Rule 424(b)(3)
Registration Number 333-63239
AMENDED PROSPECTUS
- ------------------
FIRST COMMUNITY BANCSHARES, INC.
[LOGO]
$1,000,000
7% CONVERTIBLE NOTES
First Community Bancshares, Inc. is selling up to $1,000,000 in notes.
The Notes will bear interest at the rate of 7% per annum. The interest payments
will be made on the last day of March, June, September and December of each
year. No payments of principal are required until the maturity date of December
31, 2008. However, we may, at our election, prepay the Notes at any time after
December 30, 2003 without any premium or penalty.
The Notes may only be purchased in denominations of $10,000. You may
convert the Notes into our common stock at the rate of $12.10 per share at any
time before we pay off the Notes.
Neither the Notes nor the common stock into which the Notes may be
converted are listed or traded on any national securities exchange or the Nasdaq
Stock Market. It is unlikely any active trading market for the Notes will
develop.
SEE "RISK FACTORS" ON PAGE 7 TO READ ABOUT CERTAIN FACTORS YOU SHOULD
CONSIDER BEFORE BUYING THE NOTES.
----------
THE NOTES ARE NOT SAVINGS ACCOUNTS, TIME DEPOSITS OR OTHER OBLIGATIONS
OF A BANK AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY
AGENCY HAS APPROVED OR DISAPPROVED THESE NOTES OR PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PER
NOTE TOTAL
------- ----------
<S> <C> <C>
Public offering price $10,000 $1,000,000
Underwriting discount or commission 0 0
Proceeds before expenses, to us $10,000 $1,000,000
</TABLE>
The Notes will be sold on a best efforts basis by certain officers and
full-time employees of the Company who will not be separately compensated for
such sales. There is no requirement that any minimum number or amount of Notes
be sold.
--------------------
The Date of this Amended Prospectus is December 4, 1998.
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<PAGE>
-----------------
TABLE OF CONTENTS
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---------------------
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.................................................. 12
Business................................................................. 23
Management............................................................... 34
Security Ownership of Certain Beneficial Owners and Management........... 37
Certain Transactions..................................................... 38
Plan of Distribution..................................................... 38
Description of Securities................................................ 38
Legal Matters............................................................ 40
Experts.................................................................. 40
Index to Financial Statements............................................ 41
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2
<PAGE>
PROSPECTUS SUMMARY
The following summary highlights the more detailed information
appearing in this prospectus. Prospective investors should carefully consider
the information set forth under the heading "Risk Factors." In this prospectus,
"Company," "we," "us" and "our" refer to First Community Bancshares, Inc. and
its consolidated subsidiaries, First Community Bank and Trust and First
Community Real Estate Management, Inc. "First Community" or "Bank" refer to
First Community Bank and Trust.
THE COMPANY
We are primarily a one bank holding company. Through our subsidiary,
First Community we operate 8 offices in three central and southern Indiana
counties. We are also the sole shareholder of First Community Real Estate
Management, Inc. ("FCREM"), which owns and leases two branch offices to First
Community. Our principal executive offices are located at 210 East Harriman,
Bargersville, Indiana 46106 and our telephone number is (317) 442-5171.
We operate 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.
We endeavor to provide our branch managers, lending officers, tellers,
and deposit service personnel with the authority to act promptly in servicing
our customers within the scope of Company policies. We enhance this highly
responsive service attitude with an efficient corporate support staff as well as
investing in technology.
We believe our operating philosophy has contributed to our success
along with 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 our option or in the
event of certain transactions, at par.
Sinking fund....................... No sinking fund payments.
3
<PAGE>
Ranking............................ The Notes are general obligations of the
Company and are not secured by any of our
specific assets. As of September 30, 1998,
we had approximately $3,633,000 of secured
indebtedness. We may incur additional
secured or unsecured debt in an unlimited
amount. See "Description of Securities -
Notes."
Use of proceeds.................... To provide capital to FCREM to acquire and
lease branch facilities to First Community
and to provide additional capital to First
Community to support asset growth. See
"Use of Proceeds."
No trust indenture................. The Notes will not be issued pursuant to
an indenture of trust. You will be
responsible for monitoring and enforcing
the terms of the Notes. See "Description
of Securities - Notes."
Convertibility..................... At the option of the holder the Notes may
be converted in to our common stock 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 any required
principal payments before maturity. 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 our historical
consolidated financial information for the periods indicated and should be read
in conjunction with our financial statements and other information included
elsewhere in this prospectus and in our 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 our quarterly report on Form
10-Q for the nine-month period ended September 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 nine months
ended September 30, 1998, are not necessarily indicative of results that may be
expected for future periods including the year ending December 31, 1998.
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEARS ENDED
SEPTEMBER 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............ $6,247 $5,397 $7,361 $6,158 $5,074 $3,255 $2,583
Interest expense........... 3,367 2,780 3,807 3,166 2,953 1,699 1,308
----- ----- ----- ----- ----- ----- -----
Net interest income........ 2,880 2,617 3,554 2,992 2,121 1,556 1,275
Provision for loan losses.. 204 180 255 219 208 418 92
----- ----- ----- ----- ----- ----- -----
Net interest income after..
provision for loan losses 2,676 2,437 3,299 2,773 1,913 1,138 1,183
Non-interest income........ 282 228 305 249 237 127 96
Non-interest expense....... 2,126 1,871 2,490 2,565 1,863 1,723 1,085
----- ----- ----- ----- ----- ----- -----
Income (loss) before income
tax expense............. 832 794 1,114 457 287 (458) 194
Income tax expense (benefit) 264 266 376 116 11 (281) 30
----- ----- ----- ----- ----- ----- -----
Net income (loss).......... $568 $528 $738 $341 $276 $(177) $164
===== ===== ===== ===== ===== ===== =====
Selected Ratios and Per Share Data*:
Basic earnings per share... $0.57 $0.53 $0.75 $0.35 $0.29 $(0.26) $0.25
Diluted earnings per share. $0.57 $0.53 $0.74 $0.34 $0.28 $(0.26) $0.24
Dividends per share........ $0.10 $0.10
Return on average assets... .74% .82% .85% .46% .44% (.38%) .46%
Return on average equity... 9.61 9.95 10.02 5.04 4.54 (4.48) 4.35
Average equity to average..
assets.................. 7.68 8.29 8.45 9.14 9.64 8.57 10.53
Dividend payout ratio...... 18.87 13.33
SEPTEMBER 30, DECEMBER 31,
------------- ------------------------------------------------
1998 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ----
(DOLLARS IN 000'S)
Selected Balance Sheet Data:.
Assets.................... $105,864 $98,740 $80,079 $71,393 $57,857 $43,617
Loans..................... 88,206 80,001 65,108 54,636 39,508 27,041
Allowance for loan losses 983 848 644 518 362 161
Deposits.................. 93,496 87,695 70,552 59,163 46,184 36,616
Federal Home Loan Bank
advances............... 2,834 2,930 2,379 4,603 5,314 2,507
Other borrowings 799 908 450
Total shareholders' equity 8,238 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>
RIGHTS AND WARRANT OFFERING
On October 30, 1998, we issued to our shareholders the right to
purchase up to 131,000 shares of our common stock (the "Rights") and warrants to
purchase up to 131,000 shares of our 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 January 29, 1999. Proceeds from the exercise of the Rights, if any, will be
used for additional capital for our Bank and for general corporate purposes. 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.
6
<PAGE>
RISK FACTORS
You should carefully consider the risks described below before making
an investment decision. The risks and uncertainties described below are not the
only ones facing our Company. Additional risks and uncertainties not presently
known to us or that we currently deem immaterial may also impair our business
operations.
If any of the following risks actually occur, our business, financial
condition or results of operations could be materially affected. This could
include an impairment of our ability to repay the Notes and you could lose all
or part of your investment.
This prospectus also contains forward-looking statements that involve
risks and uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including the risks faced by us described below and elsewhere in this
prospectus.
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. You must look solely to the Company for the payment
of interest and repayment of the Notes.
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. You will not have the same protections you 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 our bank
subsidiary. However, our principal source of revenue is derived from our Bank.
Our ability to pay interest on and principal of the Notes will be dependent upon
the ability of our Bank to pay dividends to us and our ability to realize a
return on our investments in amounts sufficient to service our debt obligations.
Payment of dividends by the Bank is restricted by various legal and regulatory
limitations. See "Market for Common Stock and Related Shareholder Matters" and
"Description of Securities - Common Stock."
Our right 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.
The Bank is subject to restrictions under federal law that limit the
transfer of funds by it to us whether in the form of loans, extensions of
credit, investments, asset purchases, or otherwise. Such transfers by the Bank
to us or any non-bank subsidiary of the Company is limited in amount to ten
percent (10%) of the Bank's capital and surplus and with respect to the
aggregate transfers to the Company and our non-bank subsidiary, to an aggregate
of twenty percent (20%) of the Bank's capital and surplus. Furthermore, any such
loans and extensions of credit are required to be secured in specified amounts.
Federal law also prohibits the Bank from purchasing "low quality" assets from
affiliates.
7
<PAGE>
ADEQUACY OF ALLOWANCE FOR LOAN LOSSES
Our 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. We maintain 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, we make various assumptions and judgments
about the ultimate collectability of the loan portfolio. We then provide 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 our 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 our
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 in an attempt to
maintain an adequate allowance for loan losses. Although we believe that our
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 to us 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
Our consolidated results of operations depend to a large extent on the
level of our net interest income. This 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 our cost of deposits and borrowings to increase
faster than the yield on our interest earning assets, then net interest income
will be reduced. We measure our interest rate risk monthly using static gap
analysis. The difference between our interest rate sensitive assets and our
interest rate sensitive liabilities at a point in time is our 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.
We cannot predict or control fluctuations in interest rates. We
endeavor to structure our 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 we will be able to manage interest rate risk so as to
avoid significant adverse effects in net interest income. At September 30,1998,
we had a one-year cumulative interest-rate gap of a negative 24.05 percent. At
December 31, 1997, we had a one-year cumulative interest-rate gap of 24.26
percent. This negative interest-rate gap may have a negative impact on earnings
in a rising interest rate environment. While we use various monitors of interest
rate risk, we are 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."
OUR COMPETITION
We operate in a highly competitive environment. We 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 these companies have substantially greater
financial resources and name recognition than we have. Some competitors offer
products and services that are not offered by us. Some competitors are not
subject to the same extensive laws and regulations as we are. Federal and state
legislation and regulations also affect our competitiveness in the financial
services business. It is impossible to predict the competitive impact on us of
certain federal and state legislation and/or regulations relating to the banking
industry and interstate banking.
8
<PAGE>
ECONOMIC CONDITIONS AND MONETARY POLICY
Our operating results depend to a great extent upon the rate
differentials that result from the difference from the income we receive from
our loans, securities, and other interest earning assets and the interest
expense we pay on our deposits and other interest bearing liabilities. These
rate differentials are highly sensitive to many factors beyond our control.
These factors include general economic conditions and the policies of various
governmental and regulatory authorities, in particular the Federal Reserve.
Like other depository institutions, we are 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 our operations. This could adversely affect our
ability to make loans and attract deposits, as well as public demand for loans.
LOCAL ECONOMIC CONDITIONS
Our success is affected by the general economic conditions in the
geographical markets that we serve. We expect that economic conditions will
continue to be favorable in these markets. However, favorable economic
conditions may not continue to prevail. Adverse changes in economic conditions
in the geographic markets that we serve could result in lower lending activity,
impair our ability to collect existing loans, or otherwise impair our operating
results and financial condition.
RISKS OF GROWTH
We have experienced steady growth over the past five years in assets,
loans and deposits. This growth places a strain on our management to recruit,
train and retain employees, maintain prescribed loan underwriting practices and
generate or obtain adequate capital. We plan to open one additional office
during the first quarter of 1999 and another one during the first half of 1999.
Our inability to effectively manage such growth could have a negative impact
upon our financial results and condition.
GOVERNMENT REGULATION
We are subject to extensive state and federal governmental supervision,
regulation, and control. Future legislation and government policy could
adversely affect the banking industry and our operations. 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. It is unlikely that a public market for the notes will
develop. There can be no assurance as to whether or how quickly a note may be
resold or the price for which you 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. 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 for
our shares and you may experience difficulty in reselling significant numbers of
shares if you need to liquidate your holdings.
YEAR 2000 COMPLIANCE
The Company's lending and deposit activities, like those of most
financial institutions, depend significantly upon computer systems. The Company
is addressing the potential problems associated with the possibility that the
computers which control its systems, facilities and infrastructure may not be
programmed to read four-digit date codes. This could cause some computer
applications to be unable to recognize the change from the year 1999 to the year
2000, which could cause computer systems to generate erroneous data or to fail.
In addition to possible expenses related to the Company's own systems
and those of its service providers, the Company could be affected by the Year
2000 problems affecting any of its depositors or borrowers. Such problems could
include delayed loan payments due to Year 2000 problems affecting the borrower.
At this time, it is estimated that costs associated with Year 2000
issues will be approximately $25,000 to $60,000 from 1998 through 1999. Although
management believes it is taking the necessary steps to address the Year 2000
compliance issue, no assurances can be given that some problems will not occur
or that the Company will not incur significant additional expenses in the future
periods. In the event that the Company is ultimately required to purchase
replacement computer systems, program and equipment, or to incur substantial
expenses to make its current systems, programs and equipment Year 2000
compliant, its financial position and results of operation could be adversely
impacted.
9
<PAGE>
USE OF PROCEEDS
The Company intends to use the proceeds of the Offering as follows,
assuming the sale of all of the Notes, and in the following order if less than
all of the Notes are sold (the Offering is not conditioned upon the sale of any
minimum amount of Notes and no proceeds will be held in escrow):
Gross Proceeds $1,000,000
Offering Expenses 36,750
----------
Net Proceeds $ 963,250
==========
Use of Net Proceeds:
Acquisition of Branch Locations by FCREM $ 100,000
Capital for First Community 863,250
----------
$ 963,250
===========
Pending such uses, the Company may 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* $11.00 $10.50 $11.43 $10.48 $11.43 $10.48
</TABLE>
* Through November 13, 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 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
10
<PAGE>
dividends to the Company up to the amount of 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 September 30, 1998, the shareholder's
equity of First Community was $8,238,000, of which a minimum of $1,553,000 was
available for dividends.
The number of record holders of the Company's Common Stock as of
November 13, 1998 was 282.
CAPITALIZATION
The following table sets forth the capitalization of the Company at
September 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. The 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.
<TABLE>
<CAPTION>
ACTUAL AS ADJUSTED
---------- -----------
<S> <C> <C>
Secured obligations.............................. $3,632,579 $3,632,579
Notes............................................ -0- 1,000,000
---------- ----------
Total borrowings................................. 3,632,579 4,632,579
---------- ----------
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,
1,005,268 shares issued (actual),
and 1,136,268 shares (as adjusted).......... 6,841,027 8,282,027
Retained earnings and contributed capital 1,362,991 1,362,991
Accumulated other comprehensive income ........ 33,900 33,900
---------- ----------
Stockholders' Equity........................ 8,237,918 9,678,918
---------- ----------
Total Borrowings and Stockholders' Equity $11,870,497 $14,311,497
=========== ===========
11
<PAGE>
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.
12
<PAGE>
RESULTS OF OPERATIONS
Three and Nine Months Ended September 30, 1998 and 1997
- -------------------------------------------------------
Net income increased from $528,000 to $568,000 for the nine months, and
decreased from $205,000 to $181,000 for the three months ending September 30,
1997 and 1998, respectively. Basic earnings per share increased from $.53 to
$.57 for the nine month period, and decreased from $.21 to $.18 for the three
month period ended September 30, 1997 and 1998, respectively. Net interest
income increased from $2.6 million to $2.9 million for the nine months, and from
$936,000 to $1.0 million for the three months, ended September 30, 1997 and
1998, respectively.
The increase in net income for the nine month period was primarily due
to the increase in net interest income offset by general increases in other
expense. The decrease in net income for the three month period was primarily due
to increases in personnel and other expenses as a result of the opening of an
additional branch in North Vernon, Indiana. 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 $169,000 to $226,000 for the nine months, and from $57,000 to
$77,000 for the three months, ended September 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 decreased $3,000 for the nine months
ended September 30, 1998, when compared to the same period in 1997, because of
an increase in the Company's tax exempt securities portfolio.
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
13
<PAGE>
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 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>
<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.
14
<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 $105,864,258 at September 30, 1998 and deposits from $36,616,000 at December
31, 1993 to $87,695,000 at December 31, 1997 to $93,496,163 at September 30,
1998. These factors include: (i) increased population in the geographic area
15
<PAGE>
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 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 September 30, 1998, First Community had $1.5
million 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 $982,834 or 1.1% of net loans receivable at September 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 $145,000 at September 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 24.05% and 24.26% at September 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 1.2% at September
30, 1998 and .42% at December 31, 1997.
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.
16
<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 SEPTEMBER 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........ $ 13,375 $ 4,194 $ 4,466 $ -0- $ 22,395
Fixed rate mortgages............. 4,807 2,184 2,178 11,366 20,535
Commercial loans................. 12,185 1,741 1,201 241 15,368
Consumer loans................... 10,640 10,939 4,264 570 26,413
Tax-exempt loans and leases...... -0- 17 -0- 3,478 3,495
Investments...................... 1,422 1,597 1,412 2,192 6,623
FHLB stock....................... 778 -0- -0- -0- 778
Interest-bearing deposits........ 5,517 -0- -0- -0- 5,517
---------- ----------- ----------- ----------- ------------
Total interest-earning assets.. 49,084 20,672 13,521 17,847 101,124
---------- ----------- ----------- ----------- ------------
Interest-bearing liabilities:
Fixed maturity deposits.......... 43,319 9,040 2,855 27 55,241
Other deposits................... 31,048 -0- -0- -0- 31,048
FHLB advances.................... 166 776 1,892 754 2,834
Other borrowings................. 8 17 20 799
---------- ----------- ----------- ----------- ------------
Total interest-bearing liabilities 74,541 9,833 4,767 781 89,922
---------- ----------- ----------- ----------- ------------
Excess (deficiency) of
interest-earning assets over
interest-bearing liabilities....... $ (25,457) $ 10,839 $ 8,754 $ 17,066 $ 11,202
========== =========== =========== =========== ============
Cumulative excess (deficiency)
of interest-earning assets over
interest-bearing liabilities $ (25,457) $ (14,618) $ (5,864) $ 11,202
Cumulative ratio at September 30,
1998 as a percent of total assets.. (24.05)% (13.81)% (5.54)% 10.58%
</TABLE>
17
<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>
18
<PAGE>
The following tables provide information about the Company's
significant financial instruments at September 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 SEPTEMBER 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 $ 966 $ 574 $ 738 $ 814 $ 598 $ 1,900 $ 5,590 $ 5,590
Average interest rate 10.24% 8.63% 5.60% 6.05% 6.73% 7.36% 7.51%
Investment securities held
to maturity
Fixed rate $ 456 $ 180 $ 105 $ 292 $ 1,033 $ 1,060
Average interest rate 5.57% 6.72% 6.87% 7.18% 6.36%
Loans
Fixed rate $ 16,008 $ 8,012 $ 6,552 $ 4,653 $ 2,515 $ 15,653 $ 53,393 $ 54,173
Average interest rate 9.48% 9.21% 8.97% 8.74% 8.47% 7.87% 8.79%
Variable rate $ 10,110 $ 2,225 $ 2,657 $ 1,015 $ 1,048 $ 17,758 $ 34,813 $ 35,140
Average interest rate 9.96% 9.76% 9.73% 9.43% 9.39% 8.75% 9.28%
Liabilities
Deposits
NOW, Money Market and
Savings Deposits
Variable rate $ 31,048 $ 31,048 $ 31,048
Average interest rate 3.82% 3.82%
Certificates of Deposit
Fixed rate $ 43,319 $ 6,274 $ 1,957 $ 540 $ 3,314 $ 27 $ 55,241 $ 55,408
Average interest rate 5.69% 5.96% 5.94% 6.15% 5.97% 6.10% 5.75%
FHLB Advances
Fixed rate $ 166 $ 147 $ 629 $ 114 $ 1,778 $ 2,834 $ 2,878
Average interest rate 6.02% 6.02% 6.05% 6.02% 5.78% 5.88%
Other Borrowings
Variable rate $ 8 $ 8 $ 9 $ 10 $ 10 $ 754 $ 799 $ 799
Average interest rate 7.38% 7.38% 7.38% 7.38% 7.38% 7.38% 7.38%
</TABLE>
19
<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 from the
FHLB. The balance of its FHLB advances was $2,833,613 and $2,929,789 at
September 30, 1998 and December 31, 1997, respectively.
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
20
<PAGE>
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 September 30, 1998, the Company had a capital to asset ratio of
7.8%. At September 30, 1998, First Community had core capital of approximately
7.8% 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.
On October 30, 1998, the Company issued rights and warrants to
shareholders to purchase one share of common stock of the Company for every ten
shares owned as of October 29, 1998, subject to a minimum offer and purchase of
100 shares. The rights are exercisable until January 29, 1999 and the warrants
will not become exercisable until September 15, 1999. The net proceeds to the
Company from the sale of the stock, after deducting the expenses, is expected to
be $1.4 million if all of the rights are exercised. The purpose of the rights
offering is to raise additional capital of $1.2 million for the Bank to support
additional growth and $200,000 for general corporate purposes.
In addition, on October 30, 1998, the Company commenced the offer and
sale up to $1 million in unsecured convertible notes. The notes will be due
December 31, 2008, bear interest at the rate of 7% per annum and, at the option
of the holder, are convertible to common stock of the Company at the conversion
price of $12.10 per share. The net proceeds of this offering will be used to
provide capital to FCREM to acquire and lease branch facilities to the Bank and
to provide additional capital to the Bank to support asset growth.
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.
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.
21
<PAGE>
YEAR 2000 COMPLIANCE
The Company's lending and deposit activities, like those of most
financial institutions, depend significantly upon computer systems. The Company
is addressing the potential problems associated with the possibility that the
computers which control its systems, facilities and infrastructure may not be
programmed to read four-digit date codes. This could cause some computer
applications to be unable to recognize the change from the year 1999 to the year
2000, which could cause computer systems to generate erroneous data or to fail.
Management recognizes the possibility of certain risks associated with
Year 2000 and is continuing to evaluate appropriate courses of corrective
action. As of September 30, 1998, the Company has completed an inventory of all
hardware and software systems and has made all mission critical classifications.
The Company has implemented both an employee awareness program and a customer
awareness program aimed at educating people about the efforts being made by the
Company as well as bank regulators regarding the Year 2000 issue.
The Company's data processing is performed primarily by a third party
servicer. The Company has been informed that its primary service provider
anticipates that all reprogramming efforts will be completed by December 31,
1998, allowing the Company adequate time for testing. The Company expects to
complete testing by March 31, 1999.
The Company also uses software and hardware which are covered under
maintenance agreements with third party vendors. Consequently the Company is
dependent on these vendors to conduct its business. The Company has contacted
each vendor to request time tables for Year 2000 compliance and the expected
costs, if any, to be passed along to the Company. Most of the Company's vendors
have provided responses as to where they stand regarding Year 2000 readiness.
Those who have not responded to the Company's status requests are being
contacted again. Depending on the responses received from the third party
vendors, the Company will make decisions as to whether to continue those
relationships or to search for new providers of those services.
In addition to possible expenses related to the Company's own systems
and those of its service providers, the Company could be affected by the Year
2000 problems affecting any of its depositors or borrowers. Such problems could
include delayed loan payments due to Year 2000 problems affecting the borrower.
The Company has also begun to require all significant commercial borrowers to
certify their own year 2000 compliance status. The Company is still in the
process of collecting that information.
At this time, it is estimated that costs associated with Year 2000
issues will be approximately $25,000 to $60,000 from 1998 through 1999. Although
management believes it is taking the necessary steps to address the Year 2000
compliance issue, no assurances can be given that some problems will not occur
or that the Company will not incur significant additional expenses in the future
periods. In the event that the Company is ultimately required to purchase
replacement computer systems, program and equipment, or to incur substantial
expenses to make its current systems, programs and equipment Year 2000
compliant, its financial position and results of operation could be adversely
impacted. Amounts expensed in fiscal 1997 were immaterial.
22
<PAGE>
BUSINESS
GENERAL
The Company is primarily 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 September 30, 1998, the Company had approximately $105.9 million of
assets, deposits of approximately $93.5 million and shareholders' equity of
approximately $8.2 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 (2), Indianapolis, Trafalgar, and
North Vernon (2), Indiana. As of September 30, 1998, First Community had 67
employees of which 52 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.
23
<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>
24
<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.
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
25
<PAGE>
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.
26
<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.
27
<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%
28
<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.
29
<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
=======
30
<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 $2,833,613 from the FHLB as of September 30, 1998 and $2,929,789
as of 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 Bargersville, Trafalgar,
Franklin (2), 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 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
31
<PAGE>
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 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
32
<PAGE>
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%. As of September 30,
1998, First Community had a leverage ratio and tangible equity ratio of 7.8%
based on leverage and tangible capital of $7,914,000 and had a total capital to
risk-based assets ratio of 10.7%.
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.
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 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 Room of the Commission, 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. You may obtain information on the operation of the
Public Reference Room by calling the SEC at 1-800-SEC-0330. 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).
33
<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 is also on the Board of Directors of FCREM. 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 and FCREM. 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 FCREM 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 is also on the Board of Directors of FCREM. 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
FCREM 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
34
<PAGE>
August 1991. Mr. Morris is also on the Board of Directors of First Community
and FCREM. 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 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
35
<PAGE>
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. The Company has agreed with the Tennessee
Securities Division that it will not grant options in excess of twelve percent
(12%) of the number of issued and outstanding shares of Common Stock during the
effective period of this registration statement.
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.
36
<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 November 13, 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.
37
<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. All transactions with affiliates of the Company must be
on terms no less favorable than could be approved by a majority of the
directors, including a majority of disinterested directors.
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
38
<PAGE>
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.
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 November 13, 1998, there were 1,005,268 shares of Common Stock
outstanding held of record by 282 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.
39
<PAGE>
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 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.
40
<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 September 30, 1998 and
December 31, 1997............................................. F-24
Consolidated Condensed Statement of Income for the Three and
Nine Months Ended September 30, 1998 and 1997................. F-25
Consolidated Condensed Statement of Comprehensive Income
for the Three and Nine Months Ended September 30, 1998
and 1997...................................................... F-26
Consolidated Condensed Statement of Changes in Stockholders'
Equity for the Nine Months Ended September 30, 1998........... F-27
Consolidated Condensed Statement of Cash Flows for the Nine Months
Ended September 30, 1998 and 1997............................. F-28
Notes to Unaudited Condensed Consolidated Financial Statements.... F-29
41
<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 SUBSIDIARIES
Consolidated Condensed Balance Sheet
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
--------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 1,512,237 $ 933,574
Short-term interest-bearing deposits 5,517,480 10,297,654
--------------------------------------
Cash and cash equivalents 7,029,717 11,231,228
Investment securities
Available for sale 5,590,355 2,771,058
Held to maturity 1,032,736 1,708,679
--------------------------------------
Total investment securities 6,623,091 4,479,737
Loans 88,205,903 80,000,575
Allowance for loan losses (982,834) (848,085)
--------------------------------------
Net Loans 87,223,069 79,152,490
Premises and equipment 2,744,381 1,944,779
Federal Home Loan Bank of Indianapolis stock, at cost 777,800 777,800
Foreclosed real estate 90,000 78,636
Interest receivable 861,440 700,079
Other assets 514,760 374,965
--------------------------------------
Total assets $ 105,864,258 $ 98,739,714
======================================
LIABILITIES
Deposits
Noninterest-bearing $ 7,207,106 $ 7,623,814
Interest-bearing 86,289,057 80,071,501
--------------------------------------
Total deposits 93,496,163 87,695,315
Federal Home Loan Bank of Indianapolis advances 2,833,613 2,929,789
Other borrowings 798,966
Interest payable 265,815 250,617
Other liabilities 231,783 313,987
--------------------------------------
Total liabilities 97,626,340 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 - 1,005,268 and 989,848 shares 6,841,027 6,722,251
Retained earnings and contributed capital 1,362,991 794,796
Accumulated other comprehensive income 33,900 32,959
--------------------------------------
Total stockholders' equity 8,237,918 7,550,006
--------------------------------------
Total liabilities and stockholders' equity $ 105,864,258 $ 98,739,714
======================================
</TABLE>
See notes to consolidated condensed financial statements.
F-24
<PAGE>
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Condensed Statement of Income
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------------------------------------------------
1998 1997 1998 1997
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest Income:
Loans, including fees $ 1,951,845 $ 1,777,802 $ 5,632,415 $ 4,959,194
Investment securities
Taxable 60,951 47,297 193,559 132,474
Tax exempt 55,776 25,928 92,821 84,378
Interest-bearing time deposits 66,678 52,515 280,140 173,625
Dividends 15,743 16,174 47,925 47,645
---------------------------------------------------------------------
Total interest income 2,150,993 1,919,716 6,246,860 5,397,316
---------------------------------------------------------------------
Interest Expense:
Deposits 1,095,113 963,204 3,223,139 2,687,556
FHLB advances 43,943 20,189 131,238 92,232
Other borrowings 12,363 12,363
---------------------------------------------------------------------
Total interest expense 1,151,419 983,393 3,366,740 2,779,788
---------------------------------------------------------------------
Net Interest Income 999,574 936,323 2,880,120 2,617,528
Provision for loan losses (75,000) (69,000) (204,000) (180,000)
---------------------------------------------------------------------
Net Interest Income After Provision for Loan Losses 924,574 867,323 2,676,120 2,437,528
---------------------------------------------------------------------
Other Income
Trust fees 2,407 6,715 31,060 24,491
Service charges on deposit accounts 76,679 56,984 225,635 168,730
Other operating income 4,789 23,906 24,865 34,263
---------------------------------------------------------------------
Total other income 83,875 87,605 281,560 227,484
---------------------------------------------------------------------
Other Expenses
Salaries and employee benefits 365,774 307,468 1,017,706 894,002
Premises and equipment 80,030 79,911 235,489 220,361
Advertising 30,360 36,290 93,597 96,807
Data processing fees 78,284 79,822 207,155 191,493
Deposit insurance expense 13,349 11,475 39,226 33,002
Printing and office supplies 23,379 23,276 79,579 58,842
Legal and professional fees 32,461 17,492 96,395 97,536
Telephone expense 17,844 18,003 51,404 52,334
Other operating expense 110,764 71,780 305,379 226,747
---------------------------------------------------------------------
Total other expenses 752,245 645,517 2,125,930 1,871,124
---------------------------------------------------------------------
Income Before Income Tax 256,204 309,411 831,750 793,888
Income tax expense 75,695 104,185 263,555 266,156
---------------------------------------------------------------------
Net Income $ 180,509 $ 205,226 $ 568,195 $ 527,732
=====================================================================
Basic earnings per share $ .18 $ .21 $ .57 $ .53
Diluted earnings per share .18 .20 .57 .53
</TABLE>
See notes to consolidated condensed financial statements.
F-25
<PAGE>
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Condensed Statement of Comprehensive Income
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------------------------------------------
1998 1997 1998 1997
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Income $ 180,509 $ 205,226 $ 568,195 $ 527,732
Other comprehensive income, net of tax
Holding gains on securities available for sale,
net of tax of $5,209, $10,841, $617, and $17,330 7,943 16,529 941 26,422
-------------------------------------------------------------------
Comprehensive income $ 188,452 $ 221,755 $ 569,136 $ 554,154
===================================================================
</TABLE>
See notes to consolidated condensed financial statements.
F-26
<PAGE>
FIRST COMMUNITY BANCSHARES, INC AND SUBSIDIARIES
Consolidated Condensed Statement of Changes in Stockholders' Equity
For the Nine Months Ended September 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
Net income for the period 568,195 568,195
Holding gains on securities
available for sale 941 941
Exercise of stock options 15,420 85,427 85,427
Tax benefit of stock options
exercised 33,349 33,349
------------------------------------------------------------------------------------------
BALANCES, SEPTEMBER 30, 1998 1,005,268 $6,841,027 $ 1,362,991 $ 33,900 $8,237,918
==========================================================================================
</TABLE>
See notes to consolidated condensed financial statements.
F-27
<PAGE>
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Condensed Statement of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------------------------
1998 1997
-------------------------------------
<S> <C> <C>
Operating Activities:
Net income $ 568,195 $ 527,732
Adjustments to reconcile net income to net cash provided (used) by
operating activities:
Provision for loan losses 204,000 180,000
Depreciation and amortization 110,758 101,396
Investment securities amortization 10,021 3,913
Net change in:
Interest receivable (161,361) (98,104)
Interest payable 15,198 33,505
Other assets (140,414) (1,519)
Other liabilities (48,855) 242,267
-------------------------------------
Net cash provided by operating activities 557,542 989,190
-------------------------------------
Investing Activities:
Proceeds from maturities of securities available for sale 420,000 615,000
Proceeds from paydowns and maturities of securities held to maturity 675,000 583,248
Purchases of securities available for sale (3,246,815) (500,000)
Net changes in loans (8,356,826) (11,777,435)
Proceeds from sale of foreclosed real estate 70,883 123,167
Purchases of property and equipment (910,360) (257,913)
-------------------------------------
Net cash used by investing activities (11,348,118) (11,213,933)
-------------------------------------
Financing Activities:
Net change in:
Noninterest-bearing, NOW and savings deposits 2,306,367 1,273,526
Certificates of Deposit 3,494,481 9,327,993
Repayment of FHLB advances (96,176) (1,108,144)
Proceeds from other borrowings 800,000
Repayment of other borrowings (1,034)
Stock options exercised 85,427
Cash dividends (94,282)
-------------------------------------
Net cash provided by financing activities 6,589,065 9,399,093
-------------------------------------
Net Decrease in Cash and Cash equivalents (4,201,511) (825,650)
Cash and Cash equivalents, Beginning of period 11,231,228 7,034,571
-------------------------------------
Cash and Cash equivalents, End of period $ 7,029,717 $ 6,208,921
=====================================
Supplemental cash flow disclosures:
Interest paid $ 3,351,542 $ 2,746,283
Income taxes paid 81,470 139,904
</TABLE>
See notes to consolidated condensed financial statements.
F-28
<PAGE>
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
September 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 and
commenced operation in July 1998. 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 September 30, 1998, and for the
nine months ended September 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
September 30, 1998 September 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 $ 180,509 991,524 $ .18 $ 205,226 989,848 $ .21
======== ==========
Effect of dilutive stock options 13,365 13,803
------------------------------- ----------------------------
Diluted earnings per share
Income available to common
shareholders and assumed
conversions $ 180,509 1,004,889 $ .18 $205,226 1,003,651 $ .20
========================================= =========================================
</TABLE>
F-29
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 1998 September 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 $ 568,195 990,413 $ .57 $ 527,732 989,848 $ .53
======== ==========
Effect of dilutive stock options 13,910 13,803
------------------------------- ----------------------------
Diluted earnings per share
Income available to common
shareholders and assumed
conversions $ 568,195 1,004,323 $ .57 $ 527,732 1,003,651 $ .53
========================================= =========================================
</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: Debt, Rights and Warrants Offerings
- -------------------------------------------
On July 15, 1998 the Board of Directors approved the issuance and sale of the
following securities:
- Rights to shareholders to purchase one (1) share for every ten
(10) shares owned as of October 29, 1998, 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. The rights
will be exercisable for a ninety (90) day period expiring on
January 29, 1999 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 October 29, 1998, 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. The warrants
will be exercisable for a ninety (90) day period commencing on
September 15, 1999 and expiring on December 13, 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 unsecured convertible notes. The notes will be due
December 31, 2008, bear interest at the rate of 7% per annum
payable quarterly commencing December 31, 1998, and, at the option
of the holder, will be convertible to common stock of the Company
at a conversion rate of
F-30
<PAGE>
$12.10 per share. The notes will be sold in denominations of
$10,000 and, subject to a minimum purchase requirement of one (1)
note, may initially be offered to existing shareholders.
The Company commenced such offers on October 30, 1998.
F-31
<PAGE>
=======================================================
=======================================================
=======================================================
FIRST COMMUNITY
BANCSHARES, INC.
[LOGO]
$1,000,000
7% CONVERTIBLE NOTES
--------------
AMENDED PROSPECTUS
--------------
December 4, 1998
=======================================================
<PAGE>
AMENDED 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
We are issuing to everyone who owned our common stock as of 5:00 p.m.
on October 29, 1998 the right to purchase additional shares of our common stock
at $11.00 per share ("the Rights"). We are also issuing to such shareholders
warrants to purchase shares of common stock at $11.00 per share. The Warrants
may be exercised commencing on September 15, 1999 and ending on December 13,
1999
The Rights and Warrants each entitle you to purchase one share for each
10 shares of common stock, rounded down to the nearest whole share, owned by you
on October 29, 1998, subject to a minimum offer and purchase of 100 shares. The
Rights will expire on January 29, 1999 at 5:00 P.M., Indianapolis time unless
extended by us.
The Rights and Warrants are evidenced by certificates and are freely
transferable. However, our common stock which you will receive upon exercise of
the Rights and Warrants is not listed on any national securities exchange or
traded on the Nasdaq Stock Market nor are the Rights or Warrants so listed or
traded. It is unlikely that an active trading market will develop in the Rights
or Warrants.
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 RIGHTS, WARRANTS AND COMMON STOCK WE ARE DISTRIBUTING AND OFFERING
TO YOU IN THIS PROSPECTUS ARE NOT SAVINGS ACCOUNTS, TIME DEPOSITS OR OTHER
OBLIGATIONS OF A BANK AND ARE NOT INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF
THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PER RIGHTS TOTAL RIGHTS PER WARRANT TOTAL WARRANT
SHARE SHARES SHARE SHARES
----- ------ ----- ------
<S> <C> <C> <C> <C>
Exercise price $11 $1,441,000 $11 $1,441,000
</TABLE>
--------------------------
The Date of this Amended Prospectus is December 4, 1998.
<PAGE>
---------------------
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.............. 11
Capitalization....................................................... 12
Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................. 12
Business............................................................. 23
Management........................................................... 34
Security Ownership of Certain Beneficial Owners and Management....... 37
Certain Transactions................................................. 38
Plan of Distribution................................................. 38
Description of Securities............................................ 38
Legal Matters........................................................ 40
Experts.............................................................. 40
Index to Financial Statements........................................ 41
---------------------
2
<PAGE>
PROSPECTUS SUMMARY
The following summary highlights the more detailed information
appearing in this prospectus. Prospective investors should carefully consider
the information set forth under the heading "Risk Factors." In this prospectus,
"Company," "we," "us" and "our" refer to First Community Bancshares, Inc. and
its consolidated subsidiaries, First Community Bank and Trust and First
Community Real Estate Management, Inc. "First Community" or "Bank" refer to
First Community Bank and Trust..
THE COMPANY
We are primarily a one bank holding company. Through our subsidiary,
First Community, we operate 8 offices in three central and southern Indiana
counties. We are also the sole shareholder of First Community Real Estate
Management, Inc. ("FCREM"), which owns and leases two branch offices to First
Community. Our principal executive offices of the Company are located at 210
East Harriman, Bargersville, Indiana 46106 and our telephone number is (317)
442-5171.
We operate in predominantly rural and suburban markets and embrace a
community banking philosophy that emphasizes personal service and convenience,
community involvement, local decision making authority, quick responses to loan
requests, and customized services.
We endeavor to provide our branch managers, lending officers, tellers,
and deposit service personnel with the authority to act promptly in servicing of
our customers within the scope of Company policies. We enhance this highly
responsive service attitude with an efficient corporate support staff as well as
investing in technology.
We believe our operating philosophy has contributed to our success
along with operating efficiencies, sound internal controls, and high credit
underwriting standards.
THE OFFERING
The Rights............................... An opportunity to purchase directly
from us before January 29, 1999, one
share of common stock for every ten
shares owned by you on October 29,
1998, subject to a minimum offer and
purchase requirement of 100 shares.
The purchase price is $11.00 per
share.
Re-Offer of shares not otherwise
subscribed for........................... In the event a shareholder fails to
purchase any shares or purchases
fewer shares than the number to
which the shareholder is entitled,
the remaining shares may be sold by
us to those shareholders who
purchased their full allotment.
3
<PAGE>
The Warrants............................. An opportunity to purchase directly
from us between September 15, 1999
and December 13, 1999, one share of
common stock for every ten shares
you owned on October 29, 1998,
subject to a minimum offer and
purchase of 100 shares. The
purchase price is $11.00 per share.
Purpose of offering and use of proceeds.. The purpose of this offering is to
raise additional capital for First
Community and for general corporate
purposes. The net proceeds to us
from the sale of the Shares, after
deducting the estimated expenses of
the offering, are estimated to be
$1,404,250 if all the Rights are
exercised. See "Use Of Proceeds."
Subscription price....................... The subscription price of Eleven
Dollars ($11.00) per share for both
the Rights and Warrants has been
established by our Board of
Directors. The price per share is
approximately 134% of the book value
per share of the Company as of
September 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."
Transferability.......................... You may transfer the Rights and
Warrants to someone else.
Dividends................................ We paid a cash dividend of $.10 per
share on March 15, 1997, and a 5%
stock dividend in February 1998.
Our principal source of revenue is
dividends from First Community.
Various legal restrictions limit the
extent to which First Community may
pay dividends to us.
Financial information.................... We had consolidated net income of
approximately $738,444, for the year
ended December 31, 1997 and
$568,195, for the nine months ended
September 30, 1998 .
THE RIGHTS AND WARRANTS HAVE NOT BEEN SEPARATELY VALUED BY US.
ACCORDINGLY, A SHAREHOLDER MAY BE REQUIRED TO ALLOCATE BASIS FROM CURRENTLY HELD
SHARES OF COMMON STOCK TO THE RIGHTS, WARRANTS AND/OR SHARES PURCHASED PURSUANT
TO EITHER. YOU SHOULD CONSULT YOUR 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 our historical
consolidated financial information for the periods indicated and should be read
in conjunction with our financial statements and other information included
elsewhere in this prospectus and in our 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 our quarterly report on Form
10-Q for the nine-month period ended September 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 nine months
ended September 30, 1998, are not necessarily indicative of results that may be
expected for future periods including the year ending December 31, 1998.
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEARS ENDED
SEPTEMBER 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............. $6,247 $5,397 $7,361 $6,158 $5,074 $3,255 $2,583
Interest expense............ 3,367 2,780 3,807 3,166 2,953 1,699 1,308
----- ----- ----- ----- ----- ----- -----
Net interest income......... 2,880 2,617 3,554 2,992 2,121 1,556 1,275
Provision for loan losses 204 180 255 219 208 418 92
----- ----- ----- ----- ----- ----- -----
Net interest income after
provision for loan losses 2,676 2,437 3,299 2,773 1,913 1,138 1,183
Non-interest income......... 282 228 305 249 237 127 96
Non-interest expense........ 2,126 1,871 2,490 2,565 1,863 1,723 1,085
----- ----- ----- ----- ----- ----- -----
Income (loss) before income
tax expense.............. 832 794 1,114 457 287 (458) 194
Income tax expense (benefit) 264 266 376 116 11 (281) 30
----- ----- ----- ----- ----- ----- -----
$568 $528 $738 $341 $276 $(177) $164
===== ===== ===== ===== ===== ===== =====
Selected Ratios and Per Share Data*:
Basic earnings per share.... $0.57 $0.53 $0.75 $0.35 $0.29 $(0.26) $0.25
Diluted earnings per share.. $0.57 $0.53 $0.74 $0.34 $0.28 $(0.26) $0.24
Dividends per share......... $0.10 $0.10
Return on average assets.... .74% .82% .85% .46% .44% (.38%) .46%
Return on average equity.... 9.61 9.95 10.02 5.04 4.54 (4.48) 4.35
Average equity to average
assets................... 7.68 8.29 8.45 9.14 9.64 8.57 10.53
Dividend payout ratio....... 18.87 13.33
SEPTEMBER 30, DECEMBER 31,
------------- ---------------------------------------------------
1998 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ----
(DOLLARS IN 000's)
Selected Balance Sheet Data:.....
Assets...................... $105,864 $98,740 $80,079 $71,393 $57,857 $43,617
Loans....................... 88,206 80,001 65,108 54,636 39,508 27,041
Allowance for loan losses... 983 848 644 518 362 161
Deposits.................... 93,496 87,695 70,552 59,163 46,184 36,616
Federal Home Loan Bank
advances................. 2,834 2,930 2,379 4,603 5,314 2,507
Other borrowings 799 908 450
Total shareholders' equity.. 8,238 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>
NOTE OFFERING
We commenced a best efforts offering of up to $1,000,000 in aggregate
principal amount of 7% Convertible Notes (the "Notes"), which are convertible to
our common stock at the rate of $12.10 per share, on October 30, 1998. Proceeds
from the Notes, if any, will be used primarily for capital for FCREM and First
Community.
6
<PAGE>
RISK FACTORS
You should carefully consider the risks described below before making
an investment decision. The risks and uncertainties described below are not the
only ones facing our Company. Additional risks and uncertainties not presently
known to us or that we currently deem immaterial may also impair our business
operations.
If any of the following risks actually occur, our business, financial
condition or results of operations could be materially affected. This could
include an impairment of our ability to repay the Notes and you could lose all
or part of your investment.
This prospectus also contains forward-looking statements that involve
risks and uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including the risks faced by us described below and elsewhere in this
prospectus.
DIVIDEND POLICY
We are a legal entity separate and distinct from First Community. Our
principal source of cash revenue is from First Community. Our right to
participate in the assets of any subsidiary upon its liquidation,
reorganization, or otherwise is subject to the claims of its creditors. Those
creditors have priority except to the extent that we may be a creditor with a
recognized claim. Various legal and regulatory limitations restrict the payment
of dividends by First Community. We have only declared a cash dividend on one
occasion. The shares being offered by us should not be purchased by you if you
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 we are offering 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 for our shares and the you may
experience difficulty in reselling them if you need to liquidate your holdings.
ADEQUACY OF ALLOWANCE FOR LOAN LOSSES
Our 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. We maintain 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, we make various assumptions and judgments
about the ultimate collectability of the loan portfolio. We then provide 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 our 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 our
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 we believe that our 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
7
<PAGE>
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
Our consolidated results of operations depend to a large extent on the
level of our net interest income. This 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 our cost of deposits and borrowings to increase
faster than the yield on our interest earning assets, then net interest income
will be reduced. We measure our interest rate risk monthly using static gap
analysis. The difference between our interest rate sensitive assets and our
interest rate sensitive liabilities at a point in time is our 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.
We cannot predict or control fluctuations in interest rates. We
endeavor to structure our 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 we will be able to manage interest rate risk so as to
avoid significant adverse effects in net interest income. At September 30, 1998
we had a one-year cumulative interest-rate gap of a negative 24.05 percent. At
December 31, 1997, we had a one-year cumulative interest-rate gap of 24.26
percent. This negative interest-rate gap may have a negative impact on earnings
in a rising interest rate environment. While we use various monitors of interest
rate risk, we are 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."
OUR COMPETITION
We operate in a highly competitive environment. We 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 these companies have substantially greater
financial resources and name recognition than we have. Some competitors offer
products and services that are not offered by us. Some competitors are not
subject to the same extensive laws and regulations as we are. Federal and state
legislation and regulations also affect our competitiveness in the financial
services business. It is impossible to predict the competitive impact on us of
certain federal and state legislation and/or regulations relating to the banking
industry and interstate banking.
ECONOMIC CONDITIONS AND MONETARY POLICY
Our operating results depend to a great extent upon the rate
differentials that result from the difference from the income we receive from
our loans, securities, and other interest earning assets and the interest
expense we pay on our deposits and other interest bearing liabilities. These
rate differentials are highly sensitive to many factors beyond our control.
These factors include general economic conditions and the policies of various
governmental and regulatory authorities, in particular the Federal Reserve.
Like other depository institutions, we are 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 our operations. This could adversely affect our
ability to make loans and attract deposits, as well as public demand for loans.
8
<PAGE>
LOCAL ECONOMIC CONDITIONS
Our success is affected by the general economic conditions in the
geographical market that we serve. We expect that economic conditions will
continue to be favorable in these markets. However, favorable economic
conditions may not continue to prevail. Adverse changes in economic conditions
in the geographic markets that we serve could result in lower lending activity,
impair our ability to collect existing loans, or otherwise impair our operating
results and financial condition.
RISKS OF GROWTH
We have experienced steady growth over the past five years in, assets,
loans and deposits. This growth places a strain on our management to recruit,
train and retain employees, maintain prescribed loan underwriting practices and
generate or obtain adequate capital. We plan to open one additional office
during the first quarter of 1999 and another one during the first half of 1999.
We cannot assure that this growth will continue. Any new location that we open
may be only marginally profitable or unprofitable. Our inability to effectively
manage such growth could have a negative impact upon our financial results and
condition.
GOVERNMENT REGULATION
We are subject to extensive state and federal governmental supervision,
regulation, and control. Future legislation and government policy could
adversely affect the banking industry and our operations. See "Business
Regulation and Supervision of the Company" and "- Regulation and Supervision of
First Community."
YEAR 2000 COMPLIANCE
The Company's lending and deposit activities, like those of most
financial institutions, depend significantly upon computer systems. The Company
is addressing the potential problems associated with the possibility that the
computers which control its systems, facilities and infrastructure may not be
programmed to read four-digit date codes. This could cause some computer
applications to be unable to recognize the change from the year 1999 to the year
2000, which could cause computer systems to generate erroneous data or to fail.
In addition to possible expenses related to the Company's own systems
and those of its service providers, the Company could be affected by the Year
2000 problems affecting any of its depositors or borrowers. Such problems could
include delayed loan payments due to Year 2000 problems affecting the borrower.
At this time, it is estimated that costs associated with Year 2000
issues will be approximately $25,000 to $60,000 from 1998 through 1999. Although
management believes it is taking the necessary steps to address the Year 2000
compliance issue, no assurances can be given that some problems will not occur
or that the Company will not incur significant additional expenses in the future
periods. In the event that the Company is ultimately required to purchase
replacement computer systems, program and equipment, or to incur substantial
expenses to make its current systems, programs and equipment Year 2000
compliant, its financial position and results of operation could be adversely
impacted.
9
<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., October 29,
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 October 29, 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 January 29, 1999, 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 Company intends to use the proceeds of the Exercise of Rights as
follows, assuming the exercise of all of the Rights and in the following order
if less than all of the Rights are exercised:
Gross Proceeds $1,441,000
Offering Expenses 36,750
----------
Net Proceeds $1,404,250
==========
Use of Net Proceeds:
General Corporate Purposes $ 200,000
Contribution of Additional Capital to First
Community 1,204,250
----------
$1,404,250
==========
Pending such uses, the Company may invest the net proceeds temporarily
in short and medium term securities eligible for investment by financial
institutions.
10
<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* $11.00 $10.50 $11.43 $10.48 $11.43 $10.48
</TABLE>
* Through November 13, 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 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 up to
the amount of 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 September 30, 1998, the shareholder's equity of
First Community was $8,238,000, of which a minimum of $1,553,000 was available
for dividends.
The number of record holders of the Company's Common Stock as of
November 13, 1998 was 282.
11
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at
September 30, 1998, both actual and as adjusted to reflect (i) the exercise of
all Rights granted hereby and (ii) the sale of all the Notes in the Note
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. The information set
forth below should be read in conjunction with the consolidated financial
statements and related notes included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
ACTUAL AS ADJUSTED
------ -----------
<S> <C> <C>
Secured obligations............................ $3,632,579 $3,632,579
Notes.......................................... -0- 1,000,000
----------- -----------
Total borrowings 3,632,579 4,632,579
----------- -----------
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,
1,005,268 shares issued (actual),
and 1,136,268 shares (as adjusted)........ 6,814,027 8,282,027
Retained earnings and contributed capital 1,362,991 1,362,991
Accumulated other comprehensive income ...... 33,900 33,900
----------- -----------
Stockholders' Equity..................... 8,237,918 9,678,918
----------- -----------
Total Borrowings and Stockholders' Equity $11,870,497 $14,311,497
=========== ===========
</TABLE>
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.
12
<PAGE>
RESULTS OF OPERATIONS
Three and Nine Months Ended September 30, 1998 and 1997
- -------------------------------------------------------
Net income increased from $528,000 to $568,000 for the nine months, and
decreased from $205,000 to $181,000 for the three months ending September 30,
1997 and 1998, respectively. Basic earnings per share increased from $.53 to
$.57 for the nine month period, and decreased from $.21 to $.18 for the three
month period ended September 30, 1997 and 1998, respectively. Net interest
income increased from $2.6 million to $2.9 million for the nine months, and from
$936,000 to $965,058 to 1.0 million for the three months, ended September 30,
1997 and 1998, respectively.
The increase in net income for the nine month period was primarily due
to the increase in net interest income offset by general increases in other
expense. The decrease in net income for the three month period was primarily due
to increases in personnel and other expenses as a result of the opening of an
additional branch in North Vernon, Indiana. 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 $169,000 to $226,000 for the nine months, and from $57,000 to
$77,000 for the three months, ended September 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 decreased $3,000 for the nine months
ended September 30, 1998, when compared to the same period in 1997, because of
an increase in the Company's tax exempt securities portfolio.
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
13
<PAGE>
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 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.
14
<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 $105,864,258 at September 30, 1998 and deposits from $36,616,000 at December
31, 1993 to $87,695,000 at December 31, 1997 to $93,496,163 at September 30,
1998. These factors include: (i) increased population in the geographic area
15
<PAGE>
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 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 September 30, 1998, First Community had $1.5
million 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 $982,834 or 1.1% of net loans receivable at September 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 $145,000 at September 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 24.05% and 24.26% at September 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 1.2% at September
30, 1998 and .42% at December 31, 1997.
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.
16
<PAGE>
The following tables illustrate the interest-rate sensitivity of
interest-earning assets and interest-bearing liabilities at September 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........ $ 13,735 $ 4,194 $ 4,466 $ -0- $ 22,395
Fixed rate mortgages............. 4,807 2,184 2,178 11,366 20,535
Commercial loans................. 12,185 1,741 1,201 241 15,368
Consumer loans................... 10,640 10,939 4,264 570 26,413
Tax-exempt loans and leases...... -0- 17 -0- 3,478 3,495
Investments...................... 1,422 1,597 1,412 2,192 6,623
FHLB stock....................... 778 -0- -0- -0- 778
Interest-bearing deposits........ 5,517 -0- -0- -0- 5,517
---------- ---------- ----------- ---------- -----------
Total interest-earning assets.. 49,084 20,672 13,521 17,847 101,124
---------- ---------- ----------- ---------- -----------
Interest-bearing liabilities:
Fixed maturity deposits.......... 43,319 9,040 2,855 27 55,241
Other deposits................... 31,048 -0- -0- -0- 31,048
FHLB advances.................... 166 776 1,892 754 2,834
Other Borrowings 8 17 20 799
---------- ---------- ----------- ---------- -----------
Total interest-bearing liabilities 74,541 9,833 4,767 781 89,922
---------- ---------- ----------- ---------- -----------
Excess (deficiency) of
interest-earning assets over
interest-bearing liabilities....... $ (25,457) $ 10,839 $ 8,754 $ 17,066 $ 11,202
========== ========== =========== ========== ===========
Cumulative excess (deficiency)
of interest-earning assets over
interest-bearing liabilities $ (25,457) $ (14,618) $ (5,864) $ 11,202
Cumulative ratio at September 30,
1998 as a percent of total assets.. (24.05)% (13.81)% (5.54)% 10.58%
</TABLE>
17
<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>
18
<PAGE>
The following tables provide information about the Company's
significant financial instruments at September 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 SEPTEMBER 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 $ 966 $ 574 $ 738 $ 814 $ 598 $ 1,900 $ 5,590 $ 5,590
Average interest rate 10.24% 8.63% 5.60% 6.05% 6.73% 7.36% 7.51%
Investment securities held
to maturity
Fixed rate $ 456 $ 180 $ 105 $ 292 $ 1,033 $ 1,060
Average interest rate 5.57% 6.72% 6.87% 7.18% 6.36%
Loans
Fixed rate $ 16,008 $ 8,012 $ 6,552 $ 4,653 $ 2,515 $ 15,653 $ 53,393 $ 54,173
Average interest rate 9.48% 9.21% 8.97% 8.74% 8.47% 7.87% 8.79%
Variable rate $ 10,110 $ 2,225 $ 2,657 $ 1,015 $ 1,048 $ 17,758 $ 34,813 $ 5,140
Average interest rate 9.96% 9.76% 9.73% 9.43% 9.39% 8.75% 9.28%
Liabilities
Deposits
NOW, Money Market and
Savings Deposits
Variable rate $ 31,048 $ 31,048 $ 31,048
Average interest rate 3.82% 3.82%
Certificates of Deposit
Fixed rate $ 43,319 $ 6,274 $ 1,957 $ 540 $ 3,314 $ 27 $ 55,241 $ 55,408
Average interest rate 5.69% 5.96% 5.94% 6.15% 5.97% 6.10% 5.75%
FHLB Advances
Fixed rate $ 166 $ 147 $ 629 $ 114 $ 1,778 $ 2,834 $ 2,878
Average interest rate 6.02% 6.02% 6.05% 6.02% 5.78% 5.88%
Other Borrowings
Variable rate $ 8 $ 8 $ 9 $ 10 $ 10 $ 754 $ 799 $ 799
Average interest rate 7.38% 7.38% 7.38% 7.38% 7.38% 7.38% 7.38%
</TABLE>
19
<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 from the
FHLB. The balance of its FHLB advances was $2,833,613 and $2,929,789 at
September 30, 1998 and December 31, 1997, respectively.
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,
20
<PAGE>
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 September 30, 1998, the Company had a capital to asset ratio of
7.62%. At September 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.
On October 30, 1998, the Company issued rights and warrants to
shareholders to purchase one share of common stock of the Company for every ten
shares owned as of October 29, 1998, subject to a minimum offer and purchase of
100 shares. The rights are exercisable until January 29, 1999 and the warrants
will not become exercisable until September 15, 1999. The net proceeds to the
Company from the sale of the stock, after deducting the expenses, is expected to
be $1.4 million if all of the rights are exercised. The purpose of the rights
offering is to raise additional capital of $1.2 million for the Bank to support
additional growth and $200,000 for general corporate purposes.
In addition, on October 30, 1998, the Company commenced the offer and
sale up to $1 million in unsecured convertible notes. The notes will be due
December 31, 2008, bear interest at the rate of 7% per annum and, at the option
of the holder, are convertible to common stock of the Company at the conversion
price of $12.10 per share. The net proceeds of this offering will be used to
provide capital to FCREM to acquire and lease branch facilities to the Bank and
to provide additional capital to the Bank to support asset growth.
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.
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.
21
<PAGE>
YEAR 2000 COMPLIANCE
The Company's lending and deposit activities, like those of most
financial institutions, depend significantly upon computer systems. The Company
is addressing the potential problems associated with the possibility that the
computers which control its systems, facilities and infrastructure may not be
programmed to read four-digit date codes. This could cause some computer
applications to be unable to recognize the change from the year 1999 to the year
2000, which could cause computer systems to generate erroneous data or to fail.
Management recognizes the possibility of certain risks associated with
Year 2000 and is continuing to evaluate appropriate courses of corrective
action. As of September 30, 1998, the Company has completed an inventory of all
hardware and software systems and has made all mission critical classifications.
The Company has implemented both an employee awareness program and a customer
awareness program aimed at educating people about the efforts being made by the
Company as well as bank regulators regarding the Year 2000 issue.
The Company's data processing is performed primarily by a third party
servicer. The Company has been informed that its primary service provider
anticipates that all reprogramming efforts will be completed by December 31,
1998, allowing the Company adequate time for testing. The Company expects to
complete testing by March 31, 1999.
The Company also uses software and hardware which are covered under
maintenance agreements with third party vendors. Consequently the Company is
dependent on these vendors to conduct its business. The Company has contacted
each vendor to request time tables for Year 2000 compliance and the expected
costs, if any, to be passed along to the Company. Most of the Company's vendors
have provided responses as to where they stand regarding Year 2000 readiness.
Those who have not responded to the Company's status requests are being
contacted again. Depending on the responses received from the third party
vendors, the Company will make decisions as to whether to continue those
relationships or to search for new providers of those services.
In addition to possible expenses related to the Company's own systems
and those of its service providers, the Company could be affected by the Year
2000 problems affecting any of its depositors or borrowers. Such problems could
include delayed loan payments due to Year 2000 problems affecting the borrower.
The Company has also begun to require all significant commercial borrowers to
certify their own year 2000 compliance status. The Company is still in the
process of collecting that information.
At this time, it is estimated that costs associated with Year 2000
issues will be approximately $25,000 to $60,000 from 1998 through 1999. Although
management believes it is taking the necessary steps to address the Year 2000
compliance issue, no assurances can be given that some problems will not occur
or that the Company will not incur significant additional expenses in the future
periods. In the event that the Company is ultimately required to purchase
replacement computer systems, program and equipment, or to incur substantial
expenses to make its current systems, programs and equipment Year 2000
compliant, its financial position and results of operation could be adversely
impacted. Amounts expensed in fiscal 1997 were immaterial.
22
<PAGE>
BUSINESS
GENERAL
The Company is primarily 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 September 30, 1998, the Company had approximately $105.9 million of
assets, deposits of approximately $93.5 million and shareholders' equity of
approximately $8.2 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 (2), Indianapolis, Trafalgar, and
North Vernon (2), Indiana. As of September 30, 1998, First Community had 67
employees of which 52 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.
23
<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>
24
<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.
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
25
<PAGE>
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.
26
<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.
27
<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%
28
<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.
29
<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
=======
30
<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 $2,833,613 from the FHLB as of September 30, 1998 and $2,929,789
as of 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 Bargersville, Trafalgar,
Franklin (2), 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 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
31
<PAGE>
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 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
32
<PAGE>
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%. As of September 30,
1998, First Community had a leverage ratio and tangible equity ratio of 7.8%
based on leverage and tangible capital of $7,914,000 and had a total capital to
risk-based assets ratio of 10.7%.
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.
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 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 Room of the Commission, 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. You may obtain information on the operation of the
Public Reference Room by calling the SEC at 1-800-SEC-0330. 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).
33
<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 is also on the Board of Directors of FCREM. 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 and FCREM. 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 FCREM 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 is
also on the Board of Directors of FCREM. 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
FCREM 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
34
<PAGE>
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 Directors of First
Community and FCREM. 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 value of the shares
received at the time of exercise or the
35
<PAGE>
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. The Company has agreed with the Tennessee
Securities Division that it will not grant options in excess of twelve percent
(12%) of the number of issued and outstanding shares of Common Stock during the
effective period of this registration statement.
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.
36
<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 November 13, 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.
37
<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. All transactions with affiliates of the Company must be on
terms no less favorable than could be approved by a majority of the directors,
including a majority of disinterested directors.
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 are evidenced by a Rights Certificate. The Rights were
issued to shareholders of record as of 5:00 p.m. on October 29, 1998. The Rights
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
January 29, 1999 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 January 29, 1999. 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 January 29, 1999
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 are evidenced by a Warrant Certificate the form of which
is included as Annex "A" to the Prospectus. The Warrants were issued to
shareholders of record on October 29, 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
38
<PAGE>
payment in full of 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 November 13, 1998, there were 1,005,268 shares of Common Stock
outstanding held of record by 282 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
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.
39
<PAGE>
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.
40
<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 September 30, 1998 and
December 31, 1997............................................. F-24
Consolidated Condensed Statement of Income for the Three and
Nine Months Ended September 30, 1998 and 1997................. F-25
Consolidated Condensed Statement of Comprehensive Income
for the Three and Nine Months Ended September 30, 1998
and 1997...................................................... F-26
Consolidated Condensed Statement of Changes in Stockholders'
Equity for the Nine Months Ended September 30, 1998........... F-27
Consolidated Condensed Statement of Cash Flows for the Nine Months
Ended September 30, 1998 and 1997............................. F-28
Notes to Unaudited Condensed Consolidated Financial Statements.... F-29
41
<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 SUBSIDIARIES
Consolidated Condensed Balance Sheet
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
--------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 1,512,237 $ 933,574
Short-term interest-bearing deposits 5,517,480 10,297,654
--------------------------------------
Cash and cash equivalents 7,029,717 11,231,228
Investment securities
Available for sale 5,590,355 2,771,058
Held to maturity 1,032,736 1,708,679
--------------------------------------
Total investment securities 6,623,091 4,479,737
Loans 88,205,903 80,000,575
Allowance for loan losses (982,834) (848,085)
--------------------------------------
Net Loans 87,223,069 79,152,490
Premises and equipment 2,744,381 1,944,779
Federal Home Loan Bank of Indianapolis stock, at cost 777,800 777,800
Foreclosed real estate 90,000 78,636
Interest receivable 861,440 700,079
Other assets 514,760 374,965
--------------------------------------
Total assets $ 105,864,258 $ 98,739,714
======================================
LIABILITIES
Deposits
Noninterest-bearing $ 7,207,106 $ 7,623,814
Interest-bearing 86,289,057 80,071,501
--------------------------------------
Total deposits 93,496,163 87,695,315
Federal Home Loan Bank of Indianapolis advances 2,833,613 2,929,789
Other borrowings 798,966
Interest payable 265,815 250,617
Other liabilities 231,783 313,987
--------------------------------------
Total liabilities 97,626,340 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 - 1,005,268 and 989,848 shares 6,841,027 6,722,251
Retained earnings and contributed capital 1,362,991 794,796
Accumulated other comprehensive income 33,900 32,959
--------------------------------------
Total stockholders' equity 8,237,918 7,550,006
--------------------------------------
Total liabilities and stockholders' equity $ 105,864,258 $ 98,739,714
======================================
</TABLE>
See notes to consolidated condensed financial statements.
F-24
<PAGE>
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Condensed Statement of Income
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------------------------------------------------
1998 1997 1998 1997
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest Income:
Loans, including fees $ 1,951,845 $ 1,777,802 $ 5,632,415 $ 4,959,194
Investment securities
Taxable 60,951 47,297 193,559 132,474
Tax exempt 55,776 25,928 92,821 84,378
Interest-bearing time deposits 66,678 52,515 280,140 173,625
Dividends 15,743 16,174 47,925 47,645
---------------------------------------------------------------------
Total interest income 2,150,993 1,919,716 6,246,860 5,397,316
---------------------------------------------------------------------
Interest Expense:
Deposits 1,095,113 963,204 3,223,139 2,687,556
FHLB advances 43,943 20,189 131,238 92,232
Other borrowings 12,363 12,363
---------------------------------------------------------------------
Total interest expense 1,151,419 983,393 3,366,740 2,779,788
---------------------------------------------------------------------
Net Interest Income 999,574 936,323 2,880,120 2,617,528
Provision for loan losses (75,000) (69,000) (204,000) (180,000)
---------------------------------------------------------------------
Net Interest Income After Provision for Loan Losses 924,574 867,323 2,676,120 2,437,528
---------------------------------------------------------------------
Other Income
Trust fees 2,407 6,715 31,060 24,491
Service charges on deposit accounts 76,679 56,984 225,635 168,730
Other operating income 4,789 23,906 24,865 34,263
---------------------------------------------------------------------
Total other income 83,875 87,605 281,560 227,484
---------------------------------------------------------------------
Other Expenses
Salaries and employee benefits 365,774 307,468 1,017,706 894,002
Premises and equipment 80,030 79,911 235,489 220,361
Advertising 30,360 36,290 93,597 96,807
Data processing fees 78,284 79,822 207,155 191,493
Deposit insurance expense 13,349 11,475 39,226 33,002
Printing and office supplies 23,379 23,276 79,579 58,842
Legal and professional fees 32,461 17,492 96,395 97,536
Telephone expense 17,844 18,003 51,404 52,334
Other operating expense 110,764 71,780 305,379 226,747
---------------------------------------------------------------------
Total other expenses 752,245 645,517 2,125,930 1,871,124
---------------------------------------------------------------------
Income Before Income Tax 256,204 309,411 831,750 793,888
Income tax expense 75,695 104,185 263,555 266,156
---------------------------------------------------------------------
Net Income $ 180,509 $ 205,226 $ 568,195 $ 527,732
=====================================================================
Basic earnings per share $ .18 $ .21 $ .57 $ .53
Diluted earnings per share .18 .20 .57 .53
</TABLE>
See notes to consolidated condensed financial statements.
F-25
<PAGE>
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Condensed Statement of Comprehensive Income
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------------------------------------------
1998 1997 1998 1997
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Income $ 180,509 $ 205,226 $ 568,195 $ 527,732
Other comprehensive income, net of tax
Holding gains on securities available for sale,
net of tax of $5,209, $10,841, $617, and $17,330 7,943 16,529 941 26,422
-------------------------------------------------------------------
Comprehensive income $ 188,452 $ 221,755 $ 569,136 $ 554,154
===================================================================
</TABLE>
See notes to consolidated condensed financial statements.
F-26
<PAGE>
FIRST COMMUNITY BANCSHARES, INC AND SUBSIDIARIES
Consolidated Condensed Statement of Changes in Stockholders' Equity
For the Nine Months Ended September 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
Net income for the period 568,195 568,195
Holding gains on securities
available for sale 941 941
Exercise of stock options 15,420 85,427 85,427
Tax benefit of stock options
exercised 33,349 33,349
------------------------------------------------------------------------------------------
BALANCES, SEPTEMBER 30, 1998 1,005,268 $6,841,027 $ 1,362,991 $ 33,900 $8,237,918
==========================================================================================
</TABLE>
See notes to consolidated condensed financial statements.
F-27
<PAGE>
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Condensed Statement of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------------------------
1998 1997
-------------------------------------
<S> <C> <C>
Operating Activities:
Net income $ 568,195 $ 527,732
Adjustments to reconcile net income to net cash provided (used) by
operating activities:
Provision for loan losses 204,000 180,000
Depreciation and amortization 110,758 101,396
Investment securities amortization 10,021 3,913
Net change in:
Interest receivable (161,361) (98,104)
Interest payable 15,198 33,505
Other assets (140,414) (1,519)
Other liabilities (48,855) 242,267
-------------------------------------
Net cash provided by operating activities 557,542 989,190
-------------------------------------
Investing Activities:
Proceeds from maturities of securities available for sale 420,000 615,000
Proceeds from paydowns and maturities of securities held to maturity 675,000 583,248
Purchases of securities available for sale (3,246,815) (500,000)
Net changes in loans (8,356,826) (11,777,435)
Proceeds from sale of foreclosed real estate 70,883 123,167
Purchases of property and equipment (910,360) (257,913)
-------------------------------------
Net cash used by investing activities (11,348,118) (11,213,933)
-------------------------------------
Financing Activities:
Net change in:
Noninterest-bearing, NOW and savings deposits 2,306,367 1,273,526
Certificates of Deposit 3,494,481 9,327,993
Repayment of FHLB advances (96,176) (1,108,144)
Proceeds from other borrowings 800,000
Repayment of other borrowings (1,034)
Stock options exercised 85,427
Cash dividends (94,282)
-------------------------------------
Net cash provided by financing activities 6,589,065 9,399,093
-------------------------------------
Net Decrease in Cash and Cash equivalents (4,201,511) (825,650)
Cash and Cash equivalents, Beginning of period 11,231,228 7,034,571
-------------------------------------
Cash and Cash equivalents, End of period $ 7,029,717 $ 6,208,921
=====================================
Supplemental cash flow disclosures:
Interest paid $ 3,351,542 $ 2,746,283
Income taxes paid 81,470 139,904
</TABLE>
See notes to consolidated condensed financial statements.
F-28
<PAGE>
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
September 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 and
commenced operation in July 1998. 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 September 30, 1998, and for the
nine months ended September 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
September 30, 1998 September 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 $ 180,509 991,524 $ .18 $ 205,226 989,848 $ .21
======== ==========
Effect of dilutive stock options 13,365 13,803
------------------------------- ----------------------------
Diluted earnings per share
Income available to common
shareholders and assumed
conversions $ 180,509 1,004,889 $ .18 $205,226 1,003,651 $ .20
========================================= =========================================
</TABLE>
F-29
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 1998 September 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 $ 568,195 990,413 $ .57 $ 527,732 989,848 $ .53
======== ==========
Effect of dilutive stock options 13,910 13,803
------------------------------- ----------------------------
Diluted earnings per share
Income available to common
shareholders and assumed
conversions $ 568,195 1,004,323 $ .57 $ 527,732 1,003,651 $ .53
========================================= =========================================
</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: Debt, Rights and Warrants Offerings
- -------------------------------------------
On July 15, 1998 the Board of Directors approved the issuance and sale of the
following securities:
- Rights to shareholders to purchase one (1) share for every ten
(10) shares owned as of October 29, 1998, 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. The rights
will be exercisable for a ninety (90) day period expiring on
January 29, 1999 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 October 29, 1998, 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. The warrants
will be exercisable for a ninety (90) day period commencing on
September 15, 1999 and expiring on December 13, 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 unsecured convertible notes. The notes will be due
December 31, 2008, bear interest at the rate of 7% per annum
payable quarterly commencing December 31, 1998, and, at the option
of the holder, will be convertible to common stock of the Company
at a conversion rate of
F-30
<PAGE>
$12.10 per share. The notes will be sold in denominations of
$10,000 and, subject to a minimum purchase requirement of one (1)
note, may initially be offered to existing shareholders.
The Company commenced such offers on October 30, 1998.
F-31
<PAGE>
ANNEX A
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
1
<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
<PAGE>
ANNEX B
SUBSCRIPTION AGREEMENT
----------------------
To Subscribe for and Purchase Common Stock
of
First Community Bancshares, Inc.
Being Made Pursuant to the Amended Prospectus
Dated December 4, 1998
THE OPPORTUNITY TO SUBSCRIBE FOR AND PURCHASE
COMMON STOCK PURSUANT TO
THE RIGHTS OFFERING
WILL EXPIRE AT 5:00 P.M., INDIANAPOLIS, INDIANA
TIME, ON JANUARY 29, 1999 UNLESS EXTENDED.
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET
FORTH BELOW WILL NOT CONSTITUTE A VALID DELIVERY.
FIRST COMMUNITY BANCSHARES, INC.
P.O. BOX 767
298 ST. RD. 135N
GREENWOOD, INDIANA 46142-0767
THE INSTRUCTIONS ACCOMPANYING THIS SUBSCRIPTION AGREEMENT (THIS
"SUBSCRIPTION AGREEMENT") SHOULD BE READ CAREFULLY BEFORE THIS SUBSCRIPTION
AGREEMENT IS COMPLETED.
First Community Bancshares (the "Company") is offering, pursuant
to and subject to the terms and conditions described in the Amended Prospectus
of the Company dated December 4, 1998 (together with any amendments or
supplements thereto, the "Prospectus ") and this Subscription Agreement, to
holders of shares of common stock, no par value, of the Company ("Common Stock")
of record as of the close of business on October 29, 1998 (the "Record Date")
and their registered assigns ("Eligible Holders") the opportunity to subscribe
for and purchase one (1) share of Common Stock for each ten (10) shares of
Common Stock held of record by them on the Record Date, subject to a minimum
offer of 100 shares of Common Stock, at a purchase price of $11.00 per share
(the "Subscription Price"). Such offering is referred to herein as the "Rights
Offering". Eligible Holders will also receive a Warrant as described in the
Prospectus to purchase one (1) additional share for each ten (10) shares held of
record on the record date subject to a minimum offer of 100 shares of Common
Stock.
The number of shares of Common Stock that the Eligible Holder(s)
owned on the Record Date (if it is not already indicated below), the number of
shares of Common Stock that the Eligible Holder(s) wish(es) to subscribe for and
purchase pursuant to the Rights Offering and the aggregate Subscription Price
for such Common Stock should be indicated in the appropriate boxes below. See
Instructions.
1
<PAGE>
<TABLE>
<CAPTION>
Number of Aggregate
Number of Shares Being Number of Shares Subscription Price
Shares Offered for of Common Stock for Common Stock
Now Owned Subscription Subscribed For* Subscribed For*
- --------- ------------ --------------- ---------------
<S> <C> <C> <C>
_________ ________ ________ X $11.00 = __________
</TABLE>
*If the number of shares of Common Stock subscribed for has not been indicated,
or if the Subscription Price payment delivered to the Company is not sufficient
to purchase the number of shares of Common Stock indicated as subscribed for,
the Eligible Holder will be deemed to have exercised the Rights with respect to
the maximum number of shares of Common Stock which may be purchased for the
Subscription Price delivered to the Company and, to the extent that the
Subscription Price payment delivered exceeds the Subscription Price multiplied
by the maximum number of shares of Common Stock which may be purchased by the
Eligible Holder, the Company as soon as practicable after the expiration date of
the Rights Offering, will return to such Eligible Holder the excess paid by such
Eligible Holder, without interest or deduction, provided, however, that no less
than 100 shares of Common Stock may be purchased by any Eligible Holder.
Please indicate form of payment made (see Instruction 2):
____ Check or bank draft
____ Postal, telegraphic or express money order
____ Wire transfer funds
NOTE: SIGNATURE(S) MUST BE PROVIDED BELOW.
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY.
First Community Bancshares, Inc.:
The undersigned hereby irrevocably subscribes for the number of
shares of Common Stock indicated above at a purchase price of $11.00 per share,
on the terms and conditions set forth in the Prospectus, the receipt of which is
hereby acknowledged, and in this Subscription Agreement.
Please issue a share certificate evidencing such Common Stock in
the name(s) of the undersigned and mail the share certificate to the address of
the undersigned Eligible Holder appearing below.
PLEASE SIGN HERE
(See Instructions 4 and 5)
2
<PAGE>
X_____________________________ ________
X_____________________________ ________
Signature(s) of Eligible Holder(s) Date
Address: ________________________
________________________
________________________
(Include Zip Code)
Telephone Number: ( )__________
If signed by a trustee, executor, administrator, guardian,
officer or other person acting in a fiduciary or representative capacity, please
set forth the following information.
Name(s): ________________________________
________________________________
(Please Type or Print)
Capacity: ________________________________
Address: ________________________________
(Include Zip Code)
CONDITIONAL SUBSCRIPTION FOR
ADDITIONAL SHARES
If not all the shares of Common Stock offered in the Rights
Offering are purchased by the Eligible Holders initially entitled thereto, then
the undersigned Eligible Holder hereby agrees to purchase up to an additional
shares of Common Stock if the Company elects, in its discretion, to reoffer such
shares to participating Eligible Holders. Upon notification from the Company
that I have been allotted some or all of such additional shares, I will
immediately forward payment therefor to the Company. See Instruction 8.
___________________________________________ Date_________________
___________________________________________ Date_________________
Signature of Eligible Holder
3
<PAGE>
NOTE: THE FOLLOWING MUST BE COMPLETED AND SIGNED IF THE ELIGIBLE HOLDER IS A
BROKER, DEALER, COMMERCIAL BANK, TRUST COMPANY OR OTHER NOMINEE SHAREHOLDER THAT
HELD COMMON STOCK FOR MORE THAN ONE BENEFICIAL SHAREHOLDER ON THE RECORD DATE.
SEE INSTRUCTION 5.
NOMINEE SHAREHOLDER CERTIFICATION
The undersigned is a broker, dealer, commercial bank, trust
company or other nominee which held Common Stock of record on the Record Date
for the account of more than one beneficial owner. The undersigned hereby
certifies to the Company, that (i) the undersigned has subscribed for, on behalf
of beneficial owners of Common Stock (which may include the undersigned), the
total number of shares of Common Stock specified below pursuant to the Rights
Offering, (ii) the undersigned held on the Record Date the aggregate number of
shares of Common Stock specified below for each beneficial owner (indicated
below by number without identifying any such beneficial owner) on whose behalf
it has subscribed for Common Stock and (iii) the undersigned has subscribed for
the aggregate number of shares of Common Stock specified below on behalf of each
such beneficial owner.
[ATTACH ADDITIONAL LISTS AS NECESSARY]
BENEFICIAL AGGREGATE NUMBER AGGREGATE NUMBER
OWNER NUMBER OF SHARES OF COMMON OF SHARES OF COMMON STOCK
STOCK HELD ON BEHALF OF SUCH SUBSCRIBED FOR ON BEHALF OF
BENEFICIAL OWNER AS OF THE SUCH BENEFICIAL OWNER
RECORD DATE
1
2
3
4
5
6
7
8
9
10
TOTAL TOTAL
4
<PAGE>
PLEASE SIGN AND DATE HERE:
___________________________________________ Dated:____________________
Name of Nominee Shareholder
By: _______________________________________
Name: _____________________________________
Title: ____________________________________
5
<PAGE>
INSTRUCTIONS FOR SUBSCRIPTION
-----------------------------
1. GENERAL. For the Rights to be validly exercised, a properly
completed and duly executed Subscription Agreement (or facsimile thereof), the
Rights Certificate being exercised and payment in full of the Subscription Price
for each share of Common Stock subscribed for must be RECEIVED by the Company
prior to the Expiration Date (as defined in the Prospectus). Once an Eligible
Holder has exercised the Rights, such exercise may not be revoked.
2. METHOD OF PAYMENT OF SUBSCRIPTION PRICE. Payment of the
Subscription Price must be by (i) check or bank draft drawn upon a U.S. bank or
postal, telegraphic or express money order payable to First Community Bank &
Trust Company, as Rights Agent, or (ii) wire transfer of funds to the account
maintained by the Company for such purpose at First Community Bank & Trust
Company, Account No._______, ABA No._________________ (reference should be made
to the Company, and the name of the Eligible Holder making such payment should
be indicated).
The Subscription Price will be deemed to have been received by
the Company only upon (i) clearance of any uncertified check, (ii) receipt by
the Company of any certified check or bank draft drawn upon a U.S. bank or of
any postal, telegraphic or express money order, or (iii) receipt of good funds
in the Company's account designated above. If paying by uncertified personal
check, please note that the funds paid thereby may take at least five business
days to clear. Accordingly, Eligible Holders who wish to pay the Subscription
Price by means of an uncertified personal check are urged to make payment
sufficiently in advance of the Expiration Date to ensure that such payment is
received and clears by 5:00 P.M., Indianapolis, Indiana time, on such date and
are urged to consider payment by means of certified or cashier's check, money
order or wire transfer of funds.
3. METHOD OF DELIVERY. An executed Subscription Agreement,
together with the Rights Certificate being exercised and payment in full of the
Subscription Price for each share of Common Stock subscribed for pursuant to the
Rights, should be delivered by mail or otherwise to the Company at its office in
Greenwood, Indiana appearing on the cover page of the Subscription Agreement.
The method of delivery of the Subscription Agreement, Rights
Certificate and payment of the Subscription Price to the Company will be at the
election and risk of the Eligible Holder, but if sent by mail it is recommended
that the Subscription Agreement, Rights Certificate and such payment be sent by
registered mail, with return receipt requested, and that a sufficient number of
days be allowed to ensure delivery to the Rights Agent and clearance of payment
prior to 5:00 P.M., Indianapolis, Indiana time, on the Expiration Date. Because
uncertified personal checks may take at least five business days to clear,
Eligible Holders are urged to pay, or arrange for payment, by means of certified
or cashier's check, money order or wire transfer of funds.
6
<PAGE>
4. SIGNATURE(S). Each of the signatures on the Subscription
Agreement must be that of an Eligible Holder. If any Common Stock was held of
record on the Record Date by two or more persons, all such persons must sign the
Subscription Agreement. If any Common Stock was held of record by a person
acting in a fiduciary or representative capacity, such person should so indicate
when signing, and proper evidence satisfactory to the Company of the authority
of such person to so act must be submitted with the Subscription Agreement.
5. COMMON STOCK HELD BY NOMINEES. Only holders of record of
Common Stock on the Record Date and their registered assigns may exercise the
Rights. Therefore, Eligible Holders, such as brokers, dealers, commercial banks,
and trust companies, that on the Record Date held Common Stock for the account
of others, should notify the respective beneficial owners of such Common Stock
as soon as possible to ascertain such beneficial owners' intentions and to
obtain instructions with respect to the Rights. Beneficial owners of Common
Stock held through such a nominee holder on the Record Date should contact the
Eligible Holder and request the Eligible Holder to effect transactions in
accordance with the beneficial owner's instructions. If the beneficial owner so
instructs, the Eligible Holder should complete a Subscription Agreement and
submit it, together with the proper payment, to the Rights Agent.
6. NO FRACTIONAL SHARES. No fractional shares of Common Stock
will be issued. The maximum number of shares of Common Stock for which an
Eligible Holder may subscribe will be equal to one share for each ten (10)
shares owned of record on the Record Date, rounded down to the nearest whole
number, subject to a minimum offer and purchase requirement of 100 shares of
Common Stock. Each broker, dealer, commercial bank, trust company or other
nominee holder that held Common Stock on the Record Date for more than one
beneficial owner must certify to the Company and the Rights Agent (i) the total
number of shares of Common Stock subscribed for by such nominee on behalf of
beneficial owners pursuant to the Rights, (ii) the aggregate number of shares of
Common Stock being subscribed for by it on behalf of each such beneficial owner.
7. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Questions and
requests for assistance or additional copies of these Instructions or
Subscription Agreements should be directed to the Company at its address set
forth above or by telephone at (317) 882-5277.
8. ADDITIONAL SHARES. If not all the offered Shares of Common
Stock are initially subscribed for by Eligible Holders, then the Company, at its
discretion, may offer the unsold Shares to Eligible Holders who initially
purchased Shares in the Rights Offering. Each Eligible Holder who desires to
purchase more Shares than his/her initial allotment must indicate the maximum
number of additional Shares he/she is willing to acquire in the space provided
in the Subscription Agreement and sign his/her name in the space indicated.
7
<PAGE>
=======================================================
=======================================================
=======================================================
FIRST COMMUNITY
BANCSHARES, INC.
[LOGO]
--------------
AMENDED PROSPECTUS
--------------
December 4, 1998
=======================================================
