Bancshares, Inc. (the "Company") and its wholly owned subsidiaries, First
Community Bank & Trust, a state chartered bank (the "Bank") and First
Community Real Estate Management, Inc. ("FCREMI"). FCREMI was incorporated on
May 26, 1998 to hold and manage the real estate used by the Company and the
Bank. At June 30, 1998, FCREMI had not commenced operations. A summary of
significant accounting policies is set forth in Note 1 of Notes to Financial
Statements included in the December 31, 1997, Annual Report to Shareholders.
All significant intercompany accounts and transactions have been eliminated in
consolidation.
The interim consolidated financial statements have been prepared in accordance
with instructions to Form 10-Q, and therefore do not include all information
and footnotes necessary for a fair presentation of financial position, results
of operations and cash flows in conformity with generally accepted accounting
principles.
The interim consolidated financial statements at June 30, 1998, and for the
six months ended June 30, 1998 and 1997, have not been audited by independent
accountants, but reflect, in the opinion of management, all adjustments (which
include only normal recurring adjustments) necessary to present fairly the
financial position, results of operations and cash flows for such periods.
Note 2: Earnings Per Share
- --------------------------
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
June 30, 1998 June 30, 1997
------------- -------------
Weighted Weighted
Average Per Share Average Per Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
BASIC EARNINGS PER SHARE
Income available to
common shareholders $ 179,692 989,848 $ .18 $ 159,265 989,848 $ .16
========== =========
EFFECT OF DILUTIVE STOCK OPTIONS 13,867 13,803
-------------------------- -------------------------
DILUTED EARNINGS PER SHARE
Income available to
common shareholders and
assumed conversions $ 179,692 1,003,715 $ .18 $ 159,265 1,003,651 $ .16
======================================= =====================================
</TABLE>
F-29
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
June 30, 1998 June 30, 1997
------------- -------------
Weighted Weighted
Average Per Share Average Per Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
BASIC EARNINGS PER SHARE
Income available to
common shareholders $ 387,686 989,848 $ .39 $ 322,506 989,848 $ .33
========= =========
EFFECT OF DILUTIVE STOCK OPTIONS 14,182 13,803
------------------------- ------------------------
DILUTED EARNINGS PER SHARE
Income available to
common shareholders and
assumed conversions $ 387,686 1,004,030 $ .39 $ 322,506 1,003,651 $ .32
====================================== =====================================
</TABLE>
Note 3: Changes in Methods of Accounting
- ----------------------------------------
During 1997, the Financial Accounting Standards Board ("FASB") issued
Statement No. 130, Reporting Comprehensive Income, establishing standards for
the reporting of comprehensive income and its components in financial
statements. Statement No. 130 is applicable to all entities that provide a
full set of financial statements. Enterprises that have no items of other
comprehensive income in any period presented are excluded from the scope of
this Statement.
Statement No. 130 is effective for interim and annual periods beginning after
December 15, 1997. The Company has adopted Statement No. 130 during the first
fiscal quarter of 1998. See the Consolidated Condensed Statement of
Comprehensive Income on page 6.
Note 4: Subsequent Event
- ------------------------
On July 15, 1998 the Board of Directors approved the preparation and filing of
a registration statement covering the issuance and sale of the following
securities:
- Rights to shareholders to purchase one (1) share for every ten (10)
shares owned as of the Record Date, subject to a minimum offer and
purchase of one hundred (100) shares of common stock, at a purchase
price of $11.00 per share. It is contemplated that the Right will
be exercisable for a ninety (90) day period following their
issuance and subject to the minimum purchase requirement, will be
freely transferable;
- Warrants to shareholders to purchase one (1) share for every ten
(10) shares owned on the Record Date, subject to a minimum offer
and purchase of one hundred (100) shares of Common Stock, with an
exercise price of $11.00 per share. It is contemplated that the
Warrants will be exercisable for a ninety (90) day period
commencing September 1, 1999 and subject to the minimum purchase
requirement, will be freely transferable; and
- The offer and sale of up to $1 million in aggregate principal
amount of convertible Notes. The Notes will be for a term of ten
(10) years, bear interest at the rate of 7% per annum payable
quarterly and, at the option of the holder, will be convertible to
Common Stock of the Company at a conversion rate of $12.10 per
share. The Notes will be sold in denominations of $10,000.00 and,
subject to a minimum purchase requirement of one (1) Note, will be
initially offered to existing shareholders on a pro rata basis.
F-30
<PAGE>
The Company hopes to commence such offers and establish a Record date during
the third quarter of 1998. However, there can be no assurance as to when, if
ever, these offers can be made and the Board reserves the right to make
material changes in the above terms and conditions.
F-31
<PAGE>
=======================================================
INFORMATION CONTAINED HEREIN IS SUBJECT TO
COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT
RELATING TO THE NOTES HAS BEEN FILED WITH THE SECURITIES
AND EXCHANGE COMMISSION. THE NOTES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE
REGISTRATION STATEMENT BECOMES EFFECTIVE. NO ONE IS
AUTHORIZED IN CONNECTION WITH THIS OFFERING TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN
THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY FIRST
COMMUNITY BANCSHARES, INC. THIS PROSPECTUS IS NOT AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY BY
ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OF
SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY
OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL
UNDER ANY CIRCUMSTANCES IMPLY THAT INFORMATION HEREIN
IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
---------------------
TABLE OF CONTENTS
-----------------------------------------
PAGE
----
Prospectus Summary................................. 3
Summary Consolidated Financial Data................ 5
Simultaneous Offering.............................. 6
Risk Factors....................................... 7
Use of Proceeds.................................... 10
Market for Common Stock and Related
Shareholder Matters............................. 10
Capitalization..................................... 11
Management's Discussion and Analysis of
Financial Condition and Results of Operations... 11
Business........................................... 21
Management......................................... 32
Security Ownership of Certain Beneficial
Owners and Management........................... 35
Certain Transactions............................... 36
Plan of Distribution............................... 36
Description of Securities.......................... 36
Legal Matters...................................... 38
Experts............................................ 38
Index to Financial Statements...................... 39
---------------------
=======================================================
=======================================================
FIRST COMMUNITY
BANCSHARES, INC.
[LOGO]
$1,000,000
7% CONVERTIBLE NOTES
-------------
PROSPECTUS
-------------
__________, 1998
=======================================================
<PAGE>
SUBJECT TO COMPLETION, DATED ______________, 1998
PROSPECTUS
- ----------
FIRST COMMUNITY BANCSHARES, INC.
[LOGO]
RIGHTS TO PURCHASE UP TO 131,000 SHARES OF COMMON STOCK
AND
WARRANTS TO PURCHASE UP TO 131,000 SHARES OF COMMON STOCK
First Community Bancshares, Inc., an Indiana corporation (the
"Company"), is issuing to holders of its common stock, no par value ("Common
Stock"), as of 5:00 p.m. on [ ] 1998 and their assigns (the "Eligible Holders")
the right to subscribe for and purchase additional shares of Common Stock at
$11.00 per share ("the Rights"). The Company is also issuing to Eligible Holders
warrants to purchase shares of Common Stock at $11.00 per share exercisable
commencing September 15, 1999 and continuing for 90 days thereafter (the
"Warrants").
Pursuant to the Rights, each Eligible Holder may subscribe for and
purchase one share for each 10 shares of Common Stock, rounded down to the
nearest whole share, owned on the Record Date, subject to a minimum offer and
purchase of 100 shares. Each Eligible Holder will also receive a Warrant to
purchase one share for each 10 shares of Common Stock owned on the Record Date,
subject to a minimum offer and purchase of 100 shares. Common Stock issuable
upon exercise of the Rights and Warrants are referred to herein as "Shares."
The Rights and Warrants will be evidenced by certificates and will be
freely transferable. However, the Common Stock issuable upon exercise of the
Rights and Warrants is not listed on any exchange or traded on the Nasdaq Stock
Market nor will the Rights or Warrants be so listed or traded. It is unlikely
that an active trading market will develop in the Rights or Warrants.
THE RIGHTS WILL EXPIRE ON [ ], 1998 AT 5:00 P.M., INDIANAPOLIS
TIME UNLESS EXTENDED BY AND IN THE SOLE DISCRETION OF THE COMPANY. SEE
"SUBSCRIPTION RIGHTS."
THE WARRANTS WILL EXPIRE ON DECEMBER 13, 1999 AT 5:00 P.M.,
INDIANAPOLIS TIME. SEE "DESCRIPTION OF SECURITIES.
SEE "RISK FACTORS" AT PAGE 6 FOR A DISCUSSION OF RISK FACTORS THAT
SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE SECURITIES OFFERED
HEREBY.
THE SECURITIES OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR TIME
DEPOSITS OR OTHER OBLIGATIONS OF A BANK AND ARE NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
=====================================================================================================================
SUBSCRIPTION PRICE UNDERWRITING DISCOUNTS AND PROCEEDS TO
COMMISSIONS (1) COMPANY (2)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Rights Share $ 11.00 N/A $ 11.00
- ---------------------------------------------------------------------------------------------------------------------
Total Rights Offering $ 1,441,000 N/A $ 1,441,000
- ---------------------------------------------------------------------------------------------------------------------
Per Warrant Share $ 11.00 N/A $ 11.00
- ---------------------------------------------------------------------------------------------------------------------
Total Warrant Offering $ 1,441,000 N/A $ 1,441,000
- ---------------------------------------------------------------------------------------------------------------------
=====================================================================================================================
</TABLE>
(1) The Company will not pay any commission, discount or fee in connection
with the offerings. See "Plan of Distribution."
(2) Before deducting estimated expenses of the offering payable by the Company
of approximately $36,750.
--------------------------
The Date of this Prospectus is October __, 1998.
--------------------------
<PAGE>
Information contained herein is subject to completion or amendment.
A registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of
any such State.
<PAGE>
AVAILABLE INFORMATION
The Company files reports and other information with the Securities
and Exchange Commission (the "Commission") under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), which may be inspected and copied at the
public reference facilities maintained by the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
Commission's regional offices located at Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511; and at 7 World Trade Center,
Suite 1300, New York, New York 10048. A copy of such material also can be
obtained from the Public Reference Section of the Commission, 450 Fifth Street,
N.W., Washington, D.C. 20549, at prescribed rates. In addition, the Commission
maintains a web site (http://www.sec.gov) that contains reports, proxy
statements and other information statements filed electronically by the
Company.
The Company has filed a Registration Statement on Form SB-2 (together
with all amendments and exhibits thereto, the "Registration Statement") with
the Commission under the Securities Act of 1933, as amended (the "Act"), with
respect to the Securities offered hereby. This Prospectus does not contain all
of the information set forth in the Registration Statement, certain parts of
which are omitted in accordance with the rules and regulations of the
Commission. Reference is made to the Registration Statement which can be
inspected at the public reference facilities of the Commission and copies of
which can be obtained from the Commission at prescribed rates, as set forth
above or at the Commission's web site (http://www.sec.gov).
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more
detailed information appearing elsewhere in this Prospectus. Prospective
investors should carefully consider the information set forth under the heading
"Risk Factors." Unless the context otherwise indicates, "Company" includes
First Community Bancshares, Inc. and its subsidiaries.
THE COMPANY
GENERAL
First Community Bancshares, Inc. (the "Company") is a one bank holding
Company headquartered in Bargersville, Indiana. Through its subsidiary, First
Community Bank and Trust, a commercial bank organized under the laws of the
State of Indiana ("First Community"), the Company operates 8 offices in three
central and southern Indiana counties. The Company is also the sole
shareholder of First Community Real Estate Management, Inc. ("FCREM"), which
owns and leases two branch offices to First Community. The principal executive
offices of the Company are located at 210 East Harriman, Bargersville, Indiana
46106 and its telephone number is (317) 442-5171.
The Company operates in predominantly rural and suburban markets and
embraces a community banking philosophy that emphasis personal service and
convenience, community involvement, local decision making authority, quick
responses to loan requests, and customized services.
The Company endeavors to provide its branch managers, lending
officers, tellers, and deposit service personnel with the authority to act
promptly in service of its customers within the scope of Company policies. This
highly responsive service attitude is enhanced by an efficient corporate
support staff and an investment in technology.
The Company believes the benefits of this operating philosophy
contributes to its success while providing improved operating efficiencies,
sound internal controls, and high credit underwriting standards.
The Company has decided to raise additional capital by issuing to
Eligible Holders Rights and Warrants to purchase additional Shares as provided
herein.
THE OFFERING
The Rights.................................The Company is issuing to Eligible
Holders Rights to subscribe, prior
to the Expiration Date (as defined
herein), to one (1) Share for each
ten (10) shares of Common Stock
owned of record on the Record Date
(as defined herein), subject to a
minimum offer and purchase of 100
Shares. The purchase price for the
Shares is $11.00 per share. Rights
not properly exercised by the
Expiration Date will lapse. The
Rights are freely transferable.
Re-Offer of Shares Not Otherwise
Subscribed For............................In the event less than all Rights
are initially exercised, the Company
may reoffer the remaining Shares
allocated to the Rights to those
Eligible Holders who have exercised
the Rights and purchased Shares in
the Rights Offering and indicated an
interest in acquiring additional
Shares. See "Subscription Rights."
3
<PAGE>
Purpose of Offering and Use of Proceeds....The purpose of this Offering is to
raise additional capital for general
corporate purposes and for First
Community. The net proceeds to the
Company from the sale of the Shares,
after deducting the expenses of the
Offering, are estimated to be
$1,404,250 if all the Rights and
Warrants are exercised. See "Use Of
Proceeds."
Dividends..................................The Company paid a cash dividend of
$.10 per share on March 15, 1997,
and a 5% stock dividend in February
1998. The Company is a legal entity
separate and distinct from First
Community. The principal source of
revenue for the Company is dividends
from First Community. Various legal
restrictions limit the extent to
which First Community may pay
dividends to the Company.
Subscription Price.........................The subscription price of Eleven
Dollars ($11.00) per share has been
established by the Board of
Directors of the Company. The price
per share is approximately 137% of
the book value per share of the
Company as of June 30, 1998 and
equal to the recent trading prices
of the Common Stock. See "Summary
Consolidated Financial Data" and
"Market For Common Stock and Related
Shareholder Matters."
Warrants...................................Each Eligible Holder is being issued
a Warrant to acquire one (1) share
of common stock at a price of $11.00
per share for each ten (10) shares
of Common Stock owned on the Record
Date, subject to a minimum offer and
purchase of 100 shares. The
Warrants are freely transferable and
may only be exercised during the
period commencing September 15, 1999
and continuing for a period of 90
days thereafter. The form of the
Warrant is attached hereto as Annex
"A".
Financial Information......................For the year ended December 31,
1997, and the six months ended June
30, 1998 the Company had
consolidated net income of
approximately $738,444 and $387,686
respectively.
THE RIGHTS AND WARRANTS HAVE NOT BEEN SEPARATELY VALUED BY THE
COMPANY. ACCORDINGLY, AN ELIGIBLE HOLDER MAY BE REQUIRED TO ALLOCATE BASIS FROM
CURRENTLY HELD SHARES OF COMMON STOCK TO THE RIGHTS, WARRANTS AND/OR SHARES
PURCHASED PURSUANT TO EITHER. HOLDERS OF THE RIGHTS AND WARRANTS SHOULD CONSULT
THEIR OWN TAX ADVISERS WITH RESPECT TO THE ALLOCATION OF BASIS TO THE RIGHTS,
WARRANTS AND/OR SHARES PURCHASED PURSUANT TO EITHER.
4
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The Consolidated Financial Data below summarizes historical
consolidated financial information of the Company for the periods indicated and
should be read in conjunction with the financial statements and other
information included elsewhere in this Prospectus and in the Company's annual
report on Form 10-K for the year ended December 31, 1997. The Unaudited
Consolidated Financial Data below for the interim periods indicated has been
derived from the Company's quarterly report on Form 10-Q for the six-month
period ended June 30, 1998, and should be read in conjunction with the
Unaudited Financial Statements and other information for such interim periods
included elsewhere in this Prospectus. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Index to
Consolidated Financial Statements." All adjustments considered necessary for a
fair presentation have, in the opinion of management, been included in the
unaudited interim data. Interim results for the six months ended June 30, 1998,
are not necessarily indicative of results that may be expected for future
periods including the year ending December 31, 1998.
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEARS ENDED
JUNE 30, DECEMBER 31,
-------------------- --------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
(DOLLARS IN 000'S EXCEPT SELECTED RATIOS PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Selected Results of Operations:
Interest income............. $4,096 $3,477 $7,361 $6,158 $5,074 $3,255 $2,583
Interest expense............ 2,215 1,796 3,807 3,166 2,953 1,699 1,308
----- ----- ----- ----- ----- ----- -----
Net interest income......... 1,881 1,681 3,554 2,992 2,121 1,556 1,275
Provision for loan losses 129 111 255 219 208 418 92
----- ----- ----- ----- ----- ----- -----
Net interest income after
provision for loan losses 1,752 1,570 3,299 2,773 1,913 1,138 1,183
Non-interest income......... 198 140 305 249 237 127 96
Non-interest expense........ 1,374 1,225 2,490 2,565 1,863 1,723 1,085
----- ----- ----- ----- ----- ----- -----
Income (loss) before income
tax expense.............. 576 485 1,114 457 287 (458) 194
Income tax expense (benefit) 188 162 376 116 11 (281) 30
----- ----- ----- ----- ----- ----- -----
$388 $323 $738 $341 $276 $(177) $164
===== ===== ===== ===== ===== ===== =====
Selected Ratios and Per Share Data*:
Basic earnings per share.... $0.18 $0.16 $0.75 $0.35 $0.29 $(0.26) $0.25
Diluted earnings per share.. $0.18 $0.16 $0.74 $0.34 $0.28 $(0.26) $0.24
Dividends per share......... $0.10 $0.10
Return on average assets.... .76% .77% .85% .46% .44% (.38%) .46%
Return on average equity.... 10.02 9.25 10.02 5.04 4.54 (4.48) 4.35
Average equity to average
assets................... 7.66 8.35 8.45 9.14 9.64 8.57 10.53
Dividend payout ratio....... 62.50 13.33
JUNE 30, DECEMBER 31,
------------ ---------------------------------------------------
1998 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ----
(DOLLARS IN 000's)
Selected Balance Sheet Data:.....
Assets...................... $104,147 $98,740 $80,079 $71,393 $57,857 $43,617
Loans....................... 86,995 80,001 65,108 54,636 39,508 27,041
Allowance for loan losses... 912 848 644 518 362 161
Deposits.................... 92,755 87,695 70,552 59,163 46,184 36,616
Federal Home Loan Bank
advances................. 2,930 2,930 2,379 4,603 5,314 2,507
Total shareholders' equity.. 7,931 7,550 6,886 6,442 6,145 3,818
</TABLE>
* Per share has been restated to reflect the 1994 stock dividend, the 1995
stock split and the stock dividend declared in 1997.
SIMULTANEOUS OFFERING
The Company is also engaged in a best efforts offering of up to
$1,000,000 in aggregate principal amount of 7% Convertible Notes (the "Notes"),
which are convertible to Common Stock at the rate of $12.10 per share. Proceeds
from the Notes, if any, will be used primarily for capital for First Community
and FCREM. This distribution and the offering of Notes are not conditioned on
each other.
5
<PAGE>
RISK FACTORS
Prospective investors should carefully consider, together with the
other information contained in this Prospectus, the following risk factors in
evaluating the Company and its business before purchasing any Shares pursuant
to an exercise of Rights or Warrants. Certain statements in this Prospectus
constitute "forward looking statements" within the meaning of Section 27A of
the Securities Act and Section 21E of the Exchange Act. Such forward looking
statements involve known and unknown risks, uncertainties, and other factors
that may cause actual results, performance, or achievements of the Company or
First Community to differ materially from any future results, performance, or
achievements expressed or implied by such forward looking statements. Certain
of those risk and uncertainties are set forth below.
DIVIDEND POLICY
The Company is a legal entity separate and distinct from First
Community although the principal source of the Company's cash revenues is
derived from First Community. The right of the Company to participate in the
assets of any subsidiary upon the latter's liquidation, reorganization, or
otherwise will be subject to the claims of the subsidiary's creditors, which
will have priority except to the extent that the Company may itself be a
creditor with a recognized claim. Payment of dividends by First Community is
restricted by various legal and regulatory limitations. The Company has only
declared a cash dividend on one occasion. These Shares should not be purchased
by persons who need or desire dividend income. See "Market for Common Stock and
Related Shareholder Matters" and "Description of Securities - Capital Stock".
LIMITED MARKET FOR SHARES
The shares of Common Stock are not listed for trading on any stock
exchange or the Nasdaq Stock Market and there is only a limited market for the
Common Stock. There can be no assurance that any significant market will
develop in the future. There is one market maker in the Common Stock and the
holders of Common Stock may experience difficulty in reselling shares if they
need to liquidate their holdings.
ADEQUACY OF ALLOWANCE FOR LOAN LOSSES
The risk of loan losses varies with, among other things, general
economic conditions, the type of loan being made, the credit worthiness of the
borrower over the term of the loan, and in the case of a collateralized loan,
the value of the collateral for the loan. Management maintains an allowance for
loan losses based upon, among other things, historical experience, an
evaluation of economic conditions, and regular review of delinquencies and loan
portfolio quality. Based upon such factors, management makes various
assumptions and judgments about the ultimate collectability of the loan
portfolio and provides an allowance for loan losses based upon a percentage of
the aggregate balance of outstanding loans and specific loans for which
ultimate collectability is considered questionable. If management's assumptions
and judgment prove to be incorrect and the allowance for loan losses is
inadequate to absorb future credit losses, or if the bank regulatory
authorities require First Community to increase the allowance for loan losses,
First Community's earnings (and consequently the Company's earnings) may be
significantly and adversely affected. Because certain lending activities
involve greater risk, the percentage applied to specific loan types may vary.
First Community actively manages its non-performing loans in an effort
to minimize credit losses and monitors its asset quality to maintain an
adequate allowance for loan losses. Although management believes its allowance
for loan losses is adequate, there can be no assurances that the allowance will
prove sufficient to cover future credit losses. Further, although management
uses the best information available to make determinations with respect to the
allowance for losses, future adjustments may be necessary if economic
conditions differ substantially from the assumptions used or if adverse
developments arise with respect to First Community's non-performing or
performing loans. Material additions to First Community's allowance for loan
losses would result in a decrease in First Community's net income, possibly its
capital, and could result in the inability to pay dividends among other adverse
consequences. See "Business - Nonperforming Assets and Allowance for Loan
Losses."
6
<PAGE>
EFFECT OF INTEREST RATE FLUCTUATIONS AND ECONOMIC CONDITIONS
The Company's consolidated results of operations depend to a large
extent on the level of its net interest income which is the difference between
interest income from interest earning assets (such as loans and investments)
and interest expense on interest bearing liabilities (such as deposits and
borrowings). If interest rate fluctuations cause its cost of deposits and
borrowings to increase faster than the yield on its interest earning assets,
net interest income will be reduced. The Company measures its interest rate
risk monthly using static gap analysis. The difference between an institution's
interest rate sensitive assets and its interest rate sensitive liabilities at a
point in time is its gap position. A negative gap indicates that the cumulative
interest rate sensitive liabilities exceed cumulative interest rate sensitive
assets for that period. A positive gap indicates that cumulative interest rate
sensitive assets exceed interest rate sensitive liabilities for that period.
Fluctuations in interest rates are not predictable or controllable. The
Company endeavors to structure its asset and liability strategies to mitigate
the impact of changes in market interest rates on net interest income. However,
there can be no assurances that the Company will be able to manage interest rate
risk so as to avoid significant adverse effects in net interest income. At June
30, 1998 and December 31, 1997, the Company had a one-year cumulative
interest-rate gap of a negative 23.52 and 24.26 percent respectively. This
negative interest-rate gap may have a negative impact on earnings in a rising
interest rate environment. While the Company uses various monitors of interest
rate risk, it is unable to predict future fluctuations in interest rates or the
specific impact thereof. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
COMPETITION
Banking institutions operate in a highly competitive environment. The
Company and First Community compete with other banks and thrift holding
companies, commercial banks, credit unions, savings institutions, finance
companies, mortgage companies, mutual funds, and other financial institutions,
many of which have substantially greater financial and other resources than the
Company and First Community. Certain of these competitors offer products and
services that are not offered by First Community and certain competitors are
not subject to the same extensive laws and regulations as the Company and First
Community. Federal and state legislation and regulations also affect the
Company's competitiveness in the financial services business. It is impossible
to predict the competitive impact on the Company and First Community of certain
federal and state legislation and/or regulations relating to the banking
industry and interstate banking.
ECONOMIC CONDITIONS AND MONETARY POLICY
The operating results of the Company depend to a great extent upon the
rate differentials between the income it receives from its loans, securities,
and other interest earning assets and the interest expense it pays on its
deposits and other interest bearing liabilities. These rate differentials are
highly sensitive to many factors beyond the control of the Company, including
general economic conditions and the policies of various governmental and
regulatory authorities, in particular the Federal Reserve.
Like other depository institutions, the Company is affected by the
monetary policies implemented by the Federal Reserve. The primary instrument of
monetary policy employed by the Federal Reserve is the restriction of the
expansion of the money supply through open market operations, including the
purchase and sale of government securities and the adjustment of reserve
requirements. These actions may at times result in significant fluctuations in
interest rates, which could have adverse effects on the operations of the
Company. In particular, the Company's ability to make loans and attract
deposits, as well as public demand for loans, could be adversely affected.
LOCAL ECONOMIC CONDITIONS
The success of the Company is dependent to a certain extent on the
general economic conditions in the geographical market served by First
Community. Although the Company expects that economic conditions will continue
to be favorable in these markets, no assurance can be given that favorable
economic conditions will continue to prevail. Adverse changes in economic
conditions in the geographic markets that First Community serves could result
in lower lending activity, impair First Community's ability to collect existing
loans, or otherwise have a negative effect on the operating results and
financial condition of the Company.
7
<PAGE>
RISKS OF GROWTH
The Company has experienced steady growth over the past five years in,
among other things, assets, loans and deposits. Such growth places a strain on
management to recruit, train and retain employees, maintain prescribed loan
underwriting practices and generate or obtain adequate capital. The Company
also plans to open one additional office during the fourth quarter of 1998 and
another one during the first half of 1999. There can be no assurance that this
growth will continue and any new location may be only marginally profitable or
unprofitable. The Company's inability to effectively manage such growth could
have a negative impact upon the financial results and condition of the Company.
GOVERNMENT REGULATION
The Company and First Community are each subject to extensive state
and federal governmental supervision, regulation, and control. Future
legislation and government policy could adversely affect the banking industry
and the operations of the Company and First Community. See "Business -
Regulation and Supervision of the Company" and "- Regulation and Supervision of
First Community."
YEAR 2000 COMPLIANCE
The Company, like most companies, faces a potentially serious
information systems (computer) problem because many software applications and
operational programs written in the past may not properly recognize calendar
dates beginning in the year 2000. This problem could force computers to either
shut down or provide incorrect data or information. The Company has begun the
process of identifying the changes required to computer programs hardware.
While the Company believes it is taking all appropriate steps to assure year
2000 compliance, it is dependent on vendor compliance. The bulk of the
Company's computer processing is provided under contract by Computer Services,
Inc. ("CSI"). CSI has advised the Company that it expects to be in year 2000
compliance by December 31, 1998. The Company is requiring all software and
systems vendors to represent that the services and products provided are, or
will be, year 2000 compliant, and will be testing compliance. The Company
expects to complete testing by March 31, 1999.
8
<PAGE>
SUBSCRIPTION RIGHTS
Upon the terms and subject to the conditions contained herein, the
Company hereby grants to each of its shareholders as of 5:00 p.m., [ ], 1998
and their assigns (collectively referred to as "Eligible Holders") the right to
subscribe for the purchase of shares of Common Stock at the price of Eleven
Dollars ($11.00) per share (the "Subscription Price"). Each Eligible Holder of
the Company will receive the right to buy one (1) Share for each ten (10)
shares of Common Stock owned by the shareholder as of 5:00 p.m., Indianapolis,
Indiana time on [ ], 1998 ("Record Date"), subject to a minimum offer and
purchase of 100 shares. An Eligible Holder may, subject to the minimum purchase
requirement, subscribe to purchase less than the maximum number of Shares which
he/she has been granted the right to purchase. No fractional Shares may be
subscribed for. The Rights are freely transferable. Eligible Holders will also
receive a Warrant to purchase one (1) Share for each ten (10) Shares owned on
the Record Date, subject to a minimum offer and purchase of 100 Shares. See
"Description of Securities - Warrants" and Annex "A".
EXPIRATION DATE. The Rights expire at 5:00 p.m., Indianapolis, Indiana
time, on [ ], 1998, unless extended by the Company for up to an additional 15
days (the "Expiration Date"), and if such Rights are not exercised prior to
that time, they will be void.
METHOD OF EXERCISING SUBSCRIPTION RIGHTS. Eligible Holders may
exercise Rights granted hereby by completing and executing the Subscription
Agreement enclosed with this Prospectus and delivering the Subscription
Agreement, along with payment of the full Subscription Price, to the Company at
the address set forth on the Subscription Agreement, not later than the
Expiration Date. The form of the Subscription Agreement is attached hereto as
Annex "B". The Subscription Price must be paid by check, wire transfer, bank
draft or money order, payable to the Company. If an Eligible Holder desires to
purchase more Shares than his or her initial Right, he or she should sign the
appropriate section of the Subscription Agreement and indicate the maximum
number of additional Shares he or she will purchase at the Subscription Price
if unsold shares are reoffered. Eligible Holders should be aware that risk of
delivery will be with them.
If an Eligible Holder wishes to exercise the Rights and time will not
permit the Subscription Agreement to reach the Company before the Expiration
Date, the subscription will be accepted (subject to subsequent receipt of a
duly executed Subscription Agreement) if, on or before the Expiration Date, the
Company has received payment of the Subscription Price and a telecopy of the
signed Subscription Agreement.
There is no minimum number of Shares which must be sold before the
Company may consummate the sale of any Shares.
DELIVERY OF CERTIFICATES. Certificates for Shares subscribed for by
Eligible Holders will be delivered to them as soon as practicable after the
Expiration Date.
REOFFER OF SHARES. In the event not all of the Shares allocated to the
Rights are purchased, the Company in its discretion may offer such Shares to
those Eligible Holders who exercised their Rights and indicated an interest in
purchasing more Shares.
USE OF PROCEEDS
The net proceeds of the Exercise of Rights, after deduction of
estimated offering expenses, will aggregate approximately $1,404,250, assuming
the Rights are fully subscribed for. Approximately $200,000 will be used by
the Company for general corporate purposes and the balance of approximately
$1,204,250 will be used by First Community to support asset growth. Net
proceeds from the exercise of the Warrants, if any, will be used for similar
purposes. Pending such uses, the Company will invest the net proceeds
temporarily in short and medium-term securities eligible for investment by
financial institutions.
9
<PAGE>
MARKET FOR COMMON STOCK AND RELATED SHAREHOLDER MATTERS
The following table sets forth the high and low bid prices for the
Company's Common Stock for the periods indicated, based upon information
obtained by management of the Company from the only broker known by the Company
to make a market in the Company's Common Stock, and on other price information
made available to management of the Company. Management of the Company has not
verified the accuracy of the following information. There is no established
public trading market for the Company's Common Stock. The common stock is
traded on a limited basis and many trades have involved privately negotiated
transactions. As a result, the Company is not always aware of the price at
which trades occur. The referenced prices may not reflect an actual trading
range and may reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
BID PRICE PER SHARE
-------------------
1998 1997 1996
-----------------------------------------------------------
QUARTER HIGH LOW HIGH LOW HIGH LOW
------- ---- --- ---- --- ---- ---
<S> <C> <C> <C> <C> <C> <C>
First Quarter $10.50 $10.00 $11.43 $10.48 $10.48 $9.52
Second Quarter $11.00 $10.50 $11.43 $10.48 $10.48 $9.52
Third Quarter* $11.00 $10.50 $11.43 $10.48 $11.43 $9.52
Fourth Quarter $11.43 $10.48 $11.43 $10.48
</TABLE>
* Through August 31, 1998.
The Company paid its first cash dividend of $.10 per share on March
15, 1997 to shareholders of record on January 1, 1997. On November 19, 1997,
the Board of Directors declared a 5% stock dividend payable on February 1,
1998. Any future dividend payments by the Company will be dependent upon
dividends paid by First Community and subject to regulatory limitations. The
price per share in the above table has been restated to reflect the 1997 stock
dividend.
The dividends which the Company may pay are restricted by Indiana law
to retained earnings. The ability of the Company to pay dividends to
shareholders is dependent on dividends received from First Community. Without
prior approval, current regulations allow First Community to pay dividends to
the Company not exceeding net profits (as defined) for the current year plus
retained net profits for the previous two years. First Community is also
restricted by the office of Thrift Supervision for the amount of the liquidation
account established at the time of its stock conversion. First Community
normally restricts dividends to a lesser amount because of the need to maintain
an adequate capital structure. At June 30, 1998, the stockholder's equity of
First Community was $7,746,000, of which a minimum of $1,460,000 was available
for dividends.
The number of record holders of the Company's Common Stock as of
August 31, 1998 was 283.
10
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at
June 30, 1998, both actual and as adjusted to reflect (i) the sale of all the
Notes in the Note Offering and (ii) the exercise of all Rights granted hereby
(and before deducting estimated offering expenses). The "as adjusted"
information does not reflect the sale of any shares of Common Stock pursuant to
the exercise of the Warrants or conversion of the Notes. Both the Rights and
Notes are being offered on a best-efforts basis and there can be no assurance as
to how many, if any, will be sold. The information set forth below should be
read in conjunction with the consolidated financial statements and related notes
included elsewhere in this Prospectus.
ACTUAL AS ADJUSTED
------ -----------
Secured obligations............................ $2,929,789 $2,929,789
Notes.......................................... -0- 1,000,000
----------- -----------
Total borrowings 2,929,789 3,929,789
----------- -----------
Stockholders' Equity
Preferred Stock, no par value:
1,000,000 shares authorized, none issued.. -0- -0-
Common stock, no par value:
4,000,000 shares authorized,
989,848 shares issued (actual),
and 1,120,848 shares (as adjusted)........ 6,722,251 8,163,251
Retained earnings and contributed capital 1,182,482 1,182,482
Accumulated other comprehensive income ...... 25,958 25,958
----------- -----------
Stockholders' Equity..................... 7,930,691 9,371,691
----------- -----------
Total Borrowings and Stockholders' Equity $10,860,480 $13,301,480
=========== ===========
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
First Community is a subsidiary of the Company and operates as an
Indiana commercial bank. As a bank holding Company, the Company depends upon
the operations of its subsidiaries for substantially all revenue and reports
its results of operations on a consolidated basis with its subsidiaries
First Community's profitability depends primarily upon the difference
between income on its loans and investments and the cost of its deposits and
borrowings. This difference is referred to as the spread or net interest
margin. The difference between the amount of interest earned on loans and
investments and the interest incurred on deposits and borrowings is referred to
as net interest income. Interest income from loans and investments is a
function of the amount of loans and investments outstanding during the period
and the interest rates earned. Interest expense related to deposits and
borrowings is a function of the amount of deposits and borrowings outstanding
during the period and the interest rates paid.
On May 26, 1998, the Company formed a new subsidiary, First Community
Real Estate Management, Inc. whose purpose is to purchase and lease back to
First Community properties currently owned by First Community thereby allowing
First Community to redeploy its capital to other uses. To that end, on July 15,
1998, FCREM borrowed $800,000 at a rate of 1.125% under prime, adjustable every
5 years for a term of 30 years, from another financial institution in order to
purchase the land and building of First Community's Bargersville branch office
at 210 E. Harriman Ave. in Bargersville, Indiana and the land and building of
its Banta Street office at 597 Banta Street in Franklin, Indiana. First
Community will make monthly lease payments to FCREM as lessee of these
locations. These lease payments will be sufficient to service the debt.
11
<PAGE>
RESULTS OF OPERATIONS
Three and Six Months Ended June 30, 1998 and 1997
- -------------------------------------------------
Net income increased from $322,506 to $387,686 for the six months, and
from $159,265 to $179,692 for the three months ending June 30, 1997 and 1998,
respectively. Basic earnings per share increased from $.33 to $.39 for the six
month period, and from $.16 to $.18 for the three month period ended June 30,
1997 and 1998, respectively. Net interest income increased from $1,681,205 to
$1,880,546 for the six months, and from $866,127 to $965,058 for the three
months, ended June 30, 1997 and 1998, respectively.
The increase in net income for both periods was primarily due to the
increase in net interest income offset by general increases in other expense.
The increase in net interest income for both periods was primarily due to
increases in income on loans and short-term interest-bearing time deposits
offset by an increase in interest expense on deposits. These increases in
interest income and expense resulted primarily from increases in the volume of
these interest-earning assets and interest-bearing liabilities. Income from
service charges on deposit accounts increased from $111,746 to $148,956 for the
six months, and from $56,236 to $76,328 for the three months, ended June 30,
1997 and 1998, respectively. This increase was primarily due to an increase in
the number of deposit accounts. The increases in other expenses were a direct
result of the overall growth of First Community. Income taxes increased $25,889
for the six months ended June 30, 1998, when compared to the same period in
1997, because of the increase in the Company's income before taxes of $91,069.
Year Ended December 31, 1997, 1996 and 1995
- -------------------------------------------
Net income for the year ended December 31, 1997 was $738,000 compared
to $341,000 and $276,000 for the years ended December 31, 1996 and 1995,
respectively. Earnings increased from 1995 to 1997 primarily as a result of
growth in First Community's loans and certain other items discussed more fully
below.
The increase in net interest income of $562,000 in 1997 resulted
primarily from an increase in lending and the income derived therefrom. Net
loans outstanding increased $14,688,000 in 1997, with the most significant
areas of growth being in mortgage and construction loans. The increase in
provision for loan losses from $219,000 to $255,000 is a reflection of an
increase in the loan portfolio and not a deterioration of the same. The
increase in income from service fees of $69,000 resulted from a significant
increase in the number of deposit accounts and fees associated with the same.
The decrease in deposit insurance expense of $408,000 was due to the FDIC
special assessment for all institutions with SAIF insured deposits which the
Bank incurred in 1996 only. The assessment amounted to additional expense in
1996 of $344,000. Income taxes increased $260,000 because of an increase in
First Community's overall taxable income.
The increase in net interest income of $871,000 in 1996 resulted
primarily from an increase in lending and the income derived therefrom. Net
loans outstanding increased $10,346,000 in 1996, with growth in the majority of
the lending areas. The increase in provision for loan losses from $208,000 to
$219,000 is a reflection of an increase in the loan portfolio and not a
deterioration of the same. The increase in income from service fees of $51,000
resulted from a significant increase in the number of deposit accounts and fees
associated with the same. The increase in other expenses is primarily
attributable to the signing of the omnibus appropriations bill on September 30,
1996, which imposed a FDIC special assessment for all institutions with SAIF
insured deposits. This assessment amounted to $344,000 and is included in
deposit insurance expense for the year ending December 31, 1996. Other expenses
also increased due to overall growth. Income taxes increased $105,000 in 1996
due to an increase in First Community's overall taxable income.
Net interest income increased $565,000 in 1995 due primarily to an
increase in loans. The increase in net interest income resulted primarily from
an increase in lending and the income derived therefrom. Net loans outstanding
increased $14,971,000 in 1995, with the most significant areas of growth being
in commercial and installment lending. The decrease in provision for loan loss
from $418,000 to $208,000 is a reflection of the increase in the quality of the
loan portfolio and a decrease in loan chargeoffs. The increase in income from
other service fees of $55,000 resulted from a significant increase in the
number of deposit accounts and fees associated with the same. In addition,
other income increased $43,000 due to the settlement of a suit with a former
provider of services. First Community owned a parcel of land in Trafalgar,
Indiana and sold this for a gain of $22,000 in March of 1995. The increases in
other expenses are a direct result of the overall growth of First Community.
Legal and professional fees decreased $124,000 due to a decrease in the number
and scope of legal matters in
12
<PAGE>
1995. Income taxes increased $292,000 in 1995 because of an increase in First
Community's overall taxable income.
The following table sets forth the average balance sheet amounts, the
related interest income or expense and average rates earned or paid for the
years ended December 31, 1997 and 1996.
<TABLE>
<CAPTION>
1997 1996
-------------------------------------- ---------------------------------------
INTEREST/ INTEREST/
AVERAGE INCOME AVERAGE AVERAGE INCOME AVERAGE
BALANCE EXPENSE RATE BALANCE EXPENSE RATE
------- --------- ------- ------- --------- -------
(DOLLARS IN 000'S ON FULLY TAXABLE EQUIVALENT BASIS)
<S> <C> <C> <C> <C> <C> <C>
Assets:
Interest-bearing deposits $ 5,848 $ 230 3.9% $ 5,287 $ 208 3.9%
Investment securities: (1)
Taxable 2,604 245 9.4 2,972 259 8.7
Tax-exempt 2,505 143 5.7 2,959 168 5.7
---------- ---------- ----------- ----------
Total investment securities 5,109 388 7.6 5,931 427 7.2
---------- ---------- ----------- ----------
Loans: (2)
Commercial.................... 25,794 2,589 10.0 20,989 2,112 10.1
Real estate mortgage.......... 21,043 1,887 9.0 17,807 1,592 8.9
Installment................... 23,825 2,161 9.1 19,052 1,748 9.2
Tax-exempt loans and leases... 2,386 192 8.0 2,013 151 7.5
---------- ---------- ----------- ----------
Total loans...................... 73,048 6,829 9.3 59,861 5,603 9.4
---------- ---------- ----------- ----------
Total earning assets............. 84,005 7,447 8.9 71,079 6,238 8.8
---------- ----------
Allowance for loan losses........ (720) (569)
Cash and due from banks.......... 985 838
Premises and equipment........... 1,876 1,458
Other assets..................... 980 1,192
---------- ----------
Total assets..................... $ 87,126 $ 73,998
========== ==========
Liabilities:
Interest-bearing deposits:
NOW accounts..................... $ 9,281 $ 243 2.6 $ 7,719 $ 202 2.6
Savings.......................... 15,655 694 4.4 14,322 638 4.5
Certificates of deposit and
other time deposits........... 46,958 2,758 5.9 36,480 2,106 5.8
---------- ---------- ----------- ----------
Total interest-bearing deposits.. 71,894 3,695 5.1 58,521 2,946 5.0
FHLB advances.................... 1,830 112 6.1 3,503 220 6.3
---------- ---------- ----------- ----------
Total interest-bearing liabilities 73,724 3,807 5.2 62,024 3,166 5.1
---------- ----------
Noninterest-bearing demand
deposits...................... 5,587 4,875
Other liabilities................ 451 337
---------- -----------
Total liabilities................ 79,762 67,236
Stockholders' equity............. 7,364 6,762
---------- -----------
Total liabilities and stockholders'
equity........................... $ 87,126 $ 73,998
========== ===========
Net interest income.............. $ 3,640 4.3%(3) $ 3,072 4.3%(3)
========== ==========
Adjustments to convert tax-exempt
investment securities to fully taxable
equivalent basis, using marginal rate
of 34% after adjustment for effect of
non-deductible interest expense
attributed to such assets........ $ 86 $ 80
========== ===========
</TABLE>
- -------------------
(1) The average balances of investment securities, including available for
sale securities, are computed on historical cost and do not include any
fair value adjustments.
(2) Nonaccruing loans have been included in the average balances.
(3) Net interest income divided by total earning assets.
13
<PAGE>
CHANGES IN INTEREST INCOME AND EXPENSE COMPARING DECEMBER 31, 1997 AND
1996 AND DECEMBER 31, 1996 AND 1995. The following tables analyze the changes
in interest income and interest expense comparing the years ended December 31,
1997 and 1996 and December 31, 1996 and 1995. It distinguishes between the
changes due to differences in volume (outstanding balances), the changes due to
changes in interest rates, and changes attributable to both rate and volume,
which cannot be separately identified and have been allocated proportionately
to the change due to volume and the change due to rate.
<TABLE>
<CAPTION>
INCREASE (DECREASE) IN NET INTEREST INCOME
---------------------------------------------------------
YEAR ENDED DECEMBER 31, 1997
COMPARED TO YEAR NET DUE TO DUE TO
ENDED DECEMBER 31, 1996 CHANGE RATE VOLUME
------ ---- ------
(DOLLARS IN 000'S)
<S> <C> <C> <C>
Interest-earning assets:
Loans................................................ $1,226 $ (7) $1,233
Investment securities................................ (39) 23 (62)
Interest-bearing deposits............................ 22 22
------ ------ ------
Total............................................ 1,209 16 1,193
------ ------ ------
Interest-bearing liabilities:
Savings................................................ 56 (3) 59
Interest-bearing checking.............................. 41 41
Certificates of deposit................................ 652 37 615
FHLB advances.......................................... (108) (5) (103)
------ ------ ------
Total............................................... 641 29 612
------ ------ ------
Net change in net interest income...................... $ 568 $ (13) $ 581
------ ------ ------
INCREASE (DECREASE) IN NET INTEREST INCOME
---------------------------------------------------------
YEAR ENDED DECEMBER 31, 1996
COMPARED TO YEAR NET DUE TO DUE TO
ENDED DECEMBER 31, 1995 CHANGE RATE VOLUME
------ ---- ------
(DOLLARS IN 000'S)
Interest-earning assets:
Loans.................................................. $1,131 $ (94) $1,225
Investment securities.................................. (145) 93 (238)
Interest-bearing deposits.............................. 38 0 38
------ ------ ------
Total............................................... 1,024 (1) 1,025
------ ------ ------
Interest-bearing liabilities:
Savings................................................ 152 (28) 180
Interest-bearing checking.............................. 46 (5) 51
Certificates of deposit................................ (8) (105) 97
FHLB advances.......................................... 22 (24) 46
------ ------ ------
Total............................................... 212 (162) 374
------ ------ ------
Net change in net interest income...................... $ 812 $ 161 $ 651
====== ====== ======
</TABLE>
FINANCIAL CONDITION
ASSET/DEPOSIT BASE. First Community has experienced significant
growth in assets and deposits. Management believes this growth can be
attributed to several factors, none of which can be singled out as the
predominant reason for the growth, but each of which is believed to have
contributed to the increase in assets from $43,617,000 at December 31, 1993 to
$98,740,000 at December 31, 1997 to $104,147,000 at June 30, 1998 and deposits
from $36,616,000 at December 31, 1993 to $87,695,000 at December 31, 1997 to
$92,755,430 at June 30, 1998. These factors include: (i) increased population
in the geographic area serviced; (ii) increased per-household disposable income
in the geographic area serviced; (iii) movement of the home office of one of
the locally owned banks away from the city in which the Company is located;
(iv) the acquisition of certain local
14
<PAGE>
financial institutions by larger metropolitan area banks and the preference of
certain individuals in the service area for dealing with a locally owned
institution; and (v) the expansion into new communities with the opening of the
Franklin, Indianapolis and Trafalgar branches in 1992 and the opening of the
North Vernon branch in 1993. First Community also opened a second branch in
Franklin, Indiana on October 31, 1996.
First Community currently classifies loans as substandard, doubtful
and loss to assist management in addressing collection risks and pursuant to
regulatory requirements which are not necessarily consistent with generally
accepted accounting principles. Substandard loans represent credits
characterized by the distinct possibility that some loss will be sustained if
deficiencies are not corrected. Doubtful loans possess the characteristics of
substandard loans, but collection or liquidation in full is doubtful based upon
existing facts, conditions and values. A loan classified as a loss is
considered uncollectible. As of June 30, 1998, First Community had $785,881 of
loans classified as substandard, none as doubtful and none as loss. At
December 31, 1997, First Community had $388,752 of loans classified as
substandard, none as doubtful and none as loss. The allowance for loan losses
was $912,357 or 1.1% of net loans receivable at June 30, 1998 compared to
$848,085 or 1.1% of net loans receivable at December 31, 1997. A portion of
classified loans are non-accrual loans. First Community had non-accrual loans
totaling $236,241 at June 30, 1998 compared to $204,070 at December 31, 1997.
ASSET/LIABILITY MANAGEMENT. One of the actions undertaken by First
Community's management has been to adopt asset/liability management policies in
an attempt to reduce the susceptibility of First Community's net interest
spread to the adverse impact of volatile interest by attempting to match
maturities (or time-to-repricing) of assets with maturities or repricing of
liabilities and then actively managing any mismatch. Accomplishing this
objective requires attention to both the asset and liability sides of the
balance sheet. The difference between maturity of assets and maturity of
liabilities is measured by the interest-rate gap.
First Community's one-year cumulative interest-rate gap as a percent
of total assets was a negative 23.52% and 24.26% at June 30, 1998 and December
31, 1997, respectively. This interest-rate gap represents substantial risk for
First Community in an environment of rising interest rates. A negative
interest-rate gap means First Community's earnings are vulnerable to periods of
rising interest rates because during such periods the interest expense paid on
liabilities will generally increase more rapidly than the interest income
earned on assets. Conversely, in a falling interest-rate environment, the
total expense paid on liabilities will generally decrease more rapidly than the
interest income earned on assets. A positive interest-rate gap would have the
opposite effect.
Asset management goals have been directed toward obtaining a suitable
balance of asset quality, liquidity and diversification in order to stabilize
and improve earnings. The asset management strategy has concentrated on
shortening the maturity of its loan portfolio by increasing adjustable-rate
loans and short-term installment and commercial loans. At December 31, 1997,
First Community had $40,779,000 or 51.04% of its total loan portfolio invested
in installment and commercial loans as compared to $36,485,000 or 56.10% of
total loans invested in installment and commercial loans at December 31, 1996.
Increasing short-term installment and commercial loans increases the overall
risk of the loan portfolio. Such risk relates primarily to collection and to
the loans that often are secured by rapidly depreciating assets. First
Community's ratio of non-performing assets to total assets was .77% and .42% at
June 30, 1998 and December 31, 1997, respectively.
The primary goal in the management of liabilities has been to increase
core deposit realtionships and therefore improve the stability of deposit
accounts. Management has attempted to combine a policy for controlled growth
with a strong, loyal customer base to control interest expense.
15
<PAGE>
The following tables illustrate the interest-rate sensitivity of
interest-earning assets and interest-bearing liabilities at June 30, 1998 and
December 31, 1997. Mortgages which have adjustable or renegotiable interest
rates are shown as subject to change every one to three years based upon the
contracted-for adjustment period. This schedule does not reflect the effects
of possible prepayments on enforcement of due-on-sale clauses.
<TABLE>
<CAPTION>
AT JUNE 30, 1998 MATURING OR REPRICING
--------------------------------------
ONE YEAR 1 - 3 3 - 5 OVER 5
OR LESS YEARS YEARS YEARS TOTAL
-------- ----- ----- ------ -----
(DOLLARS IN 000'S)
<S> <C> <C> <C> <C> <C>
Interest-bearing assets:
Adjustable rate mortgages........ $ 13,329 $ 3,595 $ 4,711 $ 110 $ 21,745
Fixed rate mortgages............. 4,493 2,226 2,166 10,511 19,396
Commercial loans................. 13,124 1,645 825 573 16,167
Consumer loans................... 8,733 11,697 4,883 1,125 26,438
Tax-exempt loans and leases...... 28 -0- -0- 3,221 3,249
Investments...................... 1,622 1,362 744 1,544 5,272
FHLB stock....................... 778 -0- -0- -0- 778
Interest-bearing deposits........ 7,198 -0- -0- -0- 7,198
---------- ---------- ----------- ---------- -----------
Total interest-earning assets.. 49,305 20,525 13,329 17,084 100,243
---------- ---------- ----------- ---------- -----------
Interest-bearing liabilities:
Fixed maturity deposits.......... 43,557 10,292 2,179 26 56,054
Other deposits................... 30,064 -0- -0- -0- 30,064
FHLB advances.................... 177 794 1,725 234 2,930
---------- ---------- ----------- ---------- -----------
Total interest-bearing liabilities 73,798 11,086 3,904 260 89,048
---------- ---------- ----------- ---------- -----------
Excess (deficiency) of
interest-earning assets over
interest-bearing
liabilities........................ $ (24,493) $ 9,439 $ 9,425 $ 16,824 $ 11,195
========== ========== =========== ========== ===========
Cumulative excess (deficiency)
of interest-earning assets over
interest-bearing liabilities $ (24,493) $ (15,054) $ (5,629) $ 11,195
Cumulative ratio at June 30,
1998 as a percent of total assets.. (23.52)% (14.45)% (5.40)% 10.75%
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997 MATURING OR REPRICING
------------------------------------------
ONE YEAR 1 - 3 3 - 5 OVER 5
OR LESS YEARS YEARS YEARS TOTAL
-------- ----- ----- ------ -----
(DOLLARS IN 000'S)
<S> <C> <C> <C> <C> <C>
Interest-bearing assets:
Adjustable rate mortgages........ $ 13,323 $ 4,316 $ 4,615 $ -0- $ 22,254
Fixed rate mortgages............. 3,992 1,971 1,901 $ 7,222 15,086
Commercial loans................. 11,622 1,309 687 639 14,257
Consumer loans................... 9,383 10,813 4,023 707 24,926
Tax-exempt loans and leases...... 24 -0- -0- 3,353 3,377
Investments...................... 1,295 1,893 238 1,054 4,480
FHLB stock....................... 778 -0- -0- -0- 778
Interest-bearing deposits........ 10,298 -0- -0- -0- 10,298
---------- ---------- ----------- ---------- -----------
Total interest-earning assets.. 50,715 20,302 11,464 12,975 95,456
---------- ---------- ----------- ---------- -----------
Interest-bearing liabilities:
Fixed maturity deposits.......... 38,544 11,283 1,919 -0- 51,746
Other deposits................... 25,949 -0- -0- -0- 35,949
FHLB advances.................... 177 794 1,725 234 2,930
---------- ---------- ----------- ---------- -----------
Total interest-bearing liabilities 74,670 12,077 3,644 234 90,625
---------- ---------- ----------- ---------- -----------
Excess (deficiency) of
interest-earning assets over
interest-bearing
liabilities........................ $ (23,955) $ 8,225 $ 7,820 $ 12,741 $ 4,831
========== ========== =========== ========== ===========
Cumulative excess (deficiency)
of interest-earning assets over
interest-bearing liabilities $ (23,955) $ (15,730) $ (7,910) $ 4,831
Cumulative ratio at December 31,
1997 as a percent of total assets.. (24.26)% (15.93)% (8.01)% 4.89%
</TABLE>
17
<PAGE>
The following tables provide information about the Company's
significant financial instruments at June 30, 1998 and December 31, 1997 that
are sensitive to changes in interest rates. The table presents principal cash
flows and related weighted average interest rates (on a tax equivalent basis)
by expected maturity dates.
<TABLE>
<CAPTION>
MATURING IN YEARS ENDING JUNE 30,
------------------------------------------------------------------------------------------
FAIR
1999 2000 2001 2002 2003 THEREAFTER TOTAL VALUE
---- ---- ---- ---- ---- ---------- ----- -----
(DOLLARS IN 000'S)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Investment securities
available for sale
Fixed rate $ 1,066 $ 820 $ 222 $ 309 $ 435 $ 1,252 $ 4,104 $ 4,104
Average interest rate 9.74% 9.27% 7.65% 7.03% 7.06% 8.28% 8.60%
Investment securities held
to maturity
Fixed rate $ 556 $ 215 $ 105 $ 292 $ 1,168 $ 1,192
Average interest rate 5.84% 6.72% 6.86% 6.85% 6.35%
Loans
Fixed rate $ 16,213 $ 8,035 $ 6,785 $ 4,766 $ 2,634 $ 14,947 $ 53,380 $ 54,129
Average interest rate 9.51% 9.24% 9.01% 8.80% 8.60% 7.52% 8.74%
Variable rate $ 8,774 $ 2,223 $ 2,037 $ 1,909 $ 1,119 $ 17,553 $ 33,615 $ 33,972
Average interest rate 10.14% 9.55% 9.37% 9.73% 9.64% 8.78% 9.30%
Liabilities
Deposits
NOW, Money Market and
Savings Deposits
Variable rate $ 30,064 $ 30,064 $ 30,064
Average interest rate 3.75% 3.75%
Certificates of Deposit
Fixed rate $ 43,557 $ 8,714 $ 1,578 $ 514 $ 1,665 $ 26 $ 56,054 $ 56,263
Average interest rate 5.87% 5.99% 5.89% 6.03% 6.07% 6.10% 5.90%
FHLB Advances
Fixed rate $ 177 $ 156 $ 638 $ 122 $ 1,603 $ 234 $ 2,930 $ 2,932
Average interest rate 6.01% 6.01% 6.05% 6.07% 5.77% 5.85% 5.87%
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
MATURING IN YEARS ENDING DECEMBER 31,
------------------------------------------------------------------------------------------
FAIR
1999 2000 2001 2002 2003 THEREAFTER TOTAL VALUE
---- ---- ---- ---- ---- ---------- ----- -----
(DOLLARS IN 000'S)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Investment securities
available for sale
Fixed rate $ 620 $ 1,043 $ 113 $ 109 $ 125 $ 761 $ 2,771 $ 2,771
Average interest rate 8.8% 10.3% 8.7% 9.6% 9.5% 10.3% 9.8%
Investment securities held
to maturity
Fixed rate $ 675 $ 632 $ 105 $ 5 $ 292 $ 1,709 $ 1,734
Average interest rate 5.4% 5.9% 6.9% 7.1% 7.2% 6.0%
Loans
Fixed rate $ 14,389 $ 7,760 $ 6,324 $ 4,135 $ 2,365 $ 11,921 $ 46,894 $ 47,800
Average interest rate 9.7% 9.4% 9.1% 8.9% 8.7% 8.0% 9.0%
Variable rate $ 8,676 $ 2,275 $ 923 $ 1,771 $ 927 $ 18,434 $ 33,006 $ 33,350
Average interest rate 10.3% 10.2% 9.6% 10.0% 9.6% 9.0% 9.5%
Liabilities
Deposits
NOW, Money Market and
Savings Deposits
Variable rate $ 28,325 $ 28,325 $ 28,325
Average interest rate 3.6% 3.6%
Certificates of Deposit
Fixed rate $ 38,544 $ 8,711 $ 2,572 $ 1,120 $ 799 $ 51,746 $ 52,997
Average interest rate 5.9% 6.0% 6.1% 5.9% 6.2% 6.0%
FHLB Advances
Fixed rate $ 177 $ 156 $ 638 $ 122 $ 1,603 $ 234 $ 2,930 $ 2,908
Average interest rate 6.0% 6.0% 6.1% 6.0% 5.8% 5.9% 5.9%
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Liquidity refers to the ability of a financial institution to generate
sufficient cash to fund current loan demand, meet savings deposit withdrawals
and pay operating expenses. The primary sources of liquidity are cash,
interest-bearing deposits in other financial institutions, marketable
securities, loan repayments, increased deposits and total institutional
borrowing capacity.
Management believes that it has adequate liquidity for the Company's
short- and long-term needs. Short-term liquidity needs resulting from normal
deposit/withdrawal functions are provided by the Company retaining a portion of
cash generated from operations in a Federal Home Loan Bank ("FHLB") daily
investment account. This account acts as a short-term liquidity source while
providing interest income to the Company. Long-term liquidity and other
liquidity needs are provided by the ability of the Company to borrow up to
$26,348,732 from the FHLB. The balance of its borrowings was $2,929,789 at
June 30, 1998 and December 31, 1997.
Cash and interest-bearing deposits, when combined with investments,
have decreased as a percentage of total assets primarily due to a shift to
higher yielding loans to improve margins. Management's goal is to maintain
cash, interest-bearing deposits and investments at a level sufficient to satisfy
needs for liquidity and other short-term obligations.
Liquidity, represented by cash and cash equivalents, is a result of its
operating, investing and financing activities. These activities are discussed
below for the years ended December 31, 1997 and December 31, 1996.
During 1997 and 1996, cash and cash equivalents which are defined as
cash and due from banks and interest-bearing time deposits increased $4,196,000
and $1,384,000, respectively. Cash was provided primarily from a net increase
in deposit accounts of $17,143,000 in 1997 and $11,389,000 in 1996. Cash was
used primarily to fund a net increase in loans of $15,062,000 in 1997 and
$10,587,000 in 1996.
At December 31, 1997 and 1996, commitments to fund loan originations
were approximately $5,606,000 and $9,022,000, respectively. In the opinion of
management, First Community has sufficient cash flow and borrowing capacity to
meet funding commitments and to maintain proper liquidity levels based upon
First Community's favorable liquidity ratio and the ability to borrow from the
FHLB.
At June 30, 1998, the Company had a capital to asset ratio of 7.62%.
At June 30, 1998, First Community had core capital of approximately 7.66% and
had risk-based capital in excess of 8.0%. The regulatory core and risk-based
capital requirements for First Community are 4.0% and 8.0% respectively.
ACCOUNTING MATTERS
During 1997, The Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, Reporting
Comprehensive Income, establishing standards for the reporting of comprehensive
income and its components in financial statements. SFAS No. 130 is applicable
to all entities that provide a full set of financial statements. Enterprises
that have no items of other comprehensive income in any period presented are
excluded from the scope of this Statement.
SFAS No. 130 is effective for interim and annual periods beginning
after December 15, 1997. Earlier application is permitted. The Company
adopted SFAS No. 130 during the first quarter of 1998.
19
<PAGE>
Also in 1997, the FASB issued SFAS No. 131, Disclosures About Segments
of an Enterprise and Related Information, which supersedes SFAS No. 14,
Financial Reporting for Segments of a Business Enterprise. It establishes
standards for the way that public enterprises report information about
operating segments in annual financial statements and requires reporting of
selected information about operating segments in interim financial statements
issued to the public. It also establishes standards for disclosures regarding
products and services, geographic areas and major customers. SFAS No. 131
defines operating segments as components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision-maker in deciding how to allocate resources an in assessing
performance.
This standard is effective for financial statement periods beginning
after December 15, 1997, and requires comparative information for earlier years
to be restated. Due to recent issuance of this standard, management has been
unable to fully evaluate the impact, if any, it may have on the Company's
future financial statement disclosures.
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and related data presented herein have been
prepared in accordance with generally accepted accounting principles. These
principles require the measurement of financial position and operating results
in terms of historical dollars, without considering changes in the relative
purchasing power of money over time due to inflation.
The primary assets and liabilities of the Company are monetary in
nature. Consequently, interest rates generally have a more significant impact
on performance than the effects of inflation. Interest rates, however, do not
necessarily move in the same direction or with the same magnitude as the price
of goods and services. In a period of rapidly rising interest rates, the
liquidity and the maturity structure of the Company's assets and liabilities
are critical to the maintenance of acceptable performance levels.
YEAR 2000 COMPLIANCE
The Company, like most companies, faces a potentially serious
information systems (computer) problem because many software applications and
operational programs written in the past may not properly recognize calendar
dates beginning in the year 2000. This problem could force computers to either
shut down or provide incorrect data or information. The Company has begun the
process of identifying the changes required to computer programs hardware.
While the Company believes it is taking all appropriate steps to assure year
2000 compliance, it is dependent on vendor compliance. The bulk of the
Company's computer processing is provided under contract by Computer Services,
Inc. ("CSI"). CSI has advised the Company that it expects to be in year 2000
compliance by December 31, 1998. The Company is requiring all software and
systems vendors to represent that the services and products provided are, or
will be, year 2000 compliant, and will be testing compliance. The Company
expects to complete testing by March 31, 1999.
Based on a preliminary study, the Company expects to spend
approximately $15,000 to $25,000 from 1998 through 1999 to modify its computer
information systems enabling proper processing of transactions relating to the
year 2000 and beyond. The Company continues to evaluate appropriate courses of
corrective action, including replacement of certain systems whose associated
costs would be recorded as assets and amortized. Accordingly, the Company does
not expect the amounts required to be expended over the next two years to have
a material effect on its financial position or results of operations. The
amount expensed in 1997 was immaterial. The Company has also begun to require
all significant commercial borrowers to certify their own year 2000 compliance
status as a part of the loan documentation and underwriting process.
20
<PAGE>
BUSINESS
GENERAL
The Company is a one-bank holding company incorporated in August 1991.
The Company's primary asset is its wholly-owned banking subsidiary, First
Community, an Indiana-chartered commercial bank formerly known as Bargersville
Federal Savings Bank. The Company recently formed FCREM as a wholly-owned
subsidiary to own and lease banking facilities to First Community.
At June 30, 1998, the Company had approximately $104.1 million of
assets, deposits of approximately $92.8 million and shareholders' equity of
approximately $7.9 million. First Community's primary business consists of
attracting deposits from the general public and originating real estate,
commercial and consumer loans and purchasing investments through its offices
located in Bargersville, Greenwood, Franklin, Indianapolis, Trafalgar, and
North Vernon, Indiana. As of June 30, 1998, First Community had 65 employees
of which 51 were full-time. The Company and FCREM have no employees.
First Community's deposits are insured to the maximum extent permitted
by law by the Savings Association Insurance Fund ("SAIF") of the Federal
Deposit Insurance Corporation ("FDIC"). First Community is a member of the
Federal Home Loan Bank ("FHLB") of Indianapolis. First Community is subject to
comprehensive regulation, examination and supervision by the Indiana Department
of Financial Institutions ("DFI") and the FDIC. The Company is subject to
regulation by the Federal Reserve Board. The Federal Reserve Board, as a
condition of the acquisition of First Community, required the Company to make a
commitment not to incur debt in excess of a 30% debt-to-equity ratio on an
unconsolidated basis.
The business of First Community consists primarily of attracting
deposits from the general public, originating residential real estate,
commercial and consumer loans and purchasing other types of investments. In
addition, First Community originates first mortgage income-producing property
real estate loans, second mortgage one-to-four family home loans, secured home
improvement loans, and savings deposit secured loans. Consumer loans include,
among others, new and used automobile and other secured and unsecured personal
loans. First Community offers small commercial loans to area businesses in
addition to new home construction loans and business lines of credit. First
Community also invests in various US Treasury, federal agency, state, municipal
and other investment securities permitted by applicable laws and regulations.
The principal sources of funds for First Community's lending activities include
deposits received from the general public, amortization and repayment of loans,
maturity of investment securities and FHLB advances.
First Community's primary sources of income are interest on loans,
investment securities and interest-bearing deposits in other financial
institutions and service charges on deposit accounts. Its principal expenses
are interest paid on deposit accounts and borrowings, salaries and employee
benefits, premises and equipment expenses and other overhead expenses incurred
in the operation of First Community.
21
<PAGE>
LENDING ACTIVITIES
The following table sets forth information concerning the composition
of First Community's loan portfolio in dollar amounts and percentages.
<TABLE>
<CAPTION>
AT DECEMBER 31,
1997 1996
-------------------------- -------------------------
PERCENT OF PERCENT OF
AMOUNT TOTAL AMOUNT TOTAL
------ ---------- ------ ----------
TYPE OF LOAN (DOLLARS IN 000'S)
<S> <C> <C> <C> <C>
Real estate loans
Residential mortgages
(1-4 single family homes) $28,971 36.60% $22,675 35.17%
Multi-family residential mortgages 335 .52
Construction and land development 6,773 8.55 3,621 5.62
Commercial loans 17,883 22.59 17,401 26.99
Installment loans 22,896 28.93 19,084 29.60
Tax-exempt loans and leases 3,377 4.27 1,922 2.99
------- ------ ------- ------
Loans 79,900 100.94 65,038 100.89
Allowance for losses (848) (1.07) (644) (1.00)
Deferred loan origination costs 100 .13 70 .11
------- ------ ------- ------
Loans, net $79,152 100.00% $64,464 100.00%
======= ====== ======= =======
</TABLE>
The following table sets forth certain information at December 31,
1997, regarding the dollar amount of loans maturing in First Community's loan
portfolio based on contractual maturities. Demand loans having no stated
schedule of repayments and no stated maturity and overdrafts are reported as
due in one year or less. This schedule does not reflect the effects of possible
prepayments or enforcement of due-on-sale clauses. Management expects
prepayments will cause actual maturities to be shorter. Certain mortgage loans
such as construction loans and second mortgage loans are included in the
commercial and installment loan totals below. In addition, commercial real
estate loans are included in real estate loans below.
<TABLE>
<CAPTION>
REMAINING MATURITIES
------------------------------------------------------------
BALANCE
OUTSTANDING AT
DECEMBER 31, ONE YEAR OVER ONE YEAR
1997 OR LESS TO FIVE YEARS OVER FIVE YEARS
------------------------------------------------------------
(DOLLARS IN 000'S)
<S> <C> <C> <C> <C>
Real estate loans $37,340 $ 7,719 $ 8,151 $21,470
Commercial loans 14,257 7,902 3,307 3,048
Installment loans 24,926 7,420 15,022 2,484
Tax-exempt loans and leases 3,377 24 0 3,353
------- ------- ------- -------
Total $79,900 $23,065 $26,480 $30,355
======= ======= ======= =======
</TABLE>
22
<PAGE>
The following table sets forth, as of December 31, 1997, the dollar
amount of all loans maturing after December 31, 1998 showing those having a
fixed interest rate and floating or adjustable interest rates.
FLOATING OR
FIXED RATE ADJUSTABLE RATE
---------- ---------------
TYPE OF LOAN (DOLLARS IN 000'S)
Real estate loans $15,086 $22,254
Commercial loans 5,616 8,641
Installment loans 22,815 2,111
Tax-exempt loans and leases 3,377 0
------- -------
46,894 33,006
Less amount due within one year 14,389 8,676
------- -------
Loans due after one year $32,505 $24,330
======= =======
The original contractual loan payment period for adjustable interest
rate residential loans originated by First Community normally ranges from 15 to
20 years. Current fixed rate mortgage originations may not exceed a 20-year
term. Because borrowers may refinance or prepay their loans, however, such
loans normally remain outstanding for a substantially shorter period of time.
Origination, Purchase and Sale of Loans. Interest rates charged by
First Community on its loans are affected primarily by loan demand and the
supply of funds available for lending. These factors are in turn affected by
general economic conditions and monetary policies of the federal government,
including the Federal Reserve Board, the general supply of money in the
economy, legislative tax policies and governmental budgetary matters.
Loan originations are derived from a number of sources. Residential
loan originations are attributable primarily to solicitation by First
Community's staff, referrals from real estate brokers, builders and walk-in
customers. Multifamily and other commercial real estate loan originations are
obtained from previous borrowers and direct contact with First Community. All
property securing real estate loans made by First Community is appraised in
accordance with applicable regulations of the FDIC and includes an actual
inspection of such property by designated fee appraisers. To supplement loan
demand, First Community has also purchased participations in tax-exempt leases.
First Community typically has not sold loans or loan participations in
the secondary market and services substantially, all loans which it originates
and retains.
All mortgage loans in excess of $300,000 are approved by the full
Board of Directors or the loan committee of the Board. Loan limits are
reviewed and changed from time to time to reflect current market conditions.
Fire and casualty insurance is required on all mortgage loans as well as
abstracts of title or title insurance.
Residential Mortgage Loans. Residential mortgage loans have been
predominantly secured by single-family homes. To reduce its exposure to
changes in interest rates, First Community currently originates adjustable rate
mortgages ("ARMs") along with long term, fixed-rate mortgages.
First Community offers residential construction mortgage loans with
maturities of six months or less at interest rates which vary with current
market rates. The application process includes the same items which are
required for other residential mortgage loans and include a submission of
accurate plans, specifications and costs of the property to be constructed.
These items are used as a basis to determine the appraised value of the subject
property. Appraisal reports are completed by designated fee appraisers, and
loans are based on the current appraised value. Loans of up to 80% of such
amount may be offered for a maximum period of six months for the construction
of the properties securing the loans. Extensions are permitted, when
circumstances warrant, if construction has continued satisfactorily and the
loan is current.
23
<PAGE>
Installment and Commercial Lending. First Community makes various
types of installment loans including loans to depositors secured by pledges of
their deposit accounts, new and used automobile loans, both direct and
indirect, and secured and unsecured personal loans. Although installment and
commercial loans are considered by management to involve more risk than
residential mortgage loans, such loans have shorter maturities and typically
have higher yields than mortgage loans.
Commercial loans include loans secured by commercial real estate or
deposits, single-payment loans, construction loans and loans for business
purchases, operations, inventory and lines of credit. All non-residential
mortgage loans are at a greater interest rate than single-family residential
loans.
All installment and commercial loans in excess of $300,000 are
approved by the full Board of Directors or the loan committee of First
Community. A loan officer's approval is required for installment or commercial
loans up to certain amounts. First Community has established policies
regarding financial statement requirements, credit verifications procedures and
other matters intended to minimize underwriting risk.
The most recent loan approval limits were adopted by the Board of
Directors in 1997. The limits vary from officer to officer with a range of
$2,500 to $70,000 for unsecured loans, and a range of $7,500 to $200,000 for
secured loans. Loans in excess of the above-mentioned limits must be approved
by a committee of loan officers or the board of directors loan committee.
Installment Loan Underwriting. First Community has adopted
underwriting guidelines that apply to all loans made by First Community.
However, the underwriting policies and practices are particularly important in
the installment lending area. Installment loans present risks beyond those
presented by other types of loans because the collateral is usually movable and
subject to rapid depreciation. Such factors increase the importance of
properly documenting such loans and assessing the risks associated with each
loan based upon such documentation.
The documentation required by First Community's underwriting
guidelines include an application, employment income verified by pay stubs,
direct verification with employers when deemed necessary, and may include tax
returns or audited financial statements and evidence of security. The
application must include the minimum loan amount requested, the term requested,
monthly payment, purpose of loan, job history, income, financial statement, and
security offered if applicable. The application must be signed by all
borrowers obligated for the loan. First Community also requires current credit
reports from credit bureaus as part of the underwriting procedure for all loans
including indirect automobile lending. First Community also reviews the
applicant's ability to maintain a stable monthly income and other required
monthly payments.
NONPERFORMING ASSETS AND ALLOWANCE FOR LOAN LOSSES
Nonperforming assets consist of nonaccrual loans, restructured loans,
past-due loans, real estate owned (acquired in foreclosure), and other
repossessed assets. Nonaccrual loans are loans on which interest recognition
has been suspended because they are 90 days past due as to interest or
principal or because there is a question about First Community's ability to
collect all principal and interest. Restructured loans are loans where the
terms have been modified to provide a reduction or deferral of interest or
principal because of deterioration in the borrower's financial position.
Past-due loans are accruing loans that are contractually past due 90 days or
more as to interest or principal payments, and the amount of the loan is no
greater than 80% of the fair market value of the collateral securing the loan
or First Community has a reasonable expectation of collecting all past-due
interest and principal.
24
<PAGE>
The following table summarizes nonperforming assets as of the dates
indicated.
AT DECEMBER 31,
-------------------
1997 1996
---- ----
(DOLLARS IN 000'S)
Nonaccrual loans $ 204 $ 99
Restructured loans
Past-due loans 90 days
or more (interest accruing) 120
----- -----
Total non-performing assets 324 99
Real estate owned 79 140
Other repossessed assets 9 14
===== =====
Total non-performing assets $ 412 $ 253
===== =====
Ratio of non-performing assets to total
assets .42% .32%
Interest on non-performing loans that
would have been included in income $ 19 $ 24
===== =====
Interest on non-performing loans that was
included in income $ 0 $ 0
===== =====
At December 31, 1997, no loans were identified as impaired by
management. Loans are considered to be impaired when it becomes probable that
First Community will be unable to collect all amounts due according to the
contractual terms of the loan agreement.
In banking, loan losses are one of the costs of doing business.
Although First Community's management emphasizes the early detection and
chargeoff of loan losses, it is inevitable that at any time certain losses
exist in the portfolio which have not been specifically identified.
Accordingly, the provision for loan losses is charged to earnings on an
anticipatory basis, and recognized loan losses are deducted from the allowance
so established. Over time, all net loan losses must be charged to earnings.
During the year, an estimate of the loss experience for the year serves as a
starting point in determining the appropriate level for the provision. However,
the amount actually provided in any period may be greater or less than net loan
chargeoffs, based on management's judgment as to the appropriate level of the
allowance for loan losses. The determination of the adequacy of the allowance
for loan loss is based on management's continuing review and evaluation of the
loan portfolio, and its judgment as to the impact of current economic
conditions on the portfolio. The evaluation by management includes
consideration of past loan loss experience, changes in the composition of the
loan portfolio and the current condition and amount of loans outstanding.
The allowance for loan losses increased during the year ended December
31, 1997 compared to the year ended December 31, 1996 primarily because of the
growth in loans and a change in the composition of the loan portfolio. During
1997, First Community made a $255,000 provision for loan losses due primarily
to growth in loans and a change in the mix of the loan portfolio.
25
<PAGE>
Allocation of the Allowance for Loan Losses:
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------------------------------------------
1997 1996
-------------------------------------------------------------------
PERCENTAGE PERCENTAGE
OF LOANS TO OF LOANS TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
------------- ------------- ------------- -------------
(DOLLARS IN 000'S)
<S> <C> <C> <C> <C>
Real estate mortgage loans $162 36.3% $139 35.4%
Construction and land development 68 8.5 32 5.6
Commercial loans 196 22.4 171 26.7
Installment loans 418 28.6 300 29.3
Tax-exempt loans and leases 4 4.2 2 3.0
------------- ------------- ------------- -------------
$848 100.0% $644 100.0%
============= ============= ============= =============
</TABLE>
Summary of Loan Loss Experience:
YEAR ENDED DECEMBER 31,
-------------------------
1997 1996
------- -------
(DOLLARS IN 000'S)
Balance at January 1 $ 644 $ 518
Chargeoffs:
Real estate mortgage loans (16) (2)
Commercial loans (20) (30)
Installment loans (44) (79)
------- -------
Total Chargeoffs (80) (111)
Recoveries:
Commercial 17 8
Installment 12 10
------- -------
Total Recoveries 29 18
------- -------
Net Chargeoffs (51) (93)
------- -------
Provision for loan losses 255 219
------- -------
Balance at December 31 $ 848 $ 644
======= =======
Average loans during the year $73,048 $59,861
Ratio of net chargeoffs to
total average loans outstanding
during the year .07% .16%
26
<PAGE>
INVESTMENT ACTIVITIES
The following table sets forth the carrying value of First Community's
investment portfolio and FHLB stock as of the dates indicated:
AT DECEMBER 31,
-----------------------
1997 1996
---- ----
(DOLLARS IN 000'S)
Available for sale at fair value:
State and municipal obligations $1,371 $1,756
Corporate obligations 1,400 630
------- ------
2,771 2,386
------- ------
Held to maturity at amortized cost:
Federal agency mortgage pools 174
State and municipal obligations 1,709 2,367
------ ------
1,709 2,541
FHLB stock 778 778
------ ------
Total $5,258 $5,705
====== ======
At December 31, 1997, the amortized cost of securities available for
sale was $2,716,000 and the related gross unrealized gains were $55,000. At
December 31, 1997, the fair value of securities held to maturity was $1,734,000
and the related gross unrealized gains were $25,000. There were no unrealized
losses on securities at December 31, 1997.
As of December 31, 1997, there were no state and municipal obligations
representing more than 10% of shareholders' equity included in securities.
27
<PAGE>
The following table sets forth the maturities of investment securities
at December 31, 1997 and the weighted-average yield (on a tax equivalent basis)
on such securities.
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------------------------------------
CORPORATE STATE AND MUNICIPAL
OBLIGATIONS OBLIGATIONS
-------------------------------- --------------------------------
AMOUNT YIELD AMOUNT YIELD
------------- -------------- -------------- --------------
(DOLLARS IN 000'S)
<S> <C> <C> <C> <C>
Available for Sale: (1)
Maturities:
One year or less $ 450 10.00% $ 170 5.63%
Over 1 year to 5 years 950 10.32 425 9.33
Over 5 years to 10 years 180 10.63
Over 10 years 541 10.25
----------- -----------
Total available for sale 1,400 10.21 1,316 9.41
-----------
Held to Maturity:
Maturities:
One year or less 675 5.44
Over 1 year to 5 years 742 6.04
Over 5 years to 10 years 292 7.18
Over 10 years
-----------
Total held to maturity 1,709 6.00
-----------
Total securities $ 1,400 10.21% $ 3,025 7.48%
=========== ===========
</TABLE>
- ----------
(1) Available for sale amounts shown in the maturity distribution table are at
amortized cost for computation of yields.
SOURCES OF FUNDS
Deposits are the primary source of First Community's funds for use in
lending and for other general business purposes. In addition to deposits, FHLB
advances represent a significant source of funds to First Community, as well as
funds derived from loan repayments. Loan repayments are a relatively stable
source of funds, while savings inflows and outflows are significantly
influenced by general interest rates and money market conditions.
Deposit Activities. First Community offers several types of deposit
programs designed to attract both short-term and long-term savings by providing
a wide assortment of accounts and rates. See the average balance sheet included
in "Management's Discussion and Analysis of Financial Condition and Results of
Operations" for a breakdown of the average amount and average rate paid on
First Community's deposit categories. First Community does not rely on brokered
deposits as funding sources.
The following table indicates the amount of certificates of deposit of
$100,000 or more by time remaining until maturity at December 31, 1997 (in
000's).
MATURITY PERIOD
Three months or less $ 1,808
Greater than three months through six months 1,524
Greater than six months through twelve months 5,273
Over twelve months 1,914
-------
Total $10,519
=======
28
<PAGE>
Interest earned on statement savings accounts is paid from the date of
deposit to the date of withdrawal, compounded and credited monthly. Interest
earned on money market demand deposit accounts is compounded and credited
monthly. The interest rate on these accounts is established by First Community.
In recent years, many deposits in long-term fixed-rate accounts have
been withdrawn prior to maturity or such certificates have not been renewed at
maturity due to the more attractive rates offered on various money market
accounts. Early withdrawal penalties are 30 days' interest on accounts maturing
in one year or less and 90 days interest on accounts maturing in greater than
one year.
Borrowings. The FHLB of Indianapolis functions as a central credit
facility providing credit for member financial institutions. As a member, First
Community is required to own capital stock in the FHLB and is authorized to
apply for advances on the security of such stock and certain of its home
mortgages and other assets (principally, securities which are obligations of,
or guaranteed by, the United States) provided certain standards related to
creditworthiness have been met. Advances are made pursuant to several different
credit programs. Each credit program has its own interest rate and range of
maturities. The FHLB prescribes the acceptable uses to which the advances
pursuant to each program may be made as well as limitations on the amounts of
advances. Acceptable uses prescribed by the FHLB have included expansion of
residential mortgage lending and meeting short-term liquidity needs. Depending
on the program, limitation on the amounts of advances are based either on a
fixed percentage of a member's net worth or on the FHLB's assessment of the
member's creditworthiness. The FHLB is required to review its credit
limitations and standards at least once every six months. First Community had
outstanding borrowings of $2,929,789 from the FHLB as of June 30, 1998 and
December 31, 1997.
SERVICE AREA
First Community's primary service areas are Johnson County and
Jennings County, Indiana. These areas are among the most affluent and rapidly
growing areas of Indiana. The major portion of First Community's customers
reside in Johnson County, particularly in the Bargersville, Franklin and
Greenwood areas, which account for about one-half of the county's population,
according to the 1990 U.S. Census. First Community has branches in Trafalgar,
Franklin, and Greenwood, Indiana in Johnson County, a branch at a retirement
center in Indianapolis, Indiana, and two branches in North Vernon, Indiana in
Jennings County. First Community anticipates opening a branch in Whiteland
(Johnson County) and Taylorsville (Bartholomew County) within the next 12
months.
DESCRIPTION OF PROPERTY
First Community currently leases its home office in Bargersville,
Indiana and one of its branches in Franklin, Indiana from FCREM, leases
branches in Indianapolis, Trafalgar and Franklin from third parties, and owns
branch offices in Greenwood and North Vernon, Indiana. The leases with
third-parties expire between 1999 and 2003. The Company plans for FCREM to
eventually own substantially all of the branch properties and lease them to
First Community.
COMPETITION
The banking business is highly competitive in Johnson County, which is
First Community's primary market, where it competes with 14 commercial banks, 3
savings banks, and 2 credit unions. In Jennings County, First Community
competes with 5 commercial banks, one savings bank and 2 credit unions. To a
lesser extent, First Community competes with mortgage banking companies,
consumer finance companies, and certain governmental agencies.
REGULATION AND SUPERVISION OF THE COMPANY
The Company is a bank holding company within the meaning of the Bank
Holding Company Act of 1956, as amended ("BHCA"), and is registered as such
with the Board of Governors of the Federal Reserve System ("Federal Reserve").
The Company is examined, regulated and supervised by the Federal Reserve and is
required to file annual reports and other information regarding its business
and operations and the business and operations of its subsidiaries with the
Federal Reserve. The Federal Reserve has the authority to issue cease and
29
<PAGE>
desist orders against a bank holding company if it determines that activities
represent an unsafe and unsound practice or a violation of law.
Under the BHCA, a bank holding company is, with limited exceptions,
prohibited from acquiring direct or indirect ownership or control of voting
stock of any company which is not a bank and from engaging in any activity
other than managing or controlling banks. A bank holding company may, however,
own shares of a Company engaged in activities which the Federal Reserve has
determined to be so closely related to banking or managing or controlling banks
as to be a proper incident thereto.
Acquisitions by the Company of banks and savings associations are also
subject to regulation. Any acquisition by the Company of more than five percent
of the voting stock of any bank requires prior approval of the Federal Reserve.
Acquisitions of savings associations are also subject to the approval of the
Office of Thrift Supervision ("OTS"). Indiana law permits the Company to be
acquired by bank holding companies, located in any state in the United States
provided that the Company's subsidiary bank has been in existence and
continuously operated for five (5) or more years.
A bank holding company and its subsidiaries are prohibited from
engaging in certain tie-in arrangements in connection with the extension of
credit or the provision of any property or service. With certain exceptions, a
bank holding company, a bank, and a subsidiary or affiliate thereof, may not
extend credit, lease or sell property or furnish any services or fix or vary
the consideration for the foregoing on the condition that (i) the customer must
obtain or provide some additional credit, property or services from, or to, any
of them, or (ii) the customer may not obtain some other credit, property or
service from a competitor, except to the extent reasonable conditions are
imposed to assure the soundness of credit extended.
Under the BHCA, bank holding companies may acquire savings
associations without geographic restrictions. However, under the Homeowner's
Loan Act ("HOLA"), the OTS is prohibited from approving any acquisition that
would result in a multiple savings and loan holding company controlling savings
institutions in more than one state, unless approval is for interstate
supervisory acquisitions by savings and loan holding companies, and the
acquisition of a savings institution in another state is under laws of the
state of the target savings institutions specifically permitting such
acquisition. Although the conditions imposed upon acquisitions in those states
which have enacted such legislation vary, most such statutes are of the
"regional reciprocity" type which require that the acquiring holding company be
located (as defined by the location of its subsidiary savings institutions) in
a state within a defined geographic region and that the state in which the
acquiring holding company is located has enacted reciprocal legislation
allowing savings institutions in the target state to purchase savings
institutions in the acquirer's home state on terms no more restrictive than
those imposed by the target state on the acquirer. Indiana law permits
reciprocal interstate savings institution acquisitions within a region
consisting of Indiana and contiguous states.
The Company's income is principally derived from dividends paid on the
common stock of its subsidiaries. The payment of dividends by First Community
is subject to certain regulatory restrictions. Additionally, under Federal
Reserve policy, the Company is expected to act as a source of financial
strength to, and commit resources to support, First Community. As a result of
such policy, the Company may be required to commit resources to First Community
in circumstances where it might not otherwise do so.
REGULATION AND SUPERVISION OF FIRST COMMUNITY
First Community is supervised, regulated and examined by the DFI and,
as a state nonmember bank by the FDIC. A cease or desist order may be issued by
the DFI and FDIC against First Community if the respective agency finds that
the activities of First Community represent an unsafe and unsound banking
practice or violation of law. The deposits of First Community are insured by
the SAIF of the FDIC.
Branching by banks in Indiana is subject to the jurisdiction, and
requires the prior approval of, the Bank's primary federal regulatory authority
and the DFI. Under Indiana law, First Community may branch anywhere in the
state.
The Company is a legal entity separate and distinct from First
Community. There are various legal limitations on the extent to which First
Community can supply funds to the Company. The principal source of the
Company's funds consists of dividends from First Community. State and federal
laws restrict the amount of
30
<PAGE>
dividends which may be paid by banks. In addition, First Community is subject to
certain restrictions imposed by the Federal Reserve on extensions of credit to
the Company or any of its subsidiaries, on investments in the stock or other
securities of the Company and in taking such stock or securities as collateral
for loans.
While First Community is not a member of the Federal Reserve, the
commercial banking business is affected not only by general economic conditions
but also by the monetary policies of the Federal Reserve. The instruments of
monetary policy employed by the Federal Reserve include the discount rate on
member bank borrowing and changes in reserve requirements against member bank
deposits. Federal Reserve monetary policies have had a significant effect on
the operating results of commercial banks in the past and are expected to
continue to do so in the future. In view of changing conditions in the national
economy and in the money markets, as well as the effect of actions by monetary
fiscal authorities, including the Federal Reserve, no prediction can be made as
to possible future changes in interest rates, deposit levels, loan demand or
the business and earnings of the Company and First Community.
FDICIA
On December 19, 1991, the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA") was enacted into law. FDICIA provides for,
among other things, enhanced federal supervision of depository institutions
including greater authority for the appointment of a conservator or receiver
for undercapitalized institutions, the adoption of safety and soundness
standards by the federal banking regulators on matters such as loan
underwriting and documentation, interest rate risk exposure, compensation and
other employee benefits, the establishment of risk-based deposit insurance
premiums, liberalization of the qualified thrift lender test, greater
restrictions on transactions with affiliates, and mandated consumer protection
disclosures with respect to deposit accounts.
CAPITAL REQUIREMENTS
First Community must meet certain minimum capital requirements
mandated by the FDIC and the DFI. These regulatory agencies require financial
institutions to maintain certain minimum ratios of primary capital to total
assets and total capital to total assets. The Company is not required to comply
with Federal Reserve capital requirements because it has consolidated assets of
less than $150,000,000.
First Community must maintain a leverage ratio of at least 4.0%, and a
total capital to risk-based assets ratio of at least 8.0%. First Community had
a leverage ratio and tangible equity ratio of 7.66% based on leverage and
tangible capital of $7,720,000 at June 30, 1998. First Community had a total
capital to risk-based assets ratio of 9.56%.
LEGAL PROCEEDINGS
The Company and First Community are parties to certain lawsuits from
time to time arising in the ordinary course of business. The Company and First
Community believe that none of their current lawsuits would, if adversely
determined, have a material adverse effect on the Company or First Community.
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<PAGE>
MANAGEMENT
<TABLE>
<CAPTION>
NAME AGE PRINCIPAL OCCUPATION DIRECTOR SINCE TERM TO EXPIRE
- ---- --- -------------------- -------------- --------------
<S> <C> <C> <C> <C>
Merrill M. Wesemann, M.D. 63 Chairman of the Board 1991 2000
of the Company-Physician
Albert R. Jackson, III 38 President & CEO 1997 2000
Frank D. Neese 60 Investment Banker 1996 1999
Roy Martin Umbarger 51 President, Roy Umbarger & 1996 1999
Sons, Inc.
Albert R. Jackson, Jr. 63 Retired Bank President 1997 2001
Eugene W. Morris 72 President of Farmers 1991 2001
-Mutual Fire Insurance
</TABLE>
Merrill M. Wesemann, M.D. was a Director of Bargersville Federal
Savings Bank ("Bargersville") from January 1979 until completion of the
acquisition of Bargersville by the Company. Dr. Wesemann is on the Board of
Directors of First Community and has been a Director of the Company since
August 1991. Dr. Wesemann has practiced medicine since 1961 and is a past
Treasurer of the Indiana State Medical Association. Dr. Wesemann's current
term as a Director of the Company expires at the 2000 Annual Meeting.
Albert R. Jackson, III has been CEO and CFO for both First Community
and the Company since 1996 and President of First Community since 1994. He is
also on the Board of Directors of First Community. Before that he was senior
vice president of National City Bank. Mr. Jackson has also served as senior
vice president and cashier of The Seymour National Bank & Trust Company and as
vice president for First National Bank of North Vernon, Indiana and as
treasurer and chief financial officer of that bank's holding Company, North
Vernon 1st Financial Corporation. Mr. Jackson's current term as a Director of
the Company expires at the 2000 Annual Meeting. He is the son of Albert R.
Jackson, Jr.
Roy Martin Umbarger has been the President and co-owner of Roy
Umbarger & Sons, Inc., a feed mill, grain elevator and fertilizer distributor
located in Bargersville, Indiana, since 1986. Mr. Umbarger received a degree
in Business Marketing from the University of Evansville and is a lifetime
resident of Johnson County. Mr. Umbarger's current term as a Director of the
Company expires at the 1999 Annual Meeting. Mr. Umbarger is also on the Board
of Directors of First Community and is the son-in-law of Eugene W. Morris.
Frank D. Neese is President of Indiana Securities, LLC an investment
banking firm since January 1, 1998. Mr. Neese served as Senior Vice President
of Traub and Company a registered broker-dealer from 1979 until December 31,
1997. Mr. Neese has served as a financial advisor to First Community since
1991. Mr. Neese's current term as a Director of the Company expires at the
1999 Annual Meeting. Mr. Neese is Secretary and a Director of First Community.
Mr. Neese also serves as President of the Pines of Deerfield, a real estate
development Company.
Albert R. Jackson, Jr. was the President of First National Bank of
North Vernon, Indiana from 1971 to 1989 and a Senior Executive Vice President
of The Seymour National Bank of Seymour, Indiana from 1989 to his retirement in
1994. Mr. Jackson was appointed as a Director in May 1997 and his current term
expires in 2001. He is also on the Board of Directors of First Community and is
the father of Albert R. Jackson, III.
Eugene W. Morris was a director of Bargersville from October 1974, and
was Vice Chairman of the Board of Directors from January 1988 until
Bargersville was acquired by the Company. Mr. Morris is currently President of
the Company and has been a board member since August 1991. Mr. Morris is also
on the Board of
32
<PAGE>
Directors of First Community. Mr. Morris is currently self-employed as a farmer
and also serves as President of Farmers-Mutual Fire Insurance Company of Johnson
and Shelby Counties, a mutual casualty and property insurance Company.
Mr. Morris current term as a Director of the Company expires at the 2001 Annual
Meeting. Mr. Morris is the father-in-law of Roy Martin Umbarger.
EXECUTIVE COMPENSATION
The following Summary Compensation Table provides compensation
information paid by First Community to the Chief Executive Officer for services
rendered in all capacities during the years ended December 31, 1997, 1996, and
1995. No executive officers of the Company received compensation from the
Company during the year ended December 31, 1997.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
-----------------------------------------
NAME AND PRINCIPAL ALL OTHER
POSITION YEAR SALARY($) BONUS($) COMPENSATION($) (1)
-------- ---- --------- -------- -------------------
<S> <C> <C> <C> <C>
Albert R. Jackson, III 1997 67,500 -0- 697
Chief Executive 1996 62,293 5,000 661
Officer and Chief 1995 58,782 -0- 500
Financial Officer
</TABLE>
- -------------------
(1) Contributions by the Company to the employee's 401(k) retirement plan.
There were no awards or payouts of restricted stock, options, SAR's,
or long term incentive plan payments during the last 3 fiscal years to the
named chief executive officer.
CASH COMPENSATION
A Director of the Company is not compensated for service as a member
of the Board of Directors or any committee of the Board. However, all Directors
of the Company are also Directors of First Community, and for the fiscal year
ended December 31, 1997 cash compensation for non-employee Directors of First
Community was $1,000 per month. The Chairman's compensation was $1,150 per
month for 1997. First Community provides each of First Community's Directors
with Directors' and Officers' liability insurance. Directors may also be
reimbursed for reasonable expenses incurred in attending Board and committee
meetings. Directors otherwise employed by the Company or First Community are
not separately compensated for serving as a Director. Mr. Jackson, Jr. is also
paid a consulting fee of $600 per month for providing advisory services to
First Community and Dr. Wesemann participates in a deferred compensation
program pursuant to which his director fees are deferred and the deferral
amounts earn interest at the rate of 8% per annum.
OPTIONS
The 1992 Stock Option Plan (the "1992 Plan") was adopted by the Board
of Directors on January 1, 1992 and amended and restated by the Board on
February 15, 1993 and May 15, 1995. The shareholders approved an amendment to
the 1992 Plan on May 15, 1996. The 1992 Plan covers 66,771 shares of Common
Stock.
The number of shares available under the 1992 Plan and the amount and
exercise price of options granted are subject to adjustment in the event of a
combination, merger, reorganization, stock split, stock dividend or similar
event affecting the Common Stock. The 1992 Plan will terminate ten years from
the date of its adoption and no further options shall thereafter be granted
thereunder.
Options granted to non-employee directors under the 1992 Plan are not
intended to constitute "incentive stock options" within the meaning of Section
422 of the Internal Revenue Code. Optionees generally are not subject to
federal income taxation at the time the options are granted. Taxable income is
recognized by optionees upon the exercise of an option in the amount of the
difference between the exercise price paid and the market
33
<PAGE>
value of the shares received at the time of exercise or the date restrictions on
the sale of such shares lapse. An optionee's basis in the shares received upon
the exercise of an option is equal to the exercise price paid plus any income
recognized for income tax purposes. The Company is entitled to a tax deduction
equal to the amount of income recognized by the optionees.
There are outstanding options under the 1992 Plan to purchase 15,420
shares of Common Stock with an exercise price of $5.54 per share each to Dr.
Wesemann and Eugene Morris.
On May 15, 1996, the shareholders approved the 1996 Stock Option Plan
(the "1996 Plan") for the issuance of 105,000 shares of Common Stock. The 1996
Plan provides, among other items, that nonstatutory options for 1,000 shares of
Common Stock are automatically granted to directors not otherwise employed by
the Company on a yearly basis in order to provide an incentive to outside
directors of the Company. The options have a term of ten years from the date of
grant, are exercisable only during the time the optionee remains a director or
within one year thereafter (but not beyond expiration of the option term) and
the exercise price is the fair market value of the shares on the date of grant.
In the event of changes in outstanding Common Stock of the Company by
reason of stock dividends, mergers, split-ups, consolidations,
recapitalizations, reorganizations or like events (as determined by the Board
of Directors or a committee thereof (the "Committee"), an appropriate
adjustment will be made by the committee in the number of shares of Common
Stock reserved under the 1996 Plan and in the number of shares of Common Stock
and option price per share specified in any stock option agreement with respect
to any unpurchased shares.
The Company has granted and there are outstanding options under the
1996 Plan to purchase 1,050 shares of common stock with an exercise price of
$11.43 per share and 1,000 shares of Common Stock with an exercise price of
$11.00 per share each to Dr. Wesemann, Eugene Morris, Frank Neese, Albert R.
Jackson, Jr., and Roy Martin Umbarger. In February 1998 the Board granted an
option to purchase 5,000 shares of common stock to Albert R. Jackson, III with
an exercise price of $11.50 per share and an aggregate of 6,000 shares to three
(3) other officers with an exercise price of $11.50 per share. All options
vested at the time of grant and expire ten years after the date of grant or one
(1) year after the date the optionee terminates his or her performance of
services for the Company, if earlier.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
As permitted by the Indiana Business Corporation Law ("IBCL"), the
Company may indemnify its officers and directors under certain circumstances,
The IBCL permits the Company, among other things, to indemnify such officers
and directors against certain liabilities that may arise by reason of their
status or service as directors or officers (other than liabilities arising
from willful misconduct of a culpable nature), to advance their expenses
incurred as a result of any proceeding against them as to which they could be
indemnified, and to obtain directors' and officers' insurance if available on
reasonable terms, which the Company has done. At present, the Company is not
aware of any pending or threatened litigation or proceeding involving a
director, officer, employee or agent of the Company in which indemnification
would be required or permitted. The Company believes that these provisions are
necessary to attract and retain qualified persons as directors and officers.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers, or persons controlling
the Company pursuant to the foregoing provisions, the Company has been informed
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is therefore unenforceable.
34
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
Company's Common Stock beneficially owned as of August 31, 1998 by (i) each
person known by the Company to own beneficially more than 5% of the Company's
Common Stock; (ii) each director of the Company; (iii) each of the executive
officers of the Company named in the Summary Compensation Table; and (iv) all
directors and executive officers of the Company as a group:
SHARES BENEFICIALLY
-------------------
OWNED BEFORE OFFERINGS
----------------------
NAME NUMBER PERCENT
- ---- ------ -------
Albert R. Jackson, III 18,169(1) 1.83%
5675 N County Rd. 200 W
North Vernon, Indiana 47265
Albert R. Jackson, Jr. 8,116(2) *
5745 N County Rd. 200W
North Vernon, Indiana 47265
Eugene W. Morris 24,957(3) 2.48%
5471 West CR 350 N.
Bargersville, Indiana 46106
Merrill M. Wesemann, M.D. 90,404(4) 8.97%
251 E Jefferson Street
Franklin, Indiana 46131
Roy Martin Umbarger 29,814(5) 3.01%
5180 W Road 300N
Bargersville, Indiana 46106
Frank D. Neese 58,378(6) 5.89%
320 North Meridian Street
Indianapolis, Indiana 46204
All Executive Officers and Directors 227,476 21.96%
as a group (6 persons)
- -------------------
* Denotes less than 1%
(1) Includes 2,362 shares that Mr. Jackson owns as a joint tenant with his
father, brother, and sister as to which he disclaims voting and
dispositive power and currently exercisable options for 5,000 shares
granted under the 1996 Stock Option Plan. Mr. Jackson, III is the son of
Mr. Jackson, Jr.
(2) Includes 2,362 shares held as a joint tenant with his two sons and a
daughter, 525 shares owned by Mr. Jackson's spouse and currently
exercisable options for 2,050 shares granted under the 1996 Stock Option
Plan. Mr. Jackson, Jr. is the father of Mr. Jackson, III.
(3) Includes currently exercisable options for 17,470 shares granted under the
1992 and 1996 Stock Option Plans. Mr. Morris is Mr. Umbarger's
father-in-law.
(4) Includes 8,087 shares owned by Dr. Wesemann's spouse and currently
exercisable options for 17,470 shares granted under the 1992 and 1996 Stock
Option Plans.
(5) Includes 1,365 shares owned by Mr. Umbarger's spouse, 721 shares owned as
joint-tenant with a minor son, 1,356 shares owned by his minor son, 107
shares owned by his spouse jointly with each of two daughters, 13 shares
owned by a daughter, and currently exercisable options for 2,050 shares
granted under the 1996 Stock Option Plan. Mr. Umbarger is Mr. Morris'
son-in-law.
(6) Includes currently exercisable options for 2,050 shares granted under the
1996 Stock Option Plan.
35
<PAGE>
CERTAIN TRANSACTIONS
Certain of the Company's Directors and Executive Officers were
customers of or had various transactions with First Community in the ordinary
course of business during 1996 and 1997. These transactions cover a range of
banking services. All such services were provided at market rates consistent
with published fee schedules. Similar additional transactions may be expected
to take place in the ordinary course of business in the future. Although
various laws and regulations governing First Community allow First Community to
make loans to a limited extent to its Directors and Executive Officers, all
loans involving such Directors, Executive Officers, or their affiliates were
made on substantially the same terms, including interest rates and collateral,
as those prevailing at that time for comparable transactions with other persons
and did not involve more than the normal risk of collectability or other
unfavorable features.
PLAN OF DISTRIBUTION
No underwriter or broker will be used in connection with the sale of
Shares offered and sold in connection with the exercise of the Rights or the
Warrants and no commission or remuneration will be paid to any person for the
solicitation of subscriptions. The officers and employees of the Company and
First Community processing subscriptions will not receive additional
compensation in connection herewith.
The Offering is not conditioned upon the exercise of a minimum number
of Rights or Warrants and funds paid upon the exercise thereof will become
immediately available to the Company.
DESCRIPTION OF SECURITIES
RIGHTS
The Rights will be evidenced by a Rights Certificate. The Rights will
be issued to shareholders of record as of 5:00 p.m. on [ ], 1998. The Rights
will entitle each Eligible Holder to purchase one share of Common Stock for
each ten shares owned on the Record Date rounded down to the nearest number of
whole shares and subject to a minimum offer and purchase requirement of 100
shares of Common Stock at an exercise price of $11.00 per share. The Rights
will expire on [ ], 1998 at 5:00 p.m. Indianapolis, Indiana time unless
extended by and in the sole discretion of the Company.
An Eligible Holder may exercise a Right by completing an Election to
Purchase included in the Rights Certificate and delivering it together with a
fully completed and executed Subscription Agreement and payment in full of the
Subscription Price to the Company by [ ], 1998. The Subscription Price must be
paid by check, wire transfer, bank draft or money order payable to the Company.
Rights are transferable on the register maintained for that purpose by
First Community at the office located at P.O. Box 767, 298 St. Rd. 135N
Greenwood, Indiana 46142.
Rights that have not been exercised as of 5:00 p.m. on [ ], 1998 may,
in the Company's sole discretion, be reoffered to participating Eligible
Holders who have indicated in the initial Subscription Agreement their interest
in purchasing additional shares.
WARRANTS
The Warrants will be evidenced by a Warrant Certificate the form of
which is included as Annex "A" to the Prospectus. The Warrants will be issued
to shareholders of record on [ ], 1998 (the "Record Date") and will entitle the
shareholder or registered assigns ("Warrant Holders") to purchase one share of
Common Stock for each ten shares owned on the Record Date rounded down to the
nearest number of whole shares subject to a minimum offer and purchase
requirement of 100 Shares at an exercise price of $11.00 per Share. The
Warrants may only be exercised during a 90 day period commencing on September
15, 1999 and ending at 5:00 o'clock on December 13, 1999 (the "Exercise
Period").
A Warrant Holder may exercise the Warrant by completing and executing
the relevant section on the back of the Warrant Certificate and delivering the
Warrant Certificate together with payment in full of
36
<PAGE>
the exercise price to the Company during the Exercise Period. The exercise price
must be paid by check, wire transfer, bank draft or money order payable to the
Company.
Warrants are transferable on the register maintained for that purpose
by First Community at the office located at P.O. Box 767, 298 St. Rd. 135N,
Greenwood, Indiana 46142.
Warrants which have not been exercised as of 5:00 o'clock p.m. on
December 13, 1999 will expire and be of no further effect.
CAPITAL STOCK
The authorized capital stock of the Company consists of four million
shares of Common Stock, no par value, and one million shares of preferred
stock.
As of August 31, 1998, there were 989,848 shares of Common Stock
outstanding held of record by 283 shareholders. Concurrently with this Offering
the Company is conducting an offering of $1,000,000 in aggregate principal
amount of 7% Convertible Notes which are convertible to shares of Common Stock
at the rate of $12.10 per share (82,644 shares if all of the Notes are sold and
converted).
Holders of Common Stock are entitled to one vote per share on all
matters to be voted upon by the shareholders. The holders of Common Stock are
entitled to receive ratably such dividends, if any, as may be declared from
time to time by the Board of Directors out of funds legally available therefor.
See "Market for Common Stock and Related Shareholder Matters." In the event of
a liquidation, dissolution or winding up of the Company, the holders of Common
Stock are entitled to share ratably in all assets remaining after payment of
liabilities. The Common Stock has no preemptive or conversion rights or other
subscription rights. There are no redemption or sinking fund provisions
applicable to the Common Stock. All outstanding shares of Common Stock are, and
the Shares issued upon conversion of the Notes and exercise of the Rights and
Warrants will be, fully paid and non-assessable.
The Board of Directors has the authority to issue the preferred stock
in one or more series and to fix the rights, voting rights, terms of
redemption, redemption prices, liquidation preferences and the number of shares
constituting any series or the designation of such series, without further vote
or action by the shareholders. The issuance of preferred stock may have the
effect of delaying, deferring or preventing a change in control of the Company
without further action by the shareholders and may adversely effect the voting
and other rights of the holders of Common Stock. At present the Company has no
plans to issue any of the preferred stock.
Certain provisions of Indiana law applicable to the Company may delay,
deter or prevent a merger, tender offer or other takeover attempt of the
Company.
Under Indiana law, no business combination (generally defined to
include certain mergers, sales of assets, sales of 5% or more of outstanding
stock, loans, recapitalizations or liquidations or dissolutions) involving the
Company and an interested shareholder (defined to include any holder of 10% or
more of the corporation's voting stock) may be entered into unless (1) approved
by the Board of Directors of the Company or (2)(a) five years have expired
since the acquisition of shares of the Company by the interested stockholder,
(b) all requirements of the Articles of Incorporation relating to business
combinations are satisfied and (c) either (i) a majority of stockholders of the
Company (excluding the interested shareholder) approve the business combination
or (ii) all stockholders are paid fair value (as defined in the statute) for
their stock. However, such law does not restrict any offer to purchase all of
the Company's shares.
Under Indiana law, when a target corporation (such as the Company )
incorporated in Indiana and having its principal place of business, principal
office, or substantial assets in Indiana, has a certain threshold of ownership
by Indiana residents, any acquisition which, along with previous holdings,
gives the acquirer at least 20%, 33-1/3% or 50% of the target's voting stock
triggers a shareholder approval mechanism. If the acquirer files a statutory
disclosure statement, the target's management has 50 days within which to hold
a special meeting of shareholders at which all disinterested stockholders of
the target (those not affiliated with the acquirer or any officer or inside
director of the target) consider and vote upon whether the acquirer shall have
voting rights with respect to the control shares of the target held by it.
Without stockholder approval, the control shares acquired by the acquirer have
no voting rights. If the acquirer fails to file the statutory disclosure
statement, or the
37
<PAGE>
shareholders fail to grant voting rights to the control shares, the target can
redeem the acquirer's shares at a price to be determined according to procedures
devised by the target.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Rights, Warrants and Common
Stock issuable upon the exercise thereof is First Community Bank & Trust.
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for
the Company by Henderson, Daily, Withrow & DeVoe of Indianapolis, Indiana.
EXPERTS
The consolidated financial statements of First Community Bancshares,
Inc. as of December 31, 1997 and 1996, and for each of the three years in the
period ended December 31, 1997 appearing in the Prospectus and Registration
Statement have been audited by Olive, LLP (formerly Geo. S. Olive & Co., LLC),
independent auditors as set forth in their report thereon appearing elsewhere
herein and in the Registration Statement and are included in reliance upon such
report given under the authority of such firm as experts in accounting and
auditing.
38
<PAGE>
FIRST COMMUNITY BANCSHARES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
AUDITED FINANCIAL STATEMENTS:
- -----------------------------
Independent Auditor's Report...................................... F-1
Consolidated Balance Sheet as of
December 31, 1997 and 1996.................................... F-2
Consolidated Statement of Income for the Years Ended
December 31, 1997, 1996 and 1995.............................. F-3
Consolidated Statement of Comprehensive Income
for the Years Ended December 31, 1997, 1996 and 1995.......... F-4
Consolidated Statement of Changes in Stockholders' Equity
for the Years Ended December 31, 1997, 1996 and 1995.......... F-5
Consolidated Statement of Cash Flows for the
Years Ended December 31, 1997, 1996 and 1995.................. F-6
Notes to Consolidated Financial Statements........................ F-7
UNAUDITED FINANCIAL STATEMENTS:
- -------------------------------
Consolidated Condensed Balance Sheet as of June 30, 1998 and
December 31, 1997............................................. F-24
Consolidated Condensed Statement of Income for the Three and
Six Months Ended June 30, 1998 and 1997....................... F-25
Consolidated Condensed Statement of Comprehensive Income
for the Three and Six Months Ended June 30, 1998 and 1997..... F-26
Consolidated Condensed Statement of Changes in Stockholders'
Equity for the Six Months Ended June 30, 1998................. F-27
Consolidated Condensed Statement of Cash Flows for the Six Months
Ended June 30, 1998 and 1997.................................. F-28
Notes to Unaudited Condensed Consolidated Financial Statements.... F-29
39
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Stockholders and
Board of Directors
First Community Bancshares, Inc.
Bargersville, Indiana
We have audited the accompanying consolidated balance sheet of First Community
Bancshares, Inc. and subsidiary as of December 31, 1997 and 1996, and the
related consolidated statements of income, comprehensive income, changes in
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated 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 described above present fairly, in
all material respects, the consolidated financial position of First Community
Bancshares, Inc. and subsidiary as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the three years
in the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
/s/ Geo. S. Olive & Co. LLC
Indianapolis, Indiana
February 6, 1998
F-1
<PAGE>
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 933,574 $ 1,059,473
Short-term interest-bearing deposits 10,297,654 5,975,098
-------------------------
Cash and cash equivalents 11,231,228 7,034,571
Investment securities
Available for sale 2,771,058 2,386,358
Held to maturity 1,708,679 2,540,803
-------------------------
Total investment securities 4,479,737 4,927,161
Loans 80,000,575 65,108,481
Allowance for loan losses (848,085) (644,132)
-------------------------
Net loans 79,152,490 64,464,349
Premises and equipment 1,944,779 1,791,873
Federal Home Loan Bank of
Indianapolis stock, at cost 777,800 777,800
Foreclosed real estate 78,636 139,500
Interest receivable 700,079 526,186
Other assets 374,965 417,268
-------------------------
Total assets $98,739,714 $80,078,708
=========================
LIABILITIES
Deposits
Noninterest bearing $ 7,623,814 $ 5,833,251
Interest bearing 80,071,501 64,719,018
-------------------------
Total deposits 87,695,315 70,552,269
Federal Home Loan Bank of
Indianapolis advances 2,929,789 2,378,830
Interest payable 250,617 187,083
Other liabilities 313,987 74,570
-------------------------
Total liabilities 91,189,708 73,192,752
-------------------------
COMMITMENTS AND CONTINGENT LIABILITIES
STOCKHOLDERS' EQUITY
Preferred stock, no-par value
Authorized and unissued-1,000,000 shares
Common stock, no-par par value
Authorized-4,000,000 shares
Issued and outstanding-989,848
and 942,825 shares 6,722,251 6,181,486
Retained earnings and contributed capital 794,796 692,760
Accumulated other comprehensive income 32,959 11,710
-------------------------
Total stockholders' equity 7,550,006 6,885,956
-------------------------
Total liabilities and stockholders' equity $98,739,714 $80,078,708
=========================
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE>
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1997 1996 1995
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Loans, including fees $6,779,091 $5,564,766 $4,416,698
Securities
Taxable 183,260 202,022 188,212
Tax exempt 106,252 125,814 253,979
Deposits with financial institutions 230,410 207,940 170,432
Dividends 62,136 57,153 44,834
------------------------------------------
Total interest income 7,361,149 6,157,695 5,074,155
------------------------------------------
INTEREST EXPENSE
Deposits 3,695,491 2,945,818 2,755,847
Federal Home Loan Bank advances 111,425 219,980 197,750
------------------------------------------
Total interest expense 3,806,916 3,165,798 2,953,597
------------------------------------------
NET INTEREST INCOME 3,554,233 2,991,897 2,120,558
Provision for loan losses 255,000 219,000 207,500
------------------------------------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 3,299,233 2,772,897 1,913,058
------------------------------------------
OTHER INCOME
Fiduciary activities 26,509 27,353 21,453
Service charges on deposit accounts 253,207 184,400 132,926
Net realized gains (losses)
on securities 5,630 (13,553)
Other operating income 25,522 31,722 96,373
------------------------------------------
Total other income 305,238 249,105 237,199
------------------------------------------
OTHER EXPENSES
Salaries and employee benefits 1,236,794 1,012,761 838,495
Premises and equipment 301,262 212,847 178,143
Advertising 131,989 122,429 114,790
Data processing fees 232,797 191,698 175,822
Deposit insurance expense 45,178 453,368 106,781
Printing and office supplies 64,925 81,541 68,995
Legal and professional fees 97,843 135,068 108,879
Telephone expense 69,197 61,770 50,064
Other operating expenses 310,433 293,853 220,889
------------------------------------------
Total other expenses 2,490,418 2,565,335 1,862,858
------------------------------------------
INCOME BEFORE INCOME TAX 1,114,053 456,667 287,399
Income tax expense 375,609 115,401 11,046
------------------------------------------
NET INCOME $ 738,444 $ 341,266 $ 276,353
==========================================
BASIC EARNINGS PER SHARE $.75 $.35 $.29
DILUTED EARNINGS PER SHARE .74 .34 .28
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1997 1996 1995
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET INCOME $ 738,444 $ 341,266 $ 276,353
------------------------------------------
Other comprehensive income, net of tax
Unrealized gains (losses) on securities
available for sale
Unrealized holding gains (losses)
arising during the period, net of
tax expense (benefit) of $14,166,
($4,427) and $9,044 21,249 (6,641) 13,566
Less: Reclassification adjustment
for gains (losses) included in
net income, net of tax expense
(benefit) of $2,267 and ($5,457) 3,400 (8,185)
------------------------------------------
Comprehensive income $ 759,693 $ 331,225 $ 298,104
==========================================
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
RETAINED
COMMON STOCK EARNINGS ACCUMULATED
---------------------- AND OTHER
SHARES CONTRIBUTED COMPREHENSIVE
OUTSTANDING AMOUNT CAPITAL INCOME TOTAL
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCES, JANUARY 1, 1995 738,715 $6,068,970 $ 76,017 $6,144,987
Net income for 1995 276,353 276,353
Five-for-four stock split 184,576
Cash dividends in lieu of issuing
fractional shares (876) (876)
Net change in unrealized gain on
securities available for sale $21,751 21,751
-----------------------------------------------------------------
BALANCES, DECEMBER 31, 1995 923,291 6,068,970 351,494 21,751 6,442,215
Net income for 1996 341,266 341,266
Stock options exercised 19,534 112,516 112,516
Net change in unrealized gain on
securities available for sale (10,041) (10,041)
-----------------------------------------------------------------
BALANCES, DECEMBER 31, 1996 942,825 6,181,486 692,760 11,710 6,885,956
Net income for 1997 738,444 738,444
Cash dividends ($.10 per share) (94,282) (94,282)
5% stock dividend 47,023 540,765 (540,765)
Cash dividends in lieu of issuing
fractional shares (1,361) (1,361)
Net change in unrealized gain on
securities available for sale 21,249 21,249
-----------------------------------------------------------------
BALANCES, DECEMBER 31, 1997 989,848 $6,722,251 $794,796 $32,959 $7,550,006
=================================================================
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1997 1996 1995
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 738,444 $ 341,266 $ 276,353
Adjustments to reconcile net
income to net cash provided
by operating activities
Provision for loan losses 255,000 219,000 207,500
Depreciation and amortization 137,713 82,860 71,926
Deferred income tax 498 10,278 (20,419)
Investment securities amortization 4,362 7,215 62,383
Gain on disposal of premises and equipment (20,716)
Investment securities (gains) losses (5,630) 13,553
Net change in
Interest receivable (173,893) 91,485 (126,381)
Interest payable 63,534 12,988 52,542
Other assets 27,866 89,746 (23,718)
Other liabilities 238,056 (27,278) 9,732
------------------------------------------
Net cash provided by operating
activities 1,291,580 821,930 502,755
------------------------------------------
INVESTING ACTIVITIES
Purchases of securities available for sale (1,000,000) (1,670,000)
Proceeds from maturities of securities
available for sale 650,000 677,750 230,000
Proceeds from sales of securities
available for sale 2,176,965 622,021
Proceeds from maturities and paydowns
of securities held to maturity 828,248 608,936 1,542,787
Proceeds from sales of securities held
to maturity 125,000
Net change in loans (15,062,301) (10,587,119) (15,317,327)
Purchases of premises and equipment (290,617) (533,467) (25,746)
Proceeds from disposal of premises
and equipment 64,663
Purchase of stock of Federal Home
Loan Bank of Indianapolis (177,300) (87,600)
Proceeds from sale of other real estate
and repossessions 180,024 26,992 50,908
Other investing activities (4,803)
------------------------------------------
Net cash used by investing activities (14,694,646) (7,807,243) (14,470,097)
------------------------------------------
FINANCING ACTIVITIES
Net change in
Noninterest-bearing, NOW, and savings
deposits 6,597,456 5,023,029 8,518,439
Certificates of deposit 10,545,590 6,366,136 4,460,633
Short-term borrowings (908,138) 908,138
Proceeds from Federal Home Loan
Bank advances 1,750,000 3,000,000
Repayment of Federal Home Loan Bank advances (1,199,041) (2,224,485) (3,711,098)
Cash dividends (94,282)
Cash dividends in lieu of issuing fractional
shares (876)
Stock options exercised 112,516
------------------------------------------
Net cash provided by financing activities 17,599,723 8,369,058 13,175,236
------------------------------------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 4,196,657 1,383,745 (792,106)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 7,034,571 5,650,826 6,442,932
------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $11,231,228 $7,034,571 $5,650,826
==========================================
ADDITIONAL CASH FLOWS INFORMATION
Interest paid $ 3,743,382 $3,526,976 $2,901,055
Income tax paid (refunded) 187,406 110,000 (40,921)
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
- - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of First Community Bancshares, Inc.
("Company") and its wholly owned subsidiary, First Community Bank and Trust
("Bank"), conform to generally accepted accounting principles and reporting
practices followed by the banking industry. The more significant of the
policies are described below.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The Company is a bank holding company whose principal activity is the
ownership and management of the Bank. The Bank operates under a state bank
charter and provides full banking services, including trust services. As a
state bank, the Bank is subject to regulation by the Department of Financial
Institutions, State of Indiana and the Federal Deposit Insurance Corporation.
DESCRIPTION OF BUSINESS-The Bank generates commercial, mortgage and consumer
loans and receives deposits from customers located primarily in Johnson and
Jennings Counties, Indiana and surrounding counties. The Bank's loans are
generally secured by specific items of collateral including real property,
consumer assets and business assets.
CONSOLIDATION-The consolidated financial statements include the accounts of
the Company and the Bank after elimination of all material intercompany
transactions.
INVESTMENT SECURITIES-Debt securities are classified as held to maturity when
the Company has the positive intent and ability to hold the securities to
maturity. Securities held to maturity are carried at amortized cost. Debt
securities not classified as held to maturity are classified as available for
sale. Securities available for sale are carried at fair value with unrealized
gains and losses reported separately through stockholders' equity, net of tax.
Amortization of premiums and accretion of discounts are recorded as interest
income from securities. Realized gains and losses are recorded as net security
gains (losses). Gains and losses on sales of securities are determined on the
specific-identification method.
F-7
<PAGE>
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
LOANS are carried at the principal amount outstanding. A loan is impaired
when, based on current information or events, it is probable that the Bank
will be unable to collect all amounts due (principal and interest) according
to the contractual terms of the loan agreement. Payments with insignificant
delays not exceeding 90 days outstanding are not considered impaired. Certain
nonaccrual and substantially delinquent loans may be considered to be
impaired. The Bank considers its investment in one-to-four family residential
loans and consumer loans to be homogeneous and therefore excluded from
separate identification for evaluation of impairment. Interest income is
accrued on the principal balances of loans. The accrual of interest on
impaired and nonaccrual loans is discontinued when, in management's opinion,
the borrower may be unable to meet payments as they become due. When interest
accrual is discontinued, all unpaid accrued interest is reversed when
considered uncollectible. Interest income is subsequently recognized only to
the extent cash payments are received. Certain loan fees and direct costs are
being deferred and amortized as an adjustment of yield on the loans over the
contractual lives of the loans. When a loan is paid off or sold, any
unamortized loan origination fee balance is credited to income.
ALLOWANCE FOR LOAN LOSSES is maintained to absorb potential loan losses based
on management's continuing review and evaluation of the loan portfolio and its
judgment as to the impact of economic conditions on the portfolio. The
evaluation by management includes consideration of past loan loss experience,
changes in the composition of the portfolio, and the current condition and
amount of loans outstanding, and the probability of collecting all amounts
due. Impaired loans are measured by the present value of expected future cash
flows, or the fair value of the collateral of the loan, if collateral
dependent.
The determination of the adequacy of the allowance for loan losses is based on
estimates that are particularly susceptible to significant changes in the
economic environment and market conditions. Management believes that as of
December 31, 1997, the allowance for loan losses is adequate based on
information currently available. A worsening or protracted economic decline
in the area within which the Company operates would increase the likelihood of
additional losses due to credit and market risks and could create the need for
additional loss reserves.
PREMISES AND EQUIPMENT are carried at cost net of accumulated depreciation.
Depreciation is computed using the straight-line method based principally on
the estimated useful lives of the assets. Maintenance and repairs are expensed
as incurred while major additions and improvements are capitalized. Gains and
losses on dispositions are included in current operations.
FEDERAL HOME LOAN BANK STOCK is a required investment for institutions that
are members of the Federal Home Loan Bank ("FHLB") system. The required
investment in the common stock is based on a predetermined formula.
FORECLOSED REAL ESTATE is carried at the lower of cost or fair value less
estimated selling costs. When foreclosed real estate is acquired, any
required adjustment is charged to the allowance for loan losses. All
subsequent activity is included in current operations.
STOCK OPTIONS are granted for a fixed number of shares to employees with an
exercise price equal to the fair value of the shares at the date of grant. The
Company accounts for and will continue to account for stock option grants in
accordance with Accounting Principle Board Opinion ("APB") No. 25, Accounting
for Stock Issued to Employees, and, accordingly, recognizes no compensation
expense for the stock option grants.
F-8
<PAGE>
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
INCOME TAX in the consolidated statement of income includes deferred income
tax provisions or benefits for all significant temporary differences in
recognizing income and expenses for financial reporting and income tax
purposes. The Company files consolidated income tax returns with its
subsidiary.
EARNINGS PER SHARE have been computed based upon the weighted average common
shares and potential common shares outstanding during each year.
- - RESTRICTION ON CASH AND DUE FROM BANKS
The Bank is required to maintain reserve funds in cash and/or on deposit with
the Federal Reserve Bank ("FRB"). The reserve required at December 31, 1997,
was $360,000.
- - INVESTMENT SECURITIES
1997
------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
DECEMBER 31 COST GAINS LOSSES VALUE
- ------------------------------------------------------------------------------
Available for sale
State and municipal $1,316 $55 $1,371
Corporate obligations 1,400 1,400
-----------------------------------------
Total available for sale 2,716 55 2,771
Held to maturity-state and municipal 1,709 25 1,734
-----------------------------------------
Total investment securities $4,425 $80 $0 $4,505
=========================================
F-9
<PAGE>
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
1996
------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
DECEMBER 31 COST GAINS LOSSES VALUE
- ------------------------------------------------------------------------------
Available for sale
State and municipal $1,737 $24 $ (5) $1,756
Corporate obligations 630 630
-----------------------------------------
Total available for sale 2,367 24 (5) 2,386
-----------------------------------------
Held to maturity
State and municipal 2,367 2 (44) 2,325
Mortgage-backed securities 174 (1) 173
-----------------------------------------
Total held to maturity 2,541 2 (45) 2,498
-----------------------------------------
Total investment securities $4,908 $26 $(50) $4,884
=========================================
The amortized cost and fair value of securities held to maturity and available
for sale at December 31, 1997, by contractual maturity, are shown below.
Expected maturities will differ from contractual maturities because issuers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
1997
---------------------------------------
AVAILABLE FOR SALE HELD TO MATURITY
---------------------------------------
AMORTIZED FAIR AMORTIZED FAIR
MATURITY DISTRIBUTION AT DECEMBER 31 COST VALUE COST VALUE
- ------------------------------------------------------------------------------
Due in one year or less $ 620 $ 620 $ 675 $ 675
Due after one through five years 1,375 1,389 742 750
Due after five through ten years 180 187 292 309
Due after ten years 541 575
-------------------------------------
Totals $2,716 $2,771 $1,709 $1,734
=====================================
No securities were pledged at December 31, 1997. Securities with a carrying
value of $174,000 were pledged at December 31, 1996 to secure FHLB advances.
Proceeds from sales of securities available for sale during 1996 were
$183,000. Gross gains of $3,000 were realized on those sales.
Proceeds from securities held to maturity called at a premium during 1996 were
$278,000. Gross gains of $3,000 were realized on those calls.
F-10
<PAGE>
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
Proceeds, including due from broker of $1,994,000, from sales of securities
available for sale during 1995 were $2,616,000. Gross gains of $4,000 and
gross losses of $18,000 were realized on those sales.
During 1995, the Company sold two securities held to maturity with an
amortized cost of $125,000 due to substandard credit worthiness. No gains or
losses were realized on these sales.
- - LOANS AND ALLOWANCE
DECEMBER 31 1997 1996
- --------------------------------------------------------------------------
Commercial, commercial real estate
and industrial loans $17,883 $17,401
Real estate loans 28,971 23,010
Construction loans 6,773 3,621
Individuals' loans for household
and other personal expenditures 22,896 19,084
Tax-exempt loans and leases 3,377 1,922
-----------------------
79,900 65,038
Deferred loan origination costs 101 70
-----------------------
Total loans $80,001 $65,108
=======================
DECEMBER 31 1997 1996 1995
- --------------------------------------------------------------------------
Allowance for loan losses
Balances, January 1 $644 $518 $362
Provision for losses 255 219 208
Recoveries on loans 29 18 36
Loans charged off (80) (111) (88)
-----------------------------------
Balances, December 31 $848 $644 $518
===================================
At December 31, 1997, the Company had no impaired loans. At December 31,
1996, the Company had an impaired loan of $67,000 and had recorded an
allowance for losses of $7,000. The average balance of impaired loans for the
years ended December 31, 1997, 1996 and 1995 were $25,000, $112,000 and
$26,000. The Company had no interest income or cash receipts on impaired
loans during the years ended December 31, 1997, 1996 and 1995.
F-11
<PAGE>
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
The Company had no commitments to loan additional funds to the borrowers of
impaired loans.
The Bank has entered into transactions with certain directors, executive
officers, significant stockholders of the Company and their affiliates or
associates (related parties). Such transactions were made in the ordinary
course of business on substantially the same terms and conditions, including
interest rates and collateral, as those prevailing at the same time for
comparable transactions with other customers, and did not, in the opinion of
management, involve more than normal credit risk or present other unfavorable
features.
The aggregate amount of loans, as defined, to such related parties were as
follows:
- --------------------------------------------------------------------------
Balances, January 1, 1997 $649
New loans, including renewals 429
Payments, etc., including renewals (333)
----
Balances, December 31, 1997 $745
====
- - PREMISES AND EQUIPMENT
DECEMBER 31 1997 1996
- --------------------------------------------------------------------------
Land $ 432 $ 264
Buildings 853 786
Leasehold improvements 285 343
Equipment 751 686
-----------------------
Total cost 2,321 2,079
Accumulated depreciation (376) (287)
-----------------------
Net $1,945 $1,792
=======================
F-12
<PAGE>
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
- - DEPOSITS
DECEMBER 31 1997 1996
- --------------------------------------------------------------------------
Demand deposits $16,992 $14,212
Savings deposits 18,957 15,139
Certificates and other time
deposits of $100,000 or more 10,519 7,355
Other certificates and time deposits 41,227 33,846
-----------------------
Total deposits $87,695 $70,552
=======================
Certificates and other time deposits maturing in years ending December 31:
1998 $38,544
1999 8,711
2000 2,572
2001 1,120
2002 799
-------
$51,746
=======
- - FHLB ADVANCES
INTEREST
AMOUNT RATE
- --------------------------------------------------------------------------
Maturities in years ending December 31
1998 $ 177 6.01%
1999 156 6.01
2000 638 6.05
2001 122 6.01
2002 1,603 5.77
2003 234 5.85
------
$2,930 5.87%
======
The FHLB advances are secured by first mortgage loans totaling $21,259,000.
Advances are subject to restrictions or penalties in the event of prepayment.
The Bank has an available line of credit with the FHLB totaling $2,000,000.
The line of credit expires May 7, 1998 and bears interest at a rate equal to
the then current variable advance rate. There were no drawings on this line
of credit at December 31, 1997.
F-13
<PAGE>
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
- - INCOME TAX
YEAR ENDED DECEMBER 31 1997 1996 1995
- --------------------------------------------------------------------------
Income tax expense
Currently payable
Federal $270 $ 54 $15
State 106 51 16
Deferred
Federal 8 20 (31)
State (8) (10) 11
-------------------
Total income tax expense $376 $115 $11
===================
Reconciliation of federal statutory to actual tax expense
Federal statutory income tax at 34% $379 $155 $98
Tax exempt interest (69) (66) (108)
Effect of state income taxes 65 27 18
Other 1 (1) 3
--------------------
Actual tax expense $376 $115 $11
====================
A cumulative net deferred tax asset is included in other assets. The
components of the asset are as follows:
DECEMBER 31 1997 1996
- --------------------------------------------------------------------------
ASSETS
Allowance for loan losses $312 $227
Net operating loss carryforward 20
Alternative minimum tax credit carryforward 38 54
Other 9
--------------------
Total assets 359 301
--------------------
LIABILITIES
Depreciation 103 75
State income tax 16 13
Loan fees 35 8
Securities available for sale 22 8
--------------------
Total liabilities 176 104
--------------------
$183 $197
====================
F-14
<PAGE>
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
At December 31, 1997, the Company had an alternative minimum tax credit
carryforward of $38,000 available to offset future regular federal income tax
liabilities which has an unlimited carryover period.
Tax expense (benefit) applicable to investment security gains and losses for
the years ended December 31, 1996 and 1995 was $2,230 and $(5,400).
- - COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business there are outstanding commitments and
contingent liabilities, such as commitments to extend credit and standby
letters of credit, which are not included in the accompanying financial
statements. The Bank's exposure to credit loss in the event of nonperformance
by the other party to the financial instruments for commitments to extend
credit and standby letters of credit is represented by the contractual or
notional amount of those instruments. The Bank uses the same credit policies
in making such commitments as it does for instruments that are included in the
consolidated balance sheet.
Financial instruments whose contract amount represents credit risk as of
December 31 were as follows:
1997 1996
- --------------------------------------------------------------------------
Commitments to extend credit $5,606 $9,022
Standby letters of credit 640 401
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected
to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Bank evaluates each
customer's credit worthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Bank upon extension of credit, is based
on management's credit evaluation. Collateral held varies but may include
accounts receivable, inventory, property and equipment, and income-producing
commercial properties.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party.
The Company and Bank are also subject to claims and lawsuits which arise
primarily in the ordinary course of business. It is the opinion of management
that the disposition or ultimate resolution of such claims and lawsuits will
not have a material adverse effect on the consolidated financial position of
the Company.
In connection with the approval of its bank holding company application, the
Company must obtain Federal Reserve approval prior to incurring debt which
would cause its debt to equity ratio to exceed 30 percent. The Company is in
compliance with this commitment at December 31, 1997.
F-15
<PAGE>
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
- - Stockholders' Equity
On April 26, 1995, the Board of Directors declared a 5-for-4 stock split
effective June 1, 1995. Net income per share and weighted average shares
outstanding have been restated to reflect the stock split.
On November 19, 1997, the Board of Directors declared a 5% stock dividend
payable on February 1, 1998. Net income per share and weighted average shares
outstanding have been restated to reflect the 5% stock dividend.
The dividends which the Company may pay are restricted by Indiana law to the
amount of retained earnings. The ability of the Company to pay dividends to
stockholders is dependent on dividends received from the Bank. Without prior
approval, current regulations allow the Bank to pay dividends to the Company not
exceeding net profits (as defined) for the current year plus those for the
previous two years. The Bank is also restricted by the Office of Thrift
Supervision for the amount of the liquidation account established at the time of
its stock conversion. The Bank normally restricts dividends to a lesser amount
because of the need to maintain an adequate capital structure. At December 31,
1997, stockholder's equity of the Bank was $7,324,000, of which a minimum of
$1,080,000 was available for payment of dividends.
- - Regulatory Capital
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies and are assigned to a capital category. The
assigned capital category is largely determined by three ratios that are
calculated according to the regulations: total risk adjusted capital, Tier 1
capital, and Tier 1 leverage ratios. The ratios are intended to measure
capital relative to assets and credit risk associated with those assets and
off-balance sheet exposures of the entity. The capital category assigned to
an entity can also be affected by qualitative judgments made by regulatory
agencies about the risk inherent in the entity's activities that are not part
of the calculated ratios.
There are five capital categories defined in the regulations, ranging from
well capitalized to critically undercapitalized. Classification of a bank in
any of the undercapitalized categories can result in actions by regulators
that could have a material effect on a bank's operations. At December 31,
1997 and 1996, the Bank is categorized as well capitalized and met all subject
capital adequacy requirements. There are no conditions or events since
December 31, 1997 that management believes have changed the Bank's
classification.
F-16
<PAGE>
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
The Bank's actual and required capital amounts and ratios are as follows:
<TABLE>
<CAPTION>
1997
----------------------------------------------------
REQUIRED FOR TO BE WELL
ACTUAL ADEQUATE CAPITAL(1) CAPITALIZED(1)
----------------------------------------------------
DECEMBER 31 AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total capital(1) (to risk-weighted assets) $7,291 10.1% $5,789 8.0% $7,236 10.0%
Tier 1 capital(1) (to risk-weighted assets) 8,139 11.3% 2,895 4.0 4,342 6.0
Tier 1 capital(1) (to average assets) 8,139 8.7% 3,758 4.0 5,638 6.0
</TABLE>
(1) As defined by regulatory agencies
<TABLE>
<CAPTION>
1996
----------------------------------------------------
REQUIRED FOR TO BE WELL
ACTUAL ADEQUATE CAPITAL(1) CAPITALIZED(1)
----------------------------------------------------
DECEMBER 31 AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total capital(1) (to risk-weighted assets) $6,665 10.9% $4,885 8.0% $6,106 10.0%
Tier 1 capital(1) (to risk-weighted assets) 7,309 12.0% 2,443 4.0 3,664 6.0
Tier 1 capital(1) (to average assets) 7,309 9.4% 3,125 4.0 3,906 5.0
</TABLE>
(1) As defined by regulatory agencies
- - Employee Benefits
Effective January 1, 1995, the Bank adopted a retirement savings 401(k) plan
in which substantially all employees may participate. The Bank matches
employees' contributions as determined each year by the Bank's Board of
Directors. The Bank's expense for the plan was $8,000, $6,000 and $4,000 for
1997, 1996 and 1995.
The Company adopted a stock option plan in 1992 whereby 46,921 shares of
common stock, after restatement for stock dividends and splits, were reserved
for the granting of options to certain officers, directors and key employees.
The options were exercisable within five years from the date of grant, and the
right to purchase shares under such options vested at a rate of 40% after the
first year and 20% each year thereafter with the options being fully vested
after four years. Additional options to purchase common shares may be granted
not to exceed 10% of the Company's outstanding shares of common stock, less
previously granted options.
F-17
<PAGE>
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands, Except Per Share Data)
On February 15, 1993, the 1992 stock option plan, which is accounted for in
accordance with APB No. 25, Accounting for Stock Issued to Employees, and
related interpretations, was amended to increase the aggregate number of
shares under the plan from 46,921 to 66,771 shares. In addition, the
amendment provided for immediate vesting of all outstanding stock options and
stock options granted pursuant to the agreement. On May 15, 1996, the 1992
stock option plan was amended to extend the exercise period from five years to
ten years from the date of grant.
On May 15, 1996, the stockholders approved the 1996 stock option plan,
reserving 105,000 shares of Company stock for the granting of options to
certain key employees, directors and advisors. The exercise price of the
shares may not be less than the fair market value of the shares upon the grant
of the option. Options granted to key employees and advisors require approval
of the Compensation Committee of the Board of Directors ("Committee"). Options
granted to key employees and advisors become 25% exercisable one year from the
date of the grant and continue to vest 25% each year thereafter until fully
vested. Without any action by the Committee, each outside director will be
automatically granted an option to purchase 1,000 shares of Company stock on
each anniversary date of service on the Board of Directors beginning with
their 1997 anniversary. These options vest at the date of grant. Each option
granted under the plan shall expire no later than ten years from the date the
option is granted.
Although the Company has elected to follow APB No. 25, Standard Financial
Accounting Standards ("SFAS") No. 123 requires pro forma disclosures of net
income and earnings per share as if the Company had accounted for its employee
stock options under that Statement. The fair value of each option grant was
estimated on the grant date using an option-pricing model with the following
assumptions:
1997
--------------
Risk-free interest rates 6.67%
Dividend yields .73%
Volatility factors of expected market price of common stock 8.00%
Weighted-average expected life of the options 9 years
Under SFAS No. 123, compensation cost is recognized in the amount of the
estimated fair value of the options and amortized to expense over the options'
vesting period. The pro forma effect on net income and earnings per share of
this statement are as follows:
1997
--------------
Net income As reported $738
Pro forma 726
Basic Earnings per share As reported .75
Pro forma .73
Diluted earnings per share As reported .74
Pro forma .72
F-18
<PAGE>
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands, Except Per Share Data)
The following is a summary of the status of the Company's stock option plans
and changes in the plans as of and for the years ended December 31, 1997, 1996
and 1995.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
OPTIONS SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year 46,261 $5.54 66,771 $5.54 66,771 $5.54
Granted 5,250 11.43
Exercised 20,510 5.54
------- ------- -------
Outstanding, end of year 51,511 $6.14 46,261 $5.54 66,771 $5.54
======= ======= =======
Options exercisable at year end 51,511 46,261 66,771
Weighted-average fair value of
options granted during the year $4.00
</TABLE>
As of December 31, 1997, options outstanding of 46,261 and 5,250 have exercise
prices of $5.54 and $11.43 and weighted-average remaining contractual lives of
4.5 and 9.4 years.
- - EARNINGS PER SHARE
Earnings per share ("EPS") were computed as follows:
YEAR ENDED DECEMBER 31, 1997
-------------------------------
WEIGHTED
AVERAGE PER SHARE
INCOME SHARES AMOUNT
-------------------------------
BASIC EARNINGS PER SHARE
Income available to common stockholders $738 989,848 $.75
EFFECT OF DILUTIVE STOCK OPTIONS 13,803 ====
-----------------
DILUTED EARNINGS PER SHARE
Income available to common stockholders
and assumed conversions $738 1,003,651 $.74
===============================
F-19
<PAGE>
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands, Except Per Share Data)
Options to purchase 5,250 shares of common stock at $11.43 per share were
outstanding at December 31, 1997, but were not included in the computation of
diluted EPS because the options' exercise price was greater than the average
market price of the common shares.
YEAR ENDED DECEMBER 31, 1996
-------------------------------
WEIGHTED
AVERAGE PER SHARE
INCOME SHARES AMOUNT
-------------------------------
BASIC EARNINGS PER SHARE
Income available to common stockholders $341 986,043 $.35
EFFECT OF DILUTIVE STOCK OPTIONS 14,757 ====
-----------------
DILUTED EARNINGS PER SHARE
Income available to common stockholders
and assumed conversions $341 1,000,800 $.34
===============================
YEAR ENDED DECEMBER 31, 1995
-------------------------------
WEIGHTED
AVERAGE PER SHARE
INCOME SHARES AMOUNT
-------------------------------
BASIC EARNINGS PER SHARE
Income available to common stockholders $276 969,455 $.29
EFFECT OF DILUTIVE STOCK OPTIONS 21,174 ====
-----------------
DILUTED EARNINGS PER SHARE
Income available to common stockholders
and assumed conversions $276 990,629 $.28
===============================
- - FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument:
CASH AND CASH EQUIVALENTS-The fair value of cash and cash equivalents
approximates carrying value.
INVESTMENT SECURITIES-Fair values are based on quoted market prices.
LOANS-The fair value for loans are estimated using discounted cash flow
analyses, using interest rates currently being offered for loans with similar
terms to borrowers of similar credit quality.
F-20
<PAGE>
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
FHLB STOCK-Fair value of FHLB stock is based on the price at which it may be
resold to the FHLB.
INTEREST RECEIVABLE/PAYABLE-The fair values of interest receivable/payable
approximate carrying values.
DEPOSITS-The fair values of noninterest-bearing and interest-bearing demand
accounts are equal to the amount payable on demand at the balance sheet date.
Fair values for certificates of deposit are estimated using a discounted cash
flow calculation that applies interest rates currently being offered on
certificates to a schedule of aggregated expected monthly maturities on such
time deposits.
FHLB ADVANCES-The fair value of advances is estimated using a discounted cash
flow calculation, based on current rates for similar debt.
The estimated fair values of the Company's financial instruments are as
follows:
1997 1996
---------------------------------
CARRYING FAIR CARRYING FAIR
DECEMBER 31 VALUE VALUE VALUE VALUE
- ---------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $11,231 $11,231 $7,035 $7,035
Investment securities available
for sale 2,771 2,771 2,386 2,386
Investment securities held to maturity 1,709 1,734 2,541 2,498
Loans, net 79,152 80,403 64,464 65,305
Stock in FHLB 778 778 778 778
Interest receivable 700 700 526 526
LIABILITIES
Deposits 87,695 87,806 70,552 70,633
FHLB advances 2,930 2,908 2,379 2,351
Interest payable 251 251 187 187
F-21
<PAGE>
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
- - CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY)
Presented below is condensed financial information as to financial position,
results of operations and cash flows of the Company:
CONDENSED BALANCE SHEET
DECEMBER 31 1997 1996
- --------------------------------------------------------------------------
ASSETS
Cash on deposit $ 88 $ 64
Investment in subsidiary 7,324 6,665
Other assets 139 161
----------------------
Total assets $7,551 $6,890
======================
LIABILITIES-other liabilities $ 1 $ 4
STOCKHOLDERS' EQUITY 7,550 6,886
----------------------
Total liabilities and stockholders' equity $7,551 $6,890
======================
CONDENSED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31 1997 1996 1995
- --------------------------------------------------------------------------
Income
Dividends from subsidiary $165 $ 30
Other interest income and dividends 1 $ 1 1
----------------------
Total income 166 1 31
----------------------
Expenses
Salaries and employee benefits 44 20 19
Professional fees 46 55 20
Other expenses 18 12 22
----------------------
Total expenses 108 87 61
----------------------
Income (loss) before income tax benefit
and equity in undistributed income of
subsidiary 58 (86) (30)
Income tax benefit (42) (34) (24)
----------------------
Income (loss) before equity in
undistributed income of subsidiary 100 (52) (6)
Equity in undistributed income of subsidiary 638 393 282
----------------------
NET INCOME $738 $341 $276
======================
F-22
<PAGE>
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
CONDENSED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31 1997 1996 1995
- --------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $738 $341 $276
Adjustments to reconcile net income to
net cash provided (used) by operating
activities (620) (421) (296)
----------------------
Net cash provided (used) by
operating activities 118 (80) (20)
----------------------
FINANCING ACTIVITIES
Cash dividends (94)
Cash dividends in lieu of issuing
fractional shares (1)
Stock options exercised 113
----------------------
Net cash provided (used) by
financing activities (94) 113 (1)
----------------------
NET CHANGE IN CASH ON DEPOSIT 24 33 (21)
CASH ON DEPOSIT AT BEGINNING OF YEAR 64 31 52
----------------------
CASH ON DEPOSIT AT END OF YEAR $ 88 $ 64 $ 31
======================
F-23
<PAGE>
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARY
Consolidated Condensed Balance Sheet
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
----------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 1,242,973 $ 933,574
Short-term interest-bearing deposits 7,198,167 10,297,654
----------------------------------
Cash and cash equivalents 8,441,140 11,231,228
Investment securities
Available for sale 4,103,895 2,771,058
Held to maturity 1,168,029 1,708,679
----------------------------------
Total investment securities 5,271,924 4,479,737
Loans 86,995,467 80,000,575
Allowance for loan losses (912,357) (848,085)
----------------------------------
Net Loans 86,083,110 79,152,490
Premises and equipment 2,353,113 1,944,779
Federal Home Loan Bank of Indianapolis stock, at cost 777,800 777,800
Foreclosed real estate 14,550 78,636
Interest receivable 756,106 700,079
Other assets 449,063 374,965
----------------------------------
Total assets $104,146,806 $98,739,714
==================================
LIABILITIES
Deposits
Noninterest-bearing $ 6,636,970 $ 7,623,814
Interest-bearing 86,118,460 80,071,501
----------------------------------
Total deposits 92,755,430 87,695,315
Federal Home Loan Bank of Indianapolis advances 2,929,789 2,929,789
Interest payable 334,343 250,617
Other liabilities 196,553 313,987
----------------------------------
Total liabilities 96,216,115 91,189,708
----------------------------------
COMMITMENTS AND CONTINGENT LIABILITIES
STOCKHOLDERS' EQUITY
Preferred stock, no-par value
Authorized and unissued - 1,000,000 shares
Common stock, no-par value
Authorized - 4,000,000 shares
Issued and outstanding - 989,848 shares 6,722,251 6,722,251
Retained earnings and contributed capital 1,182,482 794,796
Accumulated other comprehensive income 25,958 32,959
----------------------------------
Total stockholders' equity 7,930,691 7,550,006
----------------------------------
Total liabilities and stockholders' equity $104,146,806 $98,739,714
==================================
</TABLE>
See notes to consolidated condensed financial statements.
F-24
<PAGE>
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARY
Consolidated Condensed Statement of Income
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------------------------------------------
1998 1997 1998 1997
---------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest Income:
Loans, including fees $1,879,631 $1,649,483 $3,680,570 $3,181,392
Investment securities
Taxable 75,013 39,933 132,608 85,177
Tax exempt 19,443 29,067 37,045 58,450
Interest-bearing time deposits 112,308 79,219 213,462 121,110
Dividends 15,513 15,223 32,182 31,471
---------------------------------------------------------------
Total interest income 2,101,908 1,812,925 4,095,867 3,477,600
---------------------------------------------------------------
Interest Expense:
Deposits 1,091,937 909,858 2,128,026 1,724,352
FHLB advances 44,913 36,940 87,295 72,043
---------------------------------------------------------------
Total interest expense 1,136,850 946,798 2,215,321 1,796,395
---------------------------------------------------------------
Net Interest Income 965,058 866,127 1,880,546 1,681,205
Provision for loan losses 69,000 57,000 129,000 111,000
---------------------------------------------------------------
Net Interest Income After Provision for Loan Losses 896,058 809,127 1,751,546 1,570,205
---------------------------------------------------------------
Other Income
Trust fees 6,058 6,936 28,653 17,776
Service charges on deposit accounts 76,328 56,236 148,956 111,746
Other operating income 11,073 3,082 20,076 10,357
---------------------------------------------------------------
Total other income 93,459 66,254 197,685 139,879
---------------------------------------------------------------
Other Expenses
Salaries and employee benefits 344,073 298,820 651,932 586,534
Premises and equipment 79,189 72,763 155,459 140,450
Advertising 36,942 32,412 63,237 60,517
Data processing fees 63,749 56,693 128,871 111,671
Deposit insurance expense 13,369 11,237 25,877 21,527
Printing and office supplies 28,633 17,967 56,200 35,566
Legal and professional fees 40,369 41,197 63,934 80,044
Telephone expense 16,711 17,013 33,560 34,331
Other operating expense 103,785 83,873 194,615 154,967
---------------------------------------------------------------
Total other expenses 726,820 631,975 1,373,685 1,225,607
---------------------------------------------------------------
Income Before Income Tax 262,697 243,406 575,546 484,477
Income tax expense 83,005 84,141 187,860 161,971
---------------------------------------------------------------
Net Income $ 179,692 $ 159,265 $ 387,686 $ 322,506
===============================================================
Basic earnings per share $ .18 $ .16 $ .39 $ .33
Diluted earnings per share .18 .16 .39 .32
</TABLE>
See notes to consolidated condensed financial statements.
F-25
<PAGE>
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARY
Consolidated Condensed Statement of Comprehensive Income
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------------------------------------
1998 1997 1998 1997
------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Income $ 179,692 $ 159,265 $ 387,686 $ 322,506
Other comprehensive income, net of tax
Holding gains (losses) on securities available
for sale, net of tax expense (benefit) of ($712),
$13,614, ($4,667) and $6,595 (1,069) 20,421 (7,001) 9,893
============================================================
Comprehensive income $ 178,623 $ 179,686 $ 380,685 $ 332,399
============================================================
</TABLE>
See notes to consolidated condensed financial statements.
F-26
<PAGE>
FIRST COMMUNITY BANCSHARES, INC AND SUBSIDIARY
Consolidated Condensed Statement of Changes in Stockholders' Equity
For the Six Months Ended June 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
Retained
Common Stock Earnings Accumulated
----------------------------- and Other
Shares Contributed Comprehensive
Outstanding Amount Capital Income Total
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCES, JANUARY 1, 1998 989,848 $6,722,251 $ 794,796 $ 32,959 $7,550,006
387,686 387,686
Net income for the period
Holding losses on securities
available for sale (7,001) (7,001)
---------------------------------------------------------------------------------
BALANCES, JUNE 30, 1998 989,848 $6,722,251 $ 1,182,482 $ 25,958 $7,930,691
=================================================================================
</TABLE>
See notes to consolidated condensed financial statements.
F-27
<PAGE>
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARY
Consolidated Condensed Statement of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
---------------------------------
1998 1997
---------------------------------
<S> <C> <C>
Operating Activities:
Net income $ 387,686 $ 322,506
Adjustments to reconcile net income to net cash provided (used) by
operating activities:
Provision for loan losses 129,000 111,000
Depreciation and amortization 67,212 62,496
Investment securities amortization 699 3,243
Net change in:
Interest receivable (56,027) (46,902)
Interest payable 83,726 9,509
Other assets (69,506) (20,222)
Other liabilities (117,434) 147,916
---------------------------------
Net cash provided by operating activities 425,356 589,546
---------------------------------
Investing Activities:
Proceeds from maturities of securities available for sale 70,000 515,000
Proceeds from paydowns and maturities of securities held to maturity 540,000 95,060
Purchases of securities available for sale (1,414,479)
Net changes in loans (7,052,170) (8,031,105)
Proceeds from sale of foreclosed real estate 56,636 123,167
Purchases of property and equipment (475,546) (202,709)
---------------------------------
Net cash used by investing activities (8,275,559) (7,500,587)
---------------------------------
Financing Activities:
Net change in:
Noninterest-bearing, NOW and savings deposits 752,392 412,476
Certificates of Deposit 4,307,723 7,504,421
Repayment of FHLB advances (1,000,000)
Cash dividends (94,282)
---------------------------------
Net cash provided by financing activities 5,060,115 6,822,615
---------------------------------
Net Decrease in Cash and Cash equivalents (2,790,088) (88,426)
Cash and Cash equivalents, Beginning of period 11,231,228 7,034,571
---------------------------------
Cash and Cash equivalents, End of period $ 8,441,140 $ 6,946,145
=================================
Supplemental cash flow disclosures:
Interest paid $ 2,131,595 $ 1,786,886
Income taxes paid 135,550 113,904
</TABLE>
See notes to consolidated condensed financial statements.
F-28
<PAGE>
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Condensed Financial Statements
June 30, 1998
(Unaudited)
Note 1: Basis of Presentation
- -----------------------------
The consolidated financial statements include the accounts of First Community
Bancshares, Inc. (the "Company") and its wholly owned subsidiaries, First
Community Bank & Trust, a state chartered bank (the "Bank") and First
Community Real Estate Management, Inc. ("FCREMI"). FCREMI was incorporated on
May 26, 1998 to hold and manage the real estate used by the Company and the
Bank. At June 30, 1998, FCREMI had not commenced operations. A summary of
significant accounting policies is set forth in Note 1 of Notes to Financial
Statements included in the December 31, 1997, Annual Report to Shareholders.
All significant intercompany accounts and transactions have been eliminated in
consolidation.
The interim consolidated financial statements have been prepared in accordance
with instructions to Form 10-Q, and therefore do not include all information
and footnotes necessary for a fair presentation of financial position, results
of operations and cash flows in conformity with generally accepted accounting
principles.
The interim consolidated financial statements at June 30, 1998, and for the
six months ended June 30, 1998 and 1997, have not been audited by independent
accountants, but reflect, in the opinion of management, all adjustments (which
include only normal recurring adjustments) necessary to present fairly the
financial position, results of operations and cash flows for such periods.
Note 2: Earnings Per Share
- --------------------------
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
June 30, 1998 June 30, 1997
------------- -------------
Weighted Weighted
Average Per Share Average Per Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
BASIC EARNINGS PER SHARE
Income available to
common shareholders $ 179,692 989,848 $ .18 $ 159,265 989,848 $ .16
========== =========
EFFECT OF DILUTIVE STOCK OPTIONS 13,867 13,803
-------------------------- -------------------------
DILUTED EARNINGS PER SHARE
Income available to
common shareholders and
assumed conversions $ 179,692 1,003,715 $ .18 $ 159,265 1,003,651 $ .16
======================================= =====================================
</TABLE>
F-29
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
June 30, 1998 June 30, 1997
------------- -------------
Weighted Weighted
Average Per Share Average Per Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
BASIC EARNINGS PER SHARE
Income available to
common shareholders $ 387,686 989,848 $ .39 $ 322,506 989,848 $ .33
========= =========
EFFECT OF DILUTIVE STOCK OPTIONS 14,182 13,803
------------------------- ------------------------
DILUTED EARNINGS PER SHARE
Income available to
common shareholders and
assumed conversions $ 387,686 1,004,030 $ .39 $ 322,506 1,003,651 $ .32
====================================== =====================================
</TABLE>
Note 3: Changes in Methods of Accounting
- ----------------------------------------
During 1997, the Financial Accounting Standards Board ("FASB") issued
Statement No. 130, Reporting Comprehensive Income, establishing standards for
the reporting of comprehensive income and its components in financial
statements. Statement No. 130 is applicable to all entities that provide a
full set of financial statements. Enterprises that have no items of other
comprehensive income in any period presented are excluded from the scope of
this Statement.
Statement No. 130 is effective for interim and annual periods beginning after
December 15, 1997. The Company has adopted Statement No. 130 during the first
fiscal quarter of 1998. See the Consolidated Condensed Statement of
Comprehensive Income on page 6.
Note 4: Subsequent Event
- ------------------------
On July 15, 1998 the Board of Directors approved the preparation and filing of
a registration statement covering the issuance and sale of the following
securities:
- Rights to shareholders to purchase one (1) share for every ten (10)
shares owned as of the Record Date, subject to a minimum offer and
purchase of one hundred (100) shares of common stock, at a purchase
price of $11.00 per share. It is contemplated that the Right will
be exercisable for a ninety (90) day period following their
issuance and subject to the minimum purchase requirement, will be
freely transferable;
- Warrants to shareholders to purchase one (1) share for every ten
(10) shares owned on the Record Date, subject to a minimum offer
and purchase of one hundred (100) shares of Common Stock, with an
exercise price of $11.00 per share. It is contemplated that the
Warrants will be exercisable for a ninety (90) day period
commencing September 1, 1999 and subject to the minimum purchase
requirement, will be freely transferable; and
- The offer and sale of up to $1 million in aggregate principal
amount of convertible Notes. The Notes will be for a term of ten
(10) years, bear interest at the rate of 7% per annum payable
quarterly and, at the option of the holder, will be convertible to
Common Stock of the Company at a conversion rate of $12.10 per
share. The Notes will be sold in denominations of $10,000.00 and,
subject to a minimum purchase requirement of one (1) Note, will be
initially offered to existing shareholders on a pro rata basis.
F-30
<PAGE>
The Company hopes to commence such offers and establish a Record date during
the third quarter of 1998. However, there can be no assurance as to when, if
ever, these offers can be made and the Board reserves the right to make
material changes in the above terms and conditions.
F-31
<PAGE>
=======================================================
INFORMATION CONTAINED HEREIN IS SUBJECT TO
COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT
RELATING TO THE SHARES HAS BEEN FILED WITH THE SECURITIES
AND EXCHANGE COMMISSION. THE RIGHTS AND WARRANTS MAY NOT
BE ISSUED NOR MAY THEY BE EXERCISED PRIOR TO THE TIME THE
REGISTRATION STATEMENT BECOMES EFFECTIVE. NO ONE IS
AUTHORIZED IN CONNECTION WITH THIS OFFERING TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN
THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY FIRST
COMMUNITY BANCSHARES, INC. THIS PROSPECTUS IS NOT AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY BY
ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OF
SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY
OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL
UNDER ANY CIRCUMSTANCES IMPLY THAT INFORMATION HEREIN
IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
---------------------
TABLE OF CONTENTS
-----------------------------------------
PAGE
----
Prospectus Summary................................. 3
Summary Consolidated Financial Data................ 5
Simultaneous Offering.............................. 5
Risk Factors....................................... 6
Subscription Rights................................ 9
Use of Proceeds.................................... 9
Market for Common Stock and Related
Shareholder Matters............................. 10
Capitalization..................................... 11
Management's Discussion and Analysis of
Financial Condition and Results of Operations... 11
Business........................................... 21
Management......................................... 32
Security Ownership of Certain Beneficial
Owners and Management........................... 35
Certain Transactions............................... 36
Plan of Distribution............................... 36
Description of Securities.......................... 36
Legal Matters...................................... 38
Experts............................................ 38
Index to Financial Statements...................... 39
---------------------
=======================================================
=======================================================
FIRST COMMUNITY
BANCSHARES, INC.
[LOGO]
-------------
PROSPECTUS
-------------
__________, 1998
=======================================================
<PAGE>
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Sections 23-1-37-1 through 23-1-37-15 of the Indiana Business
Corporation Law permits a corporation to indemnify directors and officers
against liability incurred in certain legal proceedings if the individual's
conduct was in good faith and the individual reasonably believed, in the case
of conduct in the individual's official capacity with the corporation, that
such conduct was in the best interest of the corporation, and in all other
cases believed such conduct was at least not opposed to the best interest of
the corporation. If the proceeding is criminal, the individual must have
believed that the individual's conduct was lawful or at least had no reasonable
cause to believe that such conduct was unlawful. The statute requires a
corporation to indemnify an individual who is wholly successful on the merits
or otherwise in the defense of any proceeding against reasonable expense
incurred by such individual, unless the Articles of Incorporation provide
otherwise. The corporation may pay for or reimburse the reasonable expenses
incurred by a director or officer who is a party to a proceeding in advance of
final disposition of the proceeding if certain conditions are satisfied. Unless
otherwise provided in the Articles of Incorporation, a director or officer who
is a party to a proceeding may apply for a court ordered indemnification. The
court may order indemnification if it determines that the director is entitled
to mandatory indemnification, in which case the indemnification will include
reasonable expense incurred to obtain the indemnification order; or if it
determines that the director is fairly and reasonably entitled to
indemnification in view of all the relevant circumstances. Except in the case
of mandatory indemnification, a corporation may indemnify a director or officer
only after it has determined the individual meets the standard of conduct
described above. In addition, a corporation may also indemnify and advance
expenses to an officer, whether or not a director, to the extent, consistent
with public policy, that may be provided by its articles of incorporation,
bylaws, general or specific action of its board of directors or contract.
Section 23-1-37-14 of the Indiana Business Corporation Law empowers an Indiana
corporation to purchase and maintain insurance on behalf of any director or
officer against any liability asserted against, or incurred by, any individual
serving in such capacity at the request of the corporation or arising out of
his or her status as such, whether or not the corporation would have had the
power to indemnify against such liability under the provisions of the Indiana
Business Corporation Law.
The Company carries liability insurance covering officers and
directors. There is a deductible amount of $25,000 for the Company per claim.
The policy contains certain exclusions including, but not limited to, certain
claims by shareholders.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following fees and expenses shall be borne by the Company in
connection with this Offering. All fees other than Securities and Exchange
Commission fees are estimates.
Securities and Exchange Commission Registration Fee............. $ 1,525
Printing and Engraving.......................................... 4,000
II-1
<PAGE>
Accounting Fees and Expenses.................................... 11,500
Legal Fees and Expenses......................................... 40,000
Transfer Agent and Registrar Fees and Expenses.................. 5,000
Expenses of Registration Under State Blue Sky Laws.............. 10,000
Miscellaneous................................................... 1,475
Total.................................................. $ 73,500
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
In May 1998 the Company granted options for the purchase of 1,000
shares of Common Stock to each of the 5 directors who are not otherwise
employed by the Company in reliance upon Section 4(2) of the Securities Act.
In February 1998 the Company granted options for the purchase of
11,000 shares of Common Stock to 4 employees in reliance upon Section 4(2) of
the Securities Act.
II-2
<PAGE>
ITEM 27. EXHIBITS
3.1 Articles of Incorporation of First Community Bancshares, Inc.
(Incorporated herein by reference to the Registration Statement on Form S-4 of
First Community Bancshares, Inc., Registration No. 33-47691, declared effective
July 30, 1992).
3.2 Amended Bylaws of First Community Bancshares, Inc. (Incorporated herein
by reference to the Form 10-K of First Community Bancshares, Inc. for the
fiscal year ended December 31, 1992 and filed with the Securities and Exchange
Commission on March 31, 1993)(Commission File No. 0-19618).
4.1 Form of Rights Certificate
4.2 Form of Warrant
4.3 Form of Note
5.1 * Legal Opinion of Henderson, Daily, Withrow & DeVoe dated September __,
1998.
10.6 First Community Bancshares, Inc. 1992 Stock Option Plan, as amended and
approved by Shareholders on May 19, 1993 (Incorporated herein by reference to
the Form 10-K of First Community Bancshares, Inc. for the fiscal year ended
December 31, 1993 and filed with the Securities and Exchange Commission on
March 30, 1994)(Commission File No. 0-19618).
10.7 Agreement To Purchase Real Estate by and between First Community Bank &
Trust and Mutual Building and Loan Association (Incorporated herein by
reference to the Form 10-K of First Community Bancshares, Inc. for the fiscal
year ended December 31, 1993 and filed with the Securities and Exchange
Commission on March 30, 1994).
10.8 Deferred Director Fee Agreement by and between First Community Bank &
Trust Company and Merrill M. Wesemann Dated November 23, 1994 (Incorporated
herein by reference to the Form 10-K of First Community Bancshares, Inc. for
the fiscal year ended December 31, 1994 and filed with the Securities and
Exchange Commission on March 13, 1995).
10.9 First Community Bancshares, Inc. 1996 Stock Option Plan (Incorporated
herein by reference to the First Community Bancshares, Inc. proxy statement for
the 1996 annual shareholders meeting filed with the Securities and Exchange
Commission on March 13, 1996).
10.10 Amendment to the First Community Bancshares, Inc. 1992 Stock Option
Plan, as amended and approved by Shareholders on March 13, 1996 (Incorporated
herein by reference to the First Community Bancshares, Inc. proxy statement for
the 1996 annual shareholders meeting filed with the Securities and Exchange
Commission on March 13, 1996).
21 Subsidiaries of First Community Bancshares, Inc.
23.1 Consent of Olive, LLP.
23.2 Consent of Henderson, Daily, Withrow & DeVoe (included in Exhibit 5.1).
- -------------------
* To be filed by amendment.
II-3
<PAGE>
ITEM 28. UNDERTAKINGS
The undersigned Company hereby undertakes that:
(1) Each post-effective amendment to this Registration Statement shall
include any Prospectus required by Section 10(a)(3) of the Securities Act and
will reflect in the Prospectus any facts or events that represent a fundamental
change in the information in the Registration Statement and will include any
additional or changed material information on the Plan of Distribution.
(2) For purposes of determining any liability under the Securities
Act, each filing of the Company's annual report pursuant to Section 13(a) or
Section 15(d) of the Securities Exchange Act of 1934 that is incorporated by
reference in the registration statement shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at the time shall be deemed to be the initial bona
fide offering thereof.
(3) 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 Company 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.
(4) For the purposes 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.
(5) Shall file a post-effective amendment to remove from registration
any of the Securities that remain unsold at the end of the Offering.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Company pursuant to the provisions described under Item 15 above
or otherwise, the Company 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 Company of expenses incurred or paid by a director, officer or
controlling person of the Company in the successful defense of any action, suit
or proceeding) is asserted against the Company by such director, officer or
controlling person in connection with the securities being registered, the
Company 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.
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Company certifies that it has reasonable grounds to believe that it meets all
the requirements for filing on Form SB-2 and authorizes registration statement
to be signed on its behalf by the undersigned thereto duly authorized in the
City of Greenwood, State of Indiana on September 8, 1998.
FIRST COMMUNITY BANCSHARES, INC.
By: /s/ Albert R. Jackson, III
Albert R. Jackson, III, Chief Executive
Officer, Chief Financial Officer,
Director and Secretary
II-4
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Albert R. Jackson, III, his or her true
and lawful attorneys-in-fact and agents, each acting alone, with full powers of
substitution and resubstitution, for him or her and in his or her name, place
and stead, in any and all capacities, to sign any and all amendments to this
Registration Statement, including post-effective amendments, as well as any
related registration statement (or amendment thereto) filed pursuant to Rule
462 promulgated under the Securities Act of 1933, and to file the same, with
all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he or she might or could do
in person, and hereby ratifies and confirms all his or her said
attorneys-in-fact and agents or any of them or his or her substitute or
substitutes may lawfully do or cause to be done by virtue thereof.
This Power of Attorney may be executed in multiple counterparts, each
of which shall be deemed an original, but which taken together shall constitute
one instrument.
In accordance with the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates stated:
Signatures and Title(s) Date
/s/ Albert R. Jackson, III
- --------------------------------------------
Albert R. Jackson, III, Chief Executive September 8, 1998
Officer, Chief Financial Officer,
Director and Secretary
/s/ Merrill M. Wesemann September 8, 1998
- --------------------------------------------
Merrill M. Wesemann, M.D., Director and Chairman
/s/ Eugene W. Morris September 8, 1998
- --------------------------------------------
Eugene W. Morris, Director and President
/s/ Roy Martin Umbarger September 8, 1998
- --------------------------------------------
Roy Martin Umbarger, Director and Vice President
/s/ Frank D. Neese September 10, 1998
- --------------------------------------------
Frank D. Neese, Director
/s/ Albert R. Jackson, Jr. September 8, 1998
- --------------------------------------------
Albert R. Jackson, Jr., Director
II-5
EXHIBIT 4.1
Certificate No. R ____ ____ Rights
NOT EXERCISABLE AFTER _______________, 1998.
Right Certificate
FIRST COMMUNITY BANCSHARES, INC.
This certifies that ___________________________ or registered assigns,
is the registered owner of the number of Rights set forth above, each of which
entitles the owner thereof to purchase from First Community Bancshares, Inc.,
an Indiana corporation (the "Company") at any time after _________________ (the
"Distribution Date") and prior to 5:00 P.M., Indianapolis, Indiana time, on
_____________, 1998 at the principal offices of the Rights Agent, or at the
office of its successor as Rights Agent, one fully paid and non-assessable
share of Common Stock, no par value (the "Common Shares"), of the Company, at a
purchase price of $11.00 per Common Share (the "Purchase Price"), upon
presentation and surrender of this Right Certificate together with the
Subscription Agreement duly executed and payment for the purchased shares. The
number of Rights evidenced by this Right Certificate (and the number of Common
Shares which may be purchased upon exercise hereof) set forth above, and the
Purchase Price set forth above, are the number and Purchase Price as of
___________, 1998, based on the Common Shares as constituted at such date.
The Purchase Price and the number of Common Shares which may be
purchased upon the exercise of the Rights evidenced by this Right Certificate
are subject to modification and adjustment upon the happening of certain
events.
This Right Certificate, with or without other Right Certificates, upon
surrender at the offices of First Community Bank & Trust Company, the "Rights
Agent," P.O. Box 767, 298 St. Rd. 135N, Greenwood, Indiana 46142, may be
exchanged for another Right Certificate or Right Certificates of like tenor and
date evidencing Rights entitling the holder to purchase a like aggregate number
of Common Shares as the Rights evidenced by the Right Certificate or Right
Certificates surrendered shall have entitled such holder to purchase. If this
Right Certificate shall be exercised in part, the holder shall be entitled to
receive upon surrender hereof another Right Certificate or Right Certificates
for the number of whole Rights not exercised.
No fractional Common Shares will be issued upon the exercise of any
Right or Rights evidenced hereby.
No holder of this Right Certificate shall be entitled to vote or
receive dividends or be deemed for any purpose the holder of the Common Shares
or of any other securities of the Company which may at any time be issuable on
the exercise hereof, nor shall anything contained herein be construed to confer
upon the holder hereof, as such, any of the rights of a shareholder of the
Company or any right to vote for the election of directors or upon any matter
submitted to shareholders at any meeting thereof, or to give or withhold
consent to any
<PAGE>
corporate action, or to receive notice of meetings or other actions affecting
shareholders or to receive dividends or subscription rights, or otherwise,
until the Right or Rights evidenced by this Right Certificate shall have been
exercised.
This Right Certificate shall not be valid or obligatory for any
purpose until it shall have been countersigned by the Rights Agent.
WITNESS the facsimile signature of the proper officers of the Company
and its corporate seal. Dated as of _______________, 19____.
FIRST COMMUNITY BANCSHARES, INC.
Attest:
By:
-----------------------------------
- -----------------------------------
Secretary
Countersigned: First Community Bank & Trust Company
as Rights Agent
By:
----------------------------------
Authorized Signature
2
<PAGE>
FORM OF ELECTION TO PURCHASE
----------------------------
(To be executed if holder desires to
exercise the Right Certificate)
To: FIRST COMMUNITY BANCSHARES, INC.
The undersigned hereby irrevocably elects to exercise
___________________ Rights represented by this Right Certificate to purchase
the Common Shares issuable upon the exercise of such Rights and requests that
certificates for such Common Shares be issued in the name of:
Please insert social security
or other identifying number
- -----------------------------------------------------------------------------
(Please print name and address)
- -----------------------------------------------------------------------------
If such number of Rights shall not be all the Rights evidenced by this Right
Certificate, a new Right Certificate for the balance remaining of such Rights
shall be registered in the name of and delivered to:
Please insert social security
or other identifying number
- -----------------------------------------------------------------------------
(Please print name and address)
- -----------------------------------------------------------------------------
Dated: ______________________, 19____
-----------------------------------------
Signature
3
<PAGE>
Signature Guaranteed:
Signatures must be guaranteed by a member firm of a registered
national securities exchange, a member of the National Association of
Securities Dealers, Inc., or a commercial bank or trust company having an
office or correspondent in the United States.
4
EXHIBIT 4.2
Warrant No. _______
COMMON SHARE PURCHASE WARRANT
-----------------------------
FIRST COMMUNITY BANCSHARES, INC.
--------------------------------
Warrant to Purchase _____ Common Shares
This is to certify that, for value received
________________________, or his/its registered assigns (the "Holder"), is
entitled to purchase, subject to the provisions of this Warrant ("Warrant"),
from First Community Bancshares, Inc., an Indiana corporation (the "Company"),
at any time on or after September 15, 1999 and prior to 5:00 p.m.,
Indianapolis, Indiana time, on the Expiration Date, at the Exercise Price, up
to _____ shares (subject to adjustment as provided herein) of the Company
("Warrant Stock").
1. Certain Definitions. As used in this Warrant:
--------------------
(a) "Common Shares" shall mean shares of common stock of
the Company and also includes shares of any capital stock of the Company
hereafter authorized which are not limited to a fixed sum or percentage in
respect of the rights of the holder thereof to participate in dividends and in
the distribution of assets upon the voluntary or involuntary liquidation,
dissolution or winding up of the Company.
(b) "Exercise Price" shall mean the exercise price
calculated according to Sections 3 and 4 of this Warrant.
(c) "Expiration Date" means December 13, 1999.
2. Exercise of Warrant; Restrictions.
----------------------------------
(a) This Warrant may be exercised, in whole or in part,
from time to time, but subject to the restrictions and conditions specified
herein, by presentation and surrender of this Warrant to the Company at its
principal office (or such other office as the Company may designate by notice
in writing to the Holder at the Holder's address appearing on the books of the
Company), with the Subscription Form annexed hereto completed for purchase of
the designated number of shares of Common Shares and duly executed and
accompanied by payment of the Exercise Price due in connection with such
exercise. Upon receipt by the Company of this Warrant, in proper form for
exercise, and upon payment of the Exercise Price, the Holder shall, on the
exercise date specified on the Subscription Form, be deemed to be the Holder of
record of the Common Shares issuable upon such exercise, notwithstanding that
certificates representing such Common Shares shall not then be actually issued
and
<PAGE>
delivered to the Holder. As soon as is practicable after any exercise of this
Warrant and payment of the sum payable upon such exercise, and, in any event
within ten (10) days thereafter, the Company, at its expense, will cause to be
issued in the name of and delivered to the Holder thereof, a certificate or
certificates for the number of fully paid and nonassessable Common Shares or
other securities or property to which such Holder shall be entitled upon such
exercise.
(b) The Exercise Price may be paid in cash or by certified
or cashiers check.
(c) Upon any partial exercise of this Warrant the Company,
at its expense, will forthwith issue to Holder a new Warrant of like tenor
calling in the aggregate for the number of Common Shares for which this Warrant
shall not have been exercised.
3. Exercise Price. Subject to adjustment in accordance with
Section 4 of this Warrant, the Exercise Price shall be $11.00 per Common Share.
After each adjustment of the Exercise Price pursuant to Section 4 hereof, the
number of Common Shares issuable upon exercise of this or any subsequent issued
Warrant shall be the number derived by multiplying the number of Common Shares
purchasable immediately prior to such adjustment, by the Exercise Price in
effect immediately prior to such adjustment and dividing the product so
obtained by the applicable adjusted Exercise Price.
4. Adjustment of Exercise Price and Number of Shares. The
Exercise Price and number of Common Shares purchasable hereunder shall be
subject to adjustment from time to time upon the happening of certain events as
follows:
(a) Reclassification, Consolidation, Merger or Sale. In
case of any reclassification or change of outstanding securities issuable upon
exercise of this Warrant (other than a change in par value, or from par value
to no par value, or from no par value to par value or a subdivision or
combination), or in case of any consolidation or merger of the Company with or
into another corporation (other than a merger with another corporation in which
the Company is the surviving corporation and which does not result in any
reclassification or change other than a change in par value, or from par value
to no par value, or from no par value to par value, or a subdivision or
combination of outstanding securities issuable upon exercise of the Warrant),
or in the case of the sale or transfer of all or substantially all of the
Company's assets to any other corporation, the Company, or such successor
corporation, as the case may be, shall, without payment of any additional
consideration therefor, issue a new Warrant upon surrender of this Warrant,
providing that the Holder thereof shall have the right to receive for each
Common Share which the Holder hereof would have received upon exercise of this
Warrant the kind and amount of shares, other securities, money and property
receivable upon such reclassification, change, consolidation, merger, sale or
transfer by a holder of one Common Share in connection with such events. Such
new Warrant shall provide for adjustments which shall be as nearly equivalent
as may be practicable to the adjustments provided for in this Section 4. The
provisions of this subsection (a) shall similarly apply to successive
reclassifications, changes, consolidations, mergers, sales and transfers.
2
<PAGE>
(b) Subdivision or Combination of Shares. If the Company,
while this Warrant is outstanding, shall (i) subdivide its outstanding shares
of Common Shares into a greater number of shares, (ii) combine its outstanding
Common Shares into a smaller number of Common Shares, (iii) issue Common Shares
as a stock dividend to Common Shareholders, (iv) issue any security into which
Common Shares may hereafter be converted or (v) issue any equity security
having voting, dividend, liquidation or other rights substantially equivalent
to the Common Shares, the Exercise Price in effect prior to such action shall
be adjusted so that the Holder of this Warrant thereafter shall upon the
exercise hereof be entitled to receive the number of Common Shares of capital
stock of the Company which the Holder would have owned immediately following
such action had this Warrant been exercised immediately prior thereto. An
adjustment made pursuant to subsection (b) shall become effective immediately
after the record date in the case of any issuance of any Common Shares as a
dividend or distribution and shall become effective immediately after the
effective date, in the case of a subdivision, combination or reclassification.
(c) Notice of Adjustment. Whenever an adjustment occurs
pursuant to this Section 4, the Company shall make a certificate signed, on
behalf of the Company, by an officer setting forth, in reasonable detail, the
event requiring the adjustment, the nature of the adjustment, the method by
which such adjustment was calculated (including a description of the basis on
which any determination hereunder was made), and the number of securities
purchasable under the Warrant, and shall cause copies of such certificate to be
mailed (by first class mail postage prepaid) to the Holder of this Warrant.
5. Notice of Stock Dividends, Subscriptions,
Recapitalizations, Reclassifications, Reconsolidations, Merger, Etc. If the
Company shall pay any stock dividend or make any distribution other than a cash
dividend to the Holders of its Common Shares, or shall offer for subscription
to the holders of its Common Shares after the date hereof any additional Common
Shares or any stock of any class of the Company or any other securities, and in
the case of any capital reorganization, recapitalization, reclassification of
the capital stock of the Company or a consolidation or merger of the Company
with another corporation, or the final distribution, liquidation or winding up
of the Company, or a sale of all or substantially all of its assets (whether
voluntary or involuntary), then in any one or more of such cases, the Company
shall mail to the Holder of this Warrant at the address of such Holder in the
records of the Company, at least twenty (20) days prior notice of the date on
which the books of the Company shall close (or record shall be taken) or such
stock dividend, distribution or subscription rights, such reorganization,
recapitalization, reclassification, consolidation, merger, dissolution,
liquidation, winding up or sale shall take place, as the case may be. Such
notice shall also specify the date on which shareholders of record shall be
entitled to participate in such dividend, distribution or subscription rights
or to exchange their shares for other securities or property pursuant to such
reorganization, recapitalization, reclassification, consolidation or merger,
and to receive their respective distributive shares in the event of such
dissolution, liquidation, winding up or sale, as the case may be. Such notice
shall also set forth the statement of the effect of such action (to the extent
3
<PAGE>
then known) on the Exercise Price and the kind and amount of shares of the
capital stock and property receivable upon exercise of this Warrant.
6. Reservation of Shares; Stock Fully Paid. The Company
covenants and agrees that at all times there shall be authorized and reserved
for issuance upon exercise of this Warrant such number of Common Shares as
shall be required for issuance upon exercise of this Warrant, and that all
shares which may be issued upon exercise hereof will, upon issuance, be fully
paid and nonassessable.
7. Transfer of Warrant. The Company has appointed First
Community Bank & Trust Company as registrar and transfer agent ("Registrar")
for Warrants issued by the Company. Ownership of this Warrant may only be
transferred by notation on the books of the Registrar of the name of the new
owner after delivery to the Registrar at its principal office of a valid
assignment in the form attached hereto.
8. Addresses for Notice. All notices and communications
provided for herein shall be in writing and, except as otherwise specifically
provided herein, shall be deemed given when hand delivered or sent by
registered or certified mail, return receipt requested, or sent by overnight
delivery service addressed as follows: (a) if the Company, to the Secretary of
the Company at ______________________, __________________, Indiana; or (b) if
to the Holder, to the Holder's last known address as specified in writing to
the Company, from time to time.
9. Applicable Law. This Warrant shall be governed by and
construed in accordance with the laws of the State of Indiana.
10. Authorization. This Warrant shall not be valid for any
purpose until it shall have been countersigned by the Registrar.
4
<PAGE>
Dated as of ______________________, 1998.
FIRST COMMUNITY BANCSHARES, INC.
By:
--------------------------------------
Title: President
Attest:
- -------
- -------------------------------
Secretary
Countersigned First Community Bank & Trust Company
as Registrar and Transfer Agent
By:
-------------------------------
Authorized Signature
5
<PAGE>
SUBSCRIPTION
------------
The undersigned, ____________________________, pursuant to
the provisions of the Common Share Purchase Warrant dated ________________,
19___, attached hereto, hereby elects to purchase Common Shares of ___________,
and herewith makes payment of the Exercise Price for such Common Shares in the
aggregate ___________________ amount of $______________.
---------------------------------
Printed:
-------------------------
Dated:
- ---------------------------
6
<PAGE>
ASSIGNMENT
The undersigned, __________________________, hereby sells,
assigns and transfers to the persons indicated below all of the rights of the
undersigned under the Common Share Purchase Warrant No. dated
___________________, 19___, a copy of which is attached hereto, with respect to
that portion of Common Stock purchasable under the Warrant as indicated below:
Name of Assignee Address Number of Shares of
---------------- ------- Warrant Stock Assigned
----------------------
------------------------------------
Signature
------------------------------------
Witness
Dated:
--------------------------
7
EXHIBIT 4.3
FIRST COMMUNITY BANCSHARES, INC.
--------------------------------
FIRST COMMUNITY BANCSHARES, INC.
7% CONVERTIBLE NOTE DUE DECEMBER 31, 2008
No. _____ $________
FIRST COMMUNITY BANCSHARES, INC., an Indiana corporation (the
"Company"), for value received, hereby promises to pay to
_________________________or registered assigns, on or before December 31, 2008
as provided herein the principal amount of $____________in lawful money of the
United States, plus simple interest thereon at the rate of 7% per annum.
Interest on the principal amount of this Note shall be paid in
quarterly installments on the last day of March, June, September and December
of each year, beginning December 31, 1998, and until this Note has been paid in
full. Interest will be computed on the basis of a 360-day year of twelve 30-day
months.
The principal amount of this Note shall be paid on December 31, 2008
or such earlier date as to which maturity may have been accelerated as provided
herein.
Interest and/or principal payments shall be made to the person in
whose name this Note (which term includes any Note or Notes evidencing the same
debt) is registered at the close of business on the Regular Record Date (as
hereinafter defined) for such payments. As used herein, the term "Regular
Record Date" shall mean five days (whether or not a business day) prior to the
last day of the calendar month in which a payment is due. Both principal and
interest on this Note are payable by check mailed to the registered holder at
such holder's
<PAGE>
address set forth on the Note register maintained by First Community Bank &
Trust Company acting as registrar and transfer agent for the Notes
("Registrar").
This Note is one of a series of 7% Convertible Notes due December 31,
2008 issued by the Company having the same terms and in an aggregate principal
amount of not to exceed $1 million (the "Notes"). All Notes shall rank pari
passu. The Notes are issuable in denominations of $10,000 and even multiples
thereof.
1. CONVERSION AT THE ELECTION OF THE HOLDER.
(a) General. At the option of the holder or holders hereof, this Note
may be converted in increments of $10,000 at any time and from time to time
while this Note is outstanding into fully paid and nonassessable shares of
common stock of the Company ("Common Stock"). The conversion price shall be
$12.10 per share ("Conversion Price"), subject to adjustment as provided
herein. Such conversion shall be made upon surrender of this Note to the
Registrar at its principal office accompanied by (i) a written notice of
election to convert (in substantially the form of the sample notice provided as
Exhibit A to this Note) and (ii) duly executed instruments of transfer in form
satisfactory to the Company.
The Company will pay all accrued interest to the Conversion Date, as
defined below, on the amount hereof being converted on the Conversion Date.
Other than as specifically provided in the preceding sentence, no adjustment is
to be made on conversion for interest accrued hereon or for dividends on Common
Stock issued on conversion.
(b) Issuance of Certificates. Conversion shall be deemed to have been
effected on the date when the conversion notice shall have been delivered,
accompanied by documents satisfactory to the Registrar as provided in Section
1(a) above, and such date is referred to
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herein as the "Conversion Date". As promptly as practicable thereafter, the
Company shall issue and deliver to or upon the written order of such holder a
certificate or certificates for the number of full shares of Common Stock to
which such holder is entitled and a check or cash with respect to any
fractional interest in a share of Common Stock as provided below. The person in
whose name the certificate or certificates for Common Stock are to be issued
shall be deemed to have become a shareholder of record on the applicable
Conversion Date unless the transfer books of the Company are closed on the
date, in which event he shall be deemed to have become a shareholder of record
on the next succeeding date on which the transfer books are open, but the
Conversion Price shall be that in effect on the Conversion Date. Upon
conversion of only a portion of this Note, the Company shall issue and deliver
to or upon the written order of the holder hereof, at the expense of the
Company, a new Note covering the principal amount of this Note not converted,
which new Note shall entitle the holder thereof to interest on the principal
amount thereof to the same extent as if the unconverted portion of this Note
had not been surrendered for conversion and which new Note shall contain terms
identical to this Note and provide for conversion at the then prevailing
Conversion Price, subject to adjustment as provided herein.
(c) Fractional Shares. No fractional shares of Common Stock or scrip
shall be issued upon conversion of this Note. Instead of any fractional shares
of Common Stock which would otherwise be issuable upon conversion of this Note,
the Company shall pay a cash adjustment in respect of such fractional interest
in an amount equal to the then Current Market Price (as hereinafter defined) of
such fractional interest.
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(d) Adjustment of Conversion Price. The Conversion Price shall be
subject to adjustment from time to time as follows:
(i) If the number of shares of Common Stock outstanding at
any time after the date hereof is increased by a stock dividend payable in
shares of Common Stock or by a subdivision or split-up of shares of Common
Stock, then, following the record date fixed for the determination of holders
of Common Stock entitled to receive such stock dividend, subdivision or
split-up, the Conversion Price shall be appropriately decreased so that the
number of shares of Common Stock issuable on conversion of this Note shall be
increased in proportion to such increase of outstanding shares.
(ii) If the number of shares of Common Stock outstanding at
any time after the date hereof is decreased by a combination of the outstanding
shares of Common Stock, then, following the record date of such combination,
the Conversion Price shall be appropriately increased so that the number of
shares of Common Stock issuable on conversion of this Note shall be decreased
in proportion to such decrease in outstanding shares.
(iii) In case the Company shall distribute to holders of its
Common Stock shares of its capital stock (other than Common Stock), stock or
other securities of other persons or evidences of indebtedness issued by the
Company or other persons, then, in each such case, immediately following the
record date fixed for the determination of the holders of Common Stock entitled
to receive such dividend or distribution, the Conversion Price in effect
thereafter shall be determined by multiplying the Conversion Price in effect
immediately prior to such record date by a fraction of which the numerator
shall be an amount equal to the remainder of (x) the Current Market Price of
one share of Common Stock less (y) the fair
4
<PAGE>
market value (as determined by the Board of Directors, whose determination
shall be conclusive provided it is made in good faith) of the stock, securities
or evidences of indebtedness so distributed in respect of one share of Common
Stock, as the case may be, and of which the denominator shall be the Current
Market Price of one share of Common Stock. Such adjustment shall be made on the
date such dividend or distribution is made, and shall become effective at the
opening of business on the business day next following the record date for the
determination of stockholders entitled to such dividend or distribution.
(iv) In case, at any time after the date hereof, of any
capital reorganization, or any reclassification of the stock of the Company
(other than a change in par value or as a result of a stock dividend or
subdivision, split-up or combination of shares), or the consolidation, share
exchange or merger of the Company with or into another person (other than a
consolidation or merger in which the Company is the continuing corporation and
which does not result in any change in the Common Stock), or of the sale or
other disposition of all or substantially all the properties and assets of the
Company as an entirety to any other person, this Note shall after such
reorganization, reclassification, consolidation, merger, sale or other
disposition be convertible into the kind and number of shares of stock or other
securities or property of the Company or of the corporation resulting from such
consolidation or surviving such merger or to which such properties and assets
shall have been sold or otherwise disposed to which such holder would have been
entitled in such transaction if immediately prior to such reorganization,
reclassification, consolidation, merger, sale or other disposition such holder
had converted this Note into Common Stock. The provisions of this clause (iv)
shall similarly apply to successive reorganizations, reclassifications,
consolidations,
5
<PAGE>
mergers, sales or other dispositions. The Company shall not effect any such
merger, consolidation, or similar reorganization in which the Company does not
survive or in which its Common Stock changes, unless prior to or simultaneously
with the consummation thereof the successor corporation shall assume by written
instrument executed and mailed or delivered to the registered holder of this
Note, the obligation to deliver to such holder such shares of stock, securities
or assets as, in accordance with the foregoing provisions, such holders may be
entitled to purchase.
(v) All calculations under this Section 1 shall be made to
the nearest cent or to the nearest one hundredth (1/100) of a share, as the
case may be.
(vi) For the purpose of any computation pursuant to this
Section 1, the Current Market Price at any date of one share of Common Stock
shall be deemed to be the average of the daily closing prices for the 30
consecutive business days ending 15 business days before the day in question
(as adjusted for any stock dividend, split, combination or reclassification
that took effect during such 30 business day period). The closing price for
each day shall be the last reported sales price regular way or, in case no such
reported sales take place on such day, the average of the last reported bid and
asked prices regular way, in either case on the principal national securities
exchange on which the Common Stock is listed or admitted to trading, or if not
listed or admitted to trading on any national securities exchange, the average
of the highest reported bid and the lowest reported ask prices as furnished by
The National Quotation Bureau, Incorporated (or equivalent recognized source of
quotations), all as adjusted; provided, however, that if the Common Stock is
not traded in such manner that the quotations referred to in this clause (vi)
are available for the period required
6
<PAGE>
hereunder, Current Market Price shall be determined by the Board of Directors
in good faith and shall be no less than the aggregate net asset value of the
Company as shown on its most recent available balance sheet prepared in
accordance with generally accepted accounting principles divided by the
outstanding number of shares of Common Stock, determined on the assumption that
all outstanding Notes have been fully converted. For this purpose, net asset
values shall be calculated without taking into account the liability
represented by the Notes.
(vii) In any case in which the provisions hereof require that
an adjustment shall become effective immediately after a record date for an
event, the Company may defer until the occurrence of such event (x) issuing to
the holder of this Note or portion thereof converted after such record date and
before the occurrence of such event the additional shares of Common Stock
issuable upon such conversion by reason of the adjustment required by such
event over and above the shares of Common Stock issuable upon such conversion
before giving effect to such adjustment, and (y) paying to such holder any
amount in cash in lieu of a fractional share of Common Stock; provided,
however, that the Company shall deliver to such holder a due bill or other
appropriate instrument evidencing such holder's right to receive such
additional shares, and such cash, upon the occurrence of the event requiring
such adjustment.
(e) Notice of Adjustments. Whenever the Conversion Price shall be
adjusted as provided herein, the Company shall cause a statement detailing the
facts requiring an adjustment and the Conversion Price resulting from such
adjustment to be sent by mail, first class postage prepaid, to the holder of
this Note at the address appearing on the Company's records. Where appropriate,
such copy may be given in advance and may be included as part of a notice
required to be mailed under the following paragraph.
7
<PAGE>
In the event the Company shall propose to take any action of the types
requiring an adjustment of the Conversion Price, the Company shall give notice
to the holder of this Note in the manner set forth in the preceding paragraph,
which notice shall specify the record date, if any, with respect to any such
action and the date on which such action is to take place. Such notice shall
also set forth such facts with respect thereto as shall be reasonably necessary
to indicate the effect of such action (to the extent such effect may be known
at the date of such notice) on the Conversion Price and the number, kind or
class of shares or other securities or property which shall be deliverable or
purchasable upon the occurrence of such action or deliverable upon conversion
of the Note. In the case of any action which would require the fixing of a
record date, such notice shall be given at least 20 days prior to the date so
fixed, and in case of all other action, such notice shall be given at least 20
days prior to the taking of such proposed action. Failure to give such notice,
or any defect therein, shall not affect the legality or validity of any such
action.
(f) Notices. Whenever the Company proposes to declare a dividend or
distribution with respect to its Common Stock it will so notify the holder of
this Note at least 20 days prior to the record date for such dividend or
distribution. The Company shall also give the holders of this Note written
notice 20 days prior to the record date of any proposed merger, sale of assets,
or share exchange.
(g) Taxes. The Company shall pay all documentary, stamp or other
transactional taxes attributable to the issuance or delivery of shares of
Common Stock upon conversion of this Note; provided, however, that the Company
shall not be required to pay any taxes which may
8
<PAGE>
be payable in respect of any transfer involved in the issuance or delivery of
any certificate for such shares in a name or other than that of the holder of
this Note.
(h) Reservation of Shares. The Company shall reserve, free from
preemptive rights, out of its authorized but unissued shares of Common Stock,
solely for the purpose of effecting the conversion of this Note, sufficient
shares to provide for the conversion of the entire amount of this Note. In
accordance with applicable laws and regulations, the Company shall from time to
time, increase its number of authorized shares of Common Stock so as to
maintain a number of such shares sufficient to permit the conversion of the
entire amount of this Note.
(i) Government Approvals. If any shares of capital stock to be
reserved for the purpose of conversion of this Note require registration with
or approval of any governmental authority under any federal or state law before
such shares may be validly issued or delivered upon conversion, then the
Company will in good faith and as expeditiously as possible endeavor to secure
such registration or approval, as the case may be. If, and so long as, any
capital stock into which this Note is then convertible is listed on any
national securities exchange or national quotation system, the Company will use
its best efforts to list and keep listed on such exchange or system, upon
official notice of issuance, all shares of such capital stock issuable upon
conversion.
(j) Status of Common Stock. All shares of Common Stock which may be
issued upon conversion of this Note, will upon issuance by the Company in
accordance with the terms of this Note be validly issued, fully paid and
nonassessable and free from all taxes, liens and charges with respect to the
issuance thereof.
9
<PAGE>
(k) Other Shares. In the event that at any time as a result of an
adjustment of the Conversion Price, the holder of this Note thereafter
surrendered for conversion shall become entitled to receive any shares of the
Company or another corporation other than shares of Common Stock, the
provisions hereof with respect to the Common Stock shall apply on like terms to
any such other shares.
(l) No Impairment. The Company will not, by amendment of its Articles
of Incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any
of the terms to be observed or performed hereunder by the Company under this
Section 1, but will at all times in good faith assist in the carrying out of
all the provisions of this Section 1 and in the taking of all such action as
may be necessary or appropriate in order to protect the conversion rights of
the holder of this Note against impairment.
2. REDEMPTION.
At any time after December 31, 2003, upon thirty (30) days' prior
written notice to the holder hereof, the Company may prepay this Note in whole
or in part without penalty; provided, however, that the holder may elect to
convert this Note in whole or in part prior to such prepayment in accordance
with the terms of Section 1 hereof and no such prepayment shall be made to the
extent of the amount of this Note so converted. The Company may select by lot,
or other reasonable method, those Notes which it chooses to prepay.
In addition, the Company may prepay this Note in whole without penalty
at the consummation of any sale of substantially all the assets of the Company,
a merger of the
10
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Company with or into another entity in which the shareholders of the Company
immediately prior to the closing of the transaction do not own at least 51% of
the voting securities of the surviving entity following the merger, or the
consummation of a share exchange in which shareholders of the Company exchange
Common Stock representing at least 51% of the outstanding Common Stock for the
shares of another corporation pursuant to a share exchange agreement.
3. REGISTRATION, EXCHANGE AND TRANSFER.
The Note is issuable as a registered Note without coupons in
denominations of $10,000. The Company has appointed First Community Bank &
Trust Co. as Registrar. The Registrar will keep at its principal office a
register in which, subject to such reasonable regulations as it may prescribe,
it will register the Note. No transfer of this Note shall be valid as against
the Company unless made upon such register. Upon surrender for transfer of this
Note, the Company shall execute and deliver in the name of the transferee or
transferees a new Note or Notes for a like principal amount of authorized
denominations.
This Note may be exchanged for a like aggregate principal amount of
other authorized denominations. To be exchanged, this Note shall be surrendered
for that purpose at the principal office of the Registrar, and the Company
shall execute and deliver in exchange therefor the Note or Notes which the
holder making the exchange shall be entitled to receive, bearing serial numbers
not contemporaneously outstanding.
This Note, if presented for transfer, exchange, redemption or payment,
shall (if so required by the Registrar or the Company) be duly endorsed by, or
be accompanied by
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<PAGE>
instruments of transfer in form satisfactory to the Registrar and Company duly
executed by, the registered holder or by his duly authorized attorney.
Any exchange or transfer shall be without charge, except that the
Registrar may require payment of the sum sufficient to cover any tax or
governmental charge that may be imposed in relation thereto.
The Company may deem and treat the registered holder hereof as the
absolute owner hereof (whether or not this Note shall be overdue and
notwithstanding any notation of ownership or other writing hereon by anyone
other than the Registrar or the Company), for the purpose of receiving payment
of or on account of the principal hereof and interest hereon, for the
conversion hereof and for all other purposes.
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4. EVENTS OF DEFAULT.
In case one or more of the following shall have occurred and be
continuing it shall be an Event of Default:
(i) the non-payment of any installment of interest
upon this Note within 30 days after such an installment becomes due and
payable; or
(ii) the non-payment of the principal of this Note
within 5 days after such payment becomes due and payable; or
(iii) failure on the part of the Company duly to observe
or perform any other of the covenants or agreements on the part of the Company
in this Note and continuance of such default for a period of 30 days from the
date of written notice of such default from the holder of the Note.
Upon occurrence of an Event of Default, which is not cured within the
period of time permitted, if any, the holder of this Note shall have available
to it the following rights:
(i) the right to declare all principal and interest
of the Note to be due and payable immediately, and upon any such declaration
the same shall become, and shall be, immediately due and payable; and
(ii) any other right and legal or equitable remedy
available to the holder under the laws of the State of Indiana.
5. COSTS OF COLLECTION.
From and after maturity or the acceleration of the date full
payment of this Note is due, all unpaid amounts owing hereunder shall bear
interest at the rate of 8% per annum. The holder of this Note shall be entitled
to recover all reasonable costs incurred in enforcing the
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<PAGE>
terms of this Note or in collecting amounts due hereunder, including, but not
limited to, reasonable attorneys' fees, costs and expenses.
6. GOVERNING LAW.
This Note shall be deemed to be a contract made under the laws of the
State of Indiana and shall be construed in accordance with such laws.
IN WITNESS WHEREOF, First Community Bancshares, Inc. has caused this
Note to be executed in its corporate name by the signature of its President,
attested by the signature of its Secretary.
Dated: FIRST COMMUNITY BANCSHARES, INC.
----------------------
By:
---------------------------------
Albert R. Jackson, III
"COMPANY"
ATTEST:
- -----------------------------
Secretary
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EXHIBIT A
---------
Form of Conversion Notice
-------------------------
To First Community Bancshares, Inc.:
The undersigned owner of the accompanying Note hereby irrevocably
exercises the option to convert such Note or portion thereof below designated
into shares of Common Stock of First Community Bancshares, Inc. in accordance
with the terms of such Note, and directs that the shares issuable and
deliverable upon such conversion (together with any check for a fractional
interest) be issued in the name of and delivered to the undersigned unless a
different name has been indicated below. If shares are to be issued in the name
of a person other than the undersigned, (i) the undersigned will pay any
transfer taxes payable with respect thereto, and (ii) this Notice is
accompanied by the opinion of counsel required under the Note. FILL IN FOR
REGISTRATION OF SHARES ON THE STOCK TRANSFER RECORDS MAINTAINED BY THE COMPANY:
- ---------------------------------------------
Name
- ---------------------------------------------
Address
- ---------------------------------------------
Please print name and address (including zip code number)
- ---------------------------------------------
Dated Signature
Please Insert Social Security or
Other Identifying Number
Portion to be converted
(if less than all):
$
------------------
15
EXHIBIT 21
SUBSIDIARIES OF FIRST COMMUNITY BANCSHARES, INC.
Name Place of Incorporation
---- ----------------------
First Community Bank & Trust Indiana chartered bank
First Community Real Estate Indiana
Management, Inc.
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the use of our report dated February 6, 1998 on the consolidated
financial statements of First Community Bancshares, Inc. and subsidiary (the
"Company") and to the reference made to us under the caption "Experts" in the
Registration Statement on Form SB-2 filed by First Community Bancshares, Inc.
and subsidiary with the United States Securities and Exchange Commission.
/s/ Olive LLP
Indianapolis, Indiana
September 8, 1998
