As filed with the Securities and Exchange Commission August ___, 1999
Registration No. 333-63239
===============================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
POST-EFFECTIVE
AMENDMENT NO. 3
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
FIRST COMMUNITY BANCSHARES, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
INDIANA 5035
(STATE OR JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER)
35-1833586
(I.R.S. EMPLOYER
IDENTIFICATION NO.)
210 EAST HARRIMAN
BARGERSVILLE, INDIANA 46106
(317) 442-5171
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES)
ALBERT R. JACKSON, III
P.O. BOX 767
298 ST. RD. 135N
GREENWOOD, INDIANA 46142
(317) 882-5277
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
WITH COPY TO:
O. WAYNE DAVIS, ESQ.
HENDERSON, DAILY, WITHROW & DEVOE
2600 ONE INDIANA SQUARE
INDIANAPOLIS, INDIANA 46204-2071
(317) 639-4121
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS
SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462 (b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]____________
If this Form is a post-effective amendment filed pursuant to Rule 462
(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]____________
If this Form is a post-effective amendment filed pursuant to Rule 462
(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]____________
If delivery of the prospectus is expected to be made pursuant to Rule
434, check the following box. [ ]
<PAGE>
The Company hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the Company shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
EXPLANATORY NOTE
The Registration Statement originally contained a prospectus for the
offer and sale of $1 million in aggregate principal amount of 7% convertible
notes (the "Note Offering") and a separate prospectus for the issuance of rights
and warrants to existing shareholders entitling the shareholders or their
transferees to purchase shares of the Company's no par value common stock.
This Post-Effective Amendment No. 3 relates solely to the prospectus
for the warrants which become exercisable on September 15, 1999.
<PAGE>
AMENDED PROSPECTUS
FIRST COMMUNITY BANCSHARES, INC.
[LOGO]
WARRANTS TO PURCHASE UP TO 131,000 SHARES OF COMMON STOCK
In October 1998 we issued to everyone who owned our common stock as of
5:00 p.m. on October 29, 1998 warrants to purchase an aggregate of 131,000
shares of common stock initially at $11.00 per share. The exercise price has
been reduced to $8.75 per share. The Warrants may be exercised commencing on
September 15, 1999 and ending on December 13, 1999
Our common stock which you will receive upon exercise of the Warrants
is quoted on the OTC Bulletin Board under the symbol "FCYB.". On August 20,
1999, the last bid price was $7.50 per share.
We have engaged Indiana Securities, LLC to act as information agent
with respect to the Warrants. See "Exercise of the Warrants" for more
information with respect to how to exercise the Warrants and who to call for
assistance.
SEE "RISK FACTORS" AT PAGE 6 FOR A DISCUSSION OF RISK FACTORS THAT
SHOULD BE CONSIDERED IN CONNECTION WITH THE EXERCISE OF THE WARRANTS AND
PURCHASE OF THE SECURITIES OFFERED HEREBY.
--------------------------
THE WARRANTS, AND COMMON STOCK ISSUABLE UPON EXERCISE OF THE WARRANTS,
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.
PER SHARE TOTAL
Revised exercise price $8.75 $1,146,250
Information agent fee $0.25 $ 32,750
Proceeds, before expenses, to us $8.50 $1,113,500
--------------------------
The Date of this Amended Prospectus is September __, 1999.
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<PAGE>
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TABLE OF CONTENTS
-----------------------------------------
PAGE
----
Prospectus Summary.......................................................3
Summary Consolidated Financial Data......................................5
Risk Factors.............................................................7
Exercise of the Warrants.................................................9
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...................................................13
Business................................................................26
Management..............................................................38
Security Ownership of Certain Beneficial Owners and Management..........42
Certain Transactions....................................................43
Plan of Distribution....................................................43
Description of Securities...............................................43
Legal Matters...........................................................44
Experts.................................................................44
Index to Financial Statements...........................................45
---------------------
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 9 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 three 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.
3
<PAGE>
THE OFFERING
The Warrants.............................An opportunity to purchase directly
from us between September 15, 1999 and
December 13, 1999,the number of shares
of common stock evidenced by warrants
issued on October 29, 1998, subject to
a minimum purchase of 100 shares. The
purchase price has been reduced to
$8.75 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 proceeds to us from the
sale of the Shares, before deducting
the estimated expenses of the offering,
are estimated to be approximately
$1,146,250 if all of the Warrants are
exercised.
Exercise Price...........................The exercise price of Eight Dollars and
Seventy-Five Cents ($8.75) per share
for the Warrants has been established
by our Board of Directors. The price
per share is approximately 102% of the
book value per share of the Company as
of June 30, 1999 and equal to the
recent trading prices of our Common
Stock. For additional information
respecting our financial condition,
performance and historical trading
prices, see "Summary Consolidated
Financial Data" and "Market For Common
Stock and Related Shareholder Matters."
Transferability..........................You may transfer the Warrants to
someone else.
Dividends................................We paid a cash dividend of $.10 per
share on March 15, 1997, a 5% stock
dividend in February 1998 and $.03 on
April 30 and July 30, 1999. 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 $803,000, for the year
ended December 31, 1998 and $385,000,
for the six months ended June 30, 1999.
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<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, 1998. The Unaudited Consolidated Financial Data below for the
interim periods indicated has been derived from our quarterly report on Form
10-Q for the six-month period ended June 30, 1999, and should be read in
conjunction with the Unaudited Financial Statements and other information for
such interim periods included elsewhere in this prospectus. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Index to Consolidated Financial Statements." All adjustments considered
necessary for a fair presentation have, in the opinion of management, been
included in the unaudited interim data. Interim results for the six months ended
June 30, 1999, are not necessarily indicative of results that may be expected
for future periods including the year ending December 31, 1999.
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEARS ENDED
JUNE 30, DECEMBER 31,
-------- ------------
1998 1999 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ----
(DOLLARS IN 000'S EXCEPT SELECTED RATIOS
AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Selected Results of Operations:
Interest income $4,096 $4,743 $3,255 $5,074 $6,158 $7,361 $8,420
Interest expense 2,215 2,575 1,699 2,953 3,166 3,807 4,509
------ ------ ------ ------ ------ ------ ------
Net interest Income 1,881 2,168 1,556 2,121 2.992 3.554 3,911
Provision for loan losses 129 150 418 208 219 255 239
------ ------ ------ ------ ------ ------ ------
Net interest income after
provision for loan losses 1,752 2,018 1,138 1,913 2,773 3,299 3,672
Non-income interest 198 207 127 237 249 305 418
Non-interest expense 1,374 1,707 1,723 1,863 2,565 2,490 2,937
------ ------ ------ ------ ------ ------
Income (loss) before income
tax expense 576 517 (458) 287 457 1,114 1,153
Income tax expense (benefit) 188 133 (281) 11 116 376 350
------ ------ ------ ------ ------ ------ ------
Net income (loss) $ 388 $ 385 $(177) $276 $341 $738 $803
====== ====== ====== ====== ====== ====== ======
Selected Ratios and Per Share Data*:
Basic earnings per share .39 .38 $(0.26) $0.29 $0.35 $0.75 $0.81
Diluted earnings per share .39 .37 $(0.26) $0.28 $0.34 $0.74 $0.80
Dividends per share .06 $0.10
Return on average assets .76 .62 (.38%) .44% .46% .85% .77%
Return on average equity 10.02 8.89 (4.48) 4.54 5.04 10.02 9.93
Average equity to average
assets 7.66 6.92 8.57 9.64 9.14 8.45 7.75
Dividend payout ratio - 15.79 13.33
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
-------- ------------------------------------------
1998 1999 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ----
(DOLLARS IN 000'S)
<S> <C> <C> <C> <C> <C> <C> <C>
Selected Balance Sheet Data:
Assets 104,147 137,915 $57,857 $71,393 $80,079 $98,740 $121,272
Loans 86,995 100,930 39,509 54,636 65,108 80,001 94,319
Allowance for loan losses 912 1,046 362 518 644 849 955
Deposits 92,755 120,660 46,184 59,163 70,552 87,695 106,193
Cash and cash equivalent 8,441 18,776 6,443 5,651 7,035 11,231 14,692
Federal Home Loan Bank advances 2,980 5,753 5,314 4,603 2,379 2,930 4,753
Other borrowings 2,204 1,382
Total shareholders' equity 7,931 8,778 6,145 6,442 6,886 7,550 8,486
</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>
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 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.
YOU MAY EXPERIENCE DIFFICULTY IN RESELLING OUR SHARES IF YOU NEED TO LIQUIDATE
YOUR HOLDINGS.
The shares we are offering are not listed for trading on any stock
exchange or the NASDAQ Stock Market. They are traded over-the-counter and quoted
on the OTC Bulletin Board but there is a limited market for the Common Stock.
There can be no assurance that any significant market will develop in the
future.
IF OUR 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.
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. 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 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
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.
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. At June 30, 1999 we
had a one-year cumulative interest-rate gap of a negative 20.9 percent. At
December 31, 1998, we had a one-year cumulative interest-rate gap of 19.9
percent. This negative interest-rate gap may have a negative impact on earnings
in a rising interest rate environment. While
6
<PAGE>
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."
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.
CHANGES IN GENERAL ECONOMIC CONDITIONS AND MONETARY POLICY COULD ADVERSELY
AFFECT OUR FINANCIAL PERFORMANCE AND CONDITION.
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.
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.
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.
OUR INABILITY TO EFFECTIVELY MANAGE GROWTH COULD HAVE A NEGATIVE IMPACT UPON OUR
FINANCIAL RESULTS AND CONDITION.
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 opened one additional office during the
first quarter of 1999 and another one during the second quarter of 1999. We
cannot assure that this growth will continue. Any new location that we open may
be only marginally profitable or unprofitable.
FUTURE LEGISLATION AND GOVERNMENT POLICY COULD ADVERSELY AFFECT THE BANKING
INDUSTRY AND OUR OPERATIONS.
We are subject to extensive state and federal governmental supervision,
regulation, and control. Such regulation is intended to protect depositors, the
public and deposit insurance funds administered by the Federal Deposit Insurance
Corporation rather than the shareholders of financial institutions. The
interpretation and enforcement of such laws and regulations are also subject to
change, some retroactively, and any such changes could have an adverse effect on
us and our results of operations.
Legislation has been advanced in recent years to, among other things,
break down the barriers between banking, securities and insurance activities. We
are unable to predict whether or in what form such legislation may be passed in
the future or the effect on us of any such changes.
YEAR 2000 COMPLIANCE
Our lending and deposit activities, like those of most financial
institutions, depend significantly upon computer systems. We are continuing to
address the potential problems associated with the possibility that the
computers which control our systems, facilities and infrastructure may not be
programmed to read four-digit date codes. This could cause some computer
applications to be unable
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<PAGE>
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 our own systems and those
of our service providers, we could be affected by the Year 2000 problems
affecting any of our depositors or borrowers. Such problems could include
delayed loan payments due to Year 2000 problems affecting the borrower.
To date, expenses associated with Year 2000 issues have not been
material. Although we believe we are taking the necessary steps to address the
Year 2000 compliance issue, no assurances can be given that some problems will
not occur or that we will not incur significant additional expenses in future
periods. In the event that we are ultimately required to purchase replacement
computer systems, programs and equipment, or to incur substantial expenses to
make our current systems, programs and equipment Year 2000 compliant, our
financial position and results of operation could be adversely impacted.
</R
8
<PAGE>
EXERCISE OF THE WARRANTS
A holder desiring to exercise a Warrant must complete the subscription
section of the Warrant Certificate and cause the Warrant Certificate together
with payment in full of the revised exercise price of $8.75 per share to be
delivered to First Community Bank & Trust, P.O. Box 767,298 State Road 135
North, Greenwood, Indiana 46142. The revised exercise price may be paid by
check, wire transfer, bank draft, or money order in each case via mail or
courier delivery. A Warrant may not be exercised for less than 100 shares.
Persons needing assistance or having questions concerning the manner of
exercising the Warrants should contact:
Indiana Securities, LLC
320 North Meridian Street
Indianapolis, Indiana 46204
Telephone: (317) 630-6000
Fax: (317) 632-7585
Delivery of the Warrants and the exercise price is at the risk of the sender.
Warrants not exercised by 5:00 P.M., EST, on December 13, 1999 shall,
unless otherwise extended by us, expire and be of no further force or effect.
Do not send Warrants or payments for the shares to Indiana Securities.
9
<PAGE>
USE OF PROCEEDS
We intend to use the proceeds from the exercise of the Warrants as
follows, assuming the exercise of all of the Warrants, and in the following
order if less than all of the Warrants are exercised:
Gross Proceeds............................. $1,146,250
Information agent fees..................... (32,750)
Offering Expenses.......................... 15,000
----------
Net Proceeds............................... $1,098,500
==========
Use of Net Proceeds:
General Corporate Purposes................. $200,000
Contribution of Additional Capital to
First Community......................... 898,500
----------
$1,098,500
==========
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<PAGE>
MARKET FOR COMMON STOCK AND RELATED SHAREHOLDER MATTERS
The following table sets forth the high and low bid prices for our
Common Stock for the periods indicated, based upon information obtained by us
from the brokers known by us to make a market in our Common Stock, and on other
price information made available to management of the Company. We have not
verified the accuracy of the following information. The Common Stock is traded
on a limited basis and many trades have involved privately negotiated
transactions. As a result, we are 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.
BID PRICE PER SHARE
-------------------
1997 1998 1999
---- ---- ----
HIGH LOW HIGH LOW HIGH LOW
---- --- ---- --- ---- ---
First Quarter $11.43 $10.48 $10.50 $10.00 $10.00 $8.50
Second Quarter $11.43 $10.48 $11.00 $10.50 $10.00 $8.00
Third Quarter* $11.43 $10.48 $11.00 $10.50 $10.00 $7.50
Fourth Quarter $11.43 $10.48 $11.00 $10.50
* Through August 20, 1999.
During the fourth quarter of 1998 we issued rights to our shareholders
to purchase an aggregate of 131,000 shares of Common Stock at an exercise price
of $10.00 per share. These rights expired on January 29, 1999. Rights for a
total of 16,740 shares of Common Stock were exercised by 32 shareholders.
We paid a cash dividend of $.03 per share on April 30, 1999 to
shareholders of record on March 30, 1999; a cash dividend of $.03 per share on
July 30, 1999 to shareholders of record on June 30, 1999; and, a 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 us 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.
Our ability to pay dividends to our shareholders is dependent on
dividends received from First Community. Without prior approval, current
regulations allow First Community to pay dividends to us 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 June
30, 1999, the shareholder's equity of First Community was $9,244,000, of which a
minimum of $1,771,000 was available for dividends.
The number of record holders of our Common Stock as of August 9, 1999
was 282.
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<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at
June 30, 1999, both actual and as adjusted to reflect the exercise of all
Warrants (before deducting estimated offering expenses). The information set
forth below should be read in conjunction with the consolidated financial
statements and related notes included elsewhere in this Prospectus.
ACTUAL AS ADJUSTED
------ -----------
Federal Home Loan Bank of Indianapolis advances $5,753,457 $5,753,457
Other borrowings 2,203,775 2,203,775
----------- ----------
Total borrowings 7,957,232 7,957,232
----------- ----------
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,
1,021,287 shares issued (actual),
and 1,152,287 shares (as adjusted)
6,967,489 8,065,989
Retained earnings and contributed capital 1,921,916 1,921,916
Accumulated other comprehensive income (loss) (111,550) (111,550)
----------- ----------
Stockholders' Equity 8,777,855 9,876,355
----------- ----------
Total Borrowings and Stockholders' Equity $16,735,087 17,833,587
=========== ==========
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<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.
Net interest income has continued to increase in each of the last three
years. However, the rate of increase has declined primarily due to an increase
in tax-exempt loans and securities. First Community has increased its holdings
in tax-exempt loans and securities due to their favorable tax equivalent yields.
Since the tax benefit of these types of investments is reflected in reduced
income tax expense, net interest income does not reflect the tax equivalent
yield adjustment. First Community did not have the ability to take full
advantage of the tax savings of such investments in past years due to a net
operating loss carryforward. Additionally, interest rates on interest earning
assets have declined over this period while rates on interest-bearing deposits
have remained relatively constant due to the competitive nature of the market in
which First Community operates.
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
In May 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, in July 1998,
FCREM borrowed $800,000 at an interest rate of 1.125% under prime (as defined)
per annum, 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. In December 1998, FCREM borrowed $416,000 at an interest
rate of 7.25% per annum with payments due in monthly installments through
November 2003, and a final balloon payment due in December 2003, from another
financial institution in order to purchase the land and building of First
Community's Greenwood branch office at 298 State Road 135 North, Greenwood,
Indiana. In August 1999 FCREM borrowed $422,800 from another financial
institution which loans bear interest at the rate of 7.5% per annum and is for a
term of five years. Proceeds from the loan were used to acquire the land and
buildings of First Community's North Vernon branches. First Community makes
monthly lease payments to FCREM as lessee of these locations which are
sufficient for FCREM to service the debt.
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.
RESULTS OF OPERATIONS
Three and Six Months Ended June 30, 1999 and 1998
- - - -------------------------------------------------
Net income decreased from $388,000 to $385,000 for the six months, and
was constant at $180,000 for the three months ending June 30, 1998 and 1999,
respectively. Basic earnings per share decreased from $.39 to $.38 for the six
month period, and were constant at $.18 for the three month period ended June
30, 1998 and 1999, respectively. Net interest income increased from $1.9
million to $2.2 million for the six months, and from $965,000 to $1.1 million
for the three months, ended June 30, 1998 and 1999, respectively.
The decrease in net income for the six month period was primarily due
to the increase in net interest income offset by general increases in other
expense. The increase in net interest income for both periods was primarily due
to increases in interest 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 $149,000 to $155,000 for the
six months, and from $76,000 to $80,000 for the three months, ended June 30,
1998 and 1999, 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 $56,000
for the six months ended
13
<PAGE>
June 30, 1999, when compared to the same period in 1998, because of an increase
in our tax exempt securities portfolio.
Year Ended December 31, 1998, 1997 and 1996
- - - -------------------------------------------
Net income for the year ended December 31, 1998 was $803,000 compared
to $738,000 and $341,000 for the years ended December 31, 1997 and 1996,
respectively. Basic earnings per share increased to $.81 for the year ended
December 31, 1998 from $.75 and $.35 for the years ended December 31, 1997 and
1996, respectively. Diluted earnings per share increased to $.80 for the year
ended December 31, 1998 from $.74 and $.34 for the years ended December 31, 1997
and 1996, respectively. Earnings increased from 1996 to 1998 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 $357,000 in 1998 resulted
primarily from an increase in lending and the income derived therefrom. Net
loans outstanding increased $14.2 million in 1998, with growth in each lending
area. A provision for loan losses of $239,000 was recorded as a result of an
increase in the loan portfolio and not a deterioration of that portfolio. The
increase in income from service fees of $57,000 resulted from a significant
increase in the number of deposit accounts and fees associated with those
accounts. The increases in other expenses are a direct result of the overall
growth of First Community.
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.
14
<PAGE>
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 1998.
<TABLE>
<CAPTION>
1997 1998
------------------------------ ------------------------------
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% $7,838 $328 4.2%
Investment securities: (1)
Taxable 2,604 245 9.4 3,135 307 9.8
Tax-exempt 2,505 143 5.7 3,144 179 6.7
------- ------ -------- ------
Total investment securities 5,109 388 7.6 6,279 486 7.7
------- ------ -------- ------
Loans: (2)
Commercial.................... 25,794 2,589 10.0 29,567 2,841 9.6
Real estate mortgage.......... 21,043 1,887 9.0 27,042 2,275 8.4
Installment................... 23,825 2,161 9.1 26,509 2,343 8.8
Tax-exempt loans and leases... 2,386 192 8.0 3,067 257 8.4
------- ------ -------- ------
Total loans...................... 73,048 6,829 9.3 86,185 7,716 9.4
------- ------ -------- ------
Total earning assets............. 84,005 7,447 8.9 100,302 8,530 8.5
------ ------
Allowance for loan losses........ (720) (915)
Cash and due from banks.......... 985 1,112
Premises and equipment........... 1,876 2,550
Other assets..................... 980 1,366
------- --------
Total assets..................... $87,126 $104,415
======= ========
Liabilities:
Interest-bearing deposits:
NOW accounts..................... $9,281 243 2.6 $10,458 276 2.6
Savings.......................... 15,655 694 4.4 19,971 870 4.4
Certificates of deposit and
other time deposits........... 46,958 2,758 5.9 54,495 3,159 5.8
------- ------ -------- ------
Total interest-bearing deposits.. 71,894 3,695 5.1 84,924 4,305 5.1
FHLB advances.................... 1,830 112 6.1 3,022 175 5.8
Other borrwings.................. 0 0 0 399 29 7.3
------- ------ -------- ------
Total interest-bearing liabilities 73,724 3,807 5.2 88,345 4,509 8.1
------ ------
Noninterest-bearing demand
deposits...................... 5,587 7,361
Other liabilities................ 451 621
------- --------
Total liabilities................ 79,762 96,327
Stockholders' equity............. 7,364 8,088
------- --------
Total liabilities and stockholders'
equity........................... $87,126 $104,415
======= ========
Net interest income.............. $3,640 4.3%(3) $4,021 4.0%(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 $110
====== ======
</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.
15
<PAGE>
CHANGES IN INTEREST INCOME AND EXPENSE COMPARING DECEMBER 31, 1998 AND
1997 AND DECEMBER 31, 1997 AND 1996. The following tables analyze the changes in
interest income and interest expense comparing the years ended December 31, 1998
and 1997 and December 31, 1997 and 1996. 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.
INCREASE (DECREASE) IN NET
INTEREST INCOME
YEAR ENDED DECEMBER 31, 1998
COMPARED TO YEAR NET DUE TO DUE TO
ENDED DECEMBER 31, 1997 CHANGE RATE VOLUME
------ ------ ------
(DOLLARS IN 000'S)
Interest-earning assets:
Loans........................................ $887 $ (299) $1,186
Investment securities........................ 98 8 90
Interest-bearing deposits.................... 98 16 82
------ ------- ------
Total...................................... 1,083 (275) 1,358
------ ------- ------
Interest-bearing liabilities:
Savings...................................... 176 (12) 188
Interest-bearing checking.................... 33 2 31
Certificates of deposit...................... 401 (36) 437
FHLB advances................................ 63 (6) 69
Other borrowings 29 0 29
------ ------- ------
Total...................................... 702 (52) 754
------ ------- ------
Net change in net interest income.............. $ 381 $ (223) $ 604
====== ======= ======
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)
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
====== ======= ======
16
<PAGE>
FINANCIAL CONDITION
ASSET/DEPOSIT BASE. First Community has experienced significant growth
in assets and deposits. We believe 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 $57,857,000 at December 31, 1994 to $121,272,000 at December 31,
1998 and to $137,915,000 at June 30, 1999, and deposits from $46,184,000 at
December 31, 1994 to $106,193,000 at December 31, 1998 and $120,660,000 at June
30, 1999. These factors include: (i) increased population in the geographic
area serviced; (ii) increased per-household disposable income in the geographic
area serviced; (iii) 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 (iv) the
expansion into new communities with the opening of the Franklin, Indianapolis
and Trafalgar branches in 1992, the opening of the North Vernon branch in 1993,
and the opening of second branches in Franklin, Indiana in October 1996 and in
North Vernon, Indiana in September 1998.
First Community currently classifies loans as substandard, doubtful and
loss to assist management in addressing collection risks and pursuant to
regulatory requirements which are not necessarily consistent with generally
accepted accounting principles. Substandard loans represent credits
characterized by the distinct possibility that some loss will be sustained if
deficiencies are not corrected. Doubtful loans possess the characteristics of
substandard loans, but collection or liquidation in full is doubtful based upon
existing facts, conditions and values. A loan classified as a loss is
considered uncollectible. As of June 30, 1999, First Community had $998,000 of
loans classified as substandard, none as doubtful and none as loss. At December
31, 1998, First Community had $1,464,094 of loans classified as substandard,
none as doubtful and none as loss. The allowance for loan losses was $1.0
million or 1.0% of net loans receivable at June 30, 1999 compared to $955,000 or
1.0% of net loans receivable at December 31, 1998. A portion of classified
loans are non-accrual loans. First Community had non-accrual loans totaling
$359,000 at June 30, 1999 compared to $17,000 at December 31, 1998.
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 20.9% and 19.9% at June 30, 1999 and December 31,
1998, 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, 1998,
First Community had $48.9 Million or 51.9% of its total loan portfolio invested
in installment and commercial loans as compared to $40.8 Million or 51.04% at
December 31, 1997. 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
.26% at June 30, 1999 and .45% at December 31, 1998.
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.
17
<PAGE>
The following tables illustrate the interest-rate sensitivity of
interest-earning assets and interest-bearing liabilities at June 30, 1999 and
December 31, 1998. 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, 1999 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........ $11,597 $4,904 $7,865 $24,366
Fixed rate mortgages............. 4,251 2,541 2,526 $14,670 23,988
Commercial loans................. 11,965 3,221 1,706 581 17,473
Consumer loans................... 12,612 12,522 5,658 897 31,689
Tax-exempt loans and leases...... 3,282 3,282
Investments...................... 1,552 2,630 3,087 6,025 13,294
FHLB stock....................... 779 779
Interest-bearing deposits........ 17,389 17,389
-------- -------- -------- -------- --------
Total interest-earning assets.. 60,145 25,818 20,842 25,455 132,260
-------- -------- -------- -------- --------
Interest-bearing liabilities:
Fixed maturity deposits.......... 43,954 18,671 3,400 1,094 67,119
Other deposits................... 44,860 44,860
FHLB advances.................... 156 1,760 3,837 5,753
Other Borrowings................. 18 40 1,146 1,000 2,204
-------- -------- -------- -------- --------
Total interest-bearing liabilities 88,988 20,471 8,383 2,094 119,936
-------- -------- -------- -------- --------
Excess (deficiency) of
interest-earning assets over
interest-bearing liabilities....... (28,843) 5,347 12,459 23,361 12,324
Cumulative excess (deficiency)
of interest-earning assets over
interest-bearing liabilities (28,843) (23,496) (11,037) 12,324
Cumulative ratio at June 30,
1999 as a percent of total assets.. (20.91)% (17.04)% (8.00)% 8.94%
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 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........ $14,313 $3,944 $7,148 $25,405
Fixed rate mortgages............. 5,033 2,387 2,241 $12,655 22,316
Commercial loans................. 11,936 1,935 1,186 229 15,286
Consumer loans................... 11,508 11,175 4,382 659 27,724
Tax-exempt loans and leases...... 3,463 3,463
Investments...................... 1,721 1,349 1,372 3,607 8,049
FHLB stock....................... 778 778
Interest-bearing deposits........ 138,106 13,106
--------- --------- ------- ------- -------
Total interest-earning assets.. 58,395 20,790 16,329 20,613 116,127
--------- --------- ------- ------- -------
Interest-bearing liabilities:
Fixed maturity deposits.......... 40,497 12,537 3,326 50 56,410
Other deposits................... 41,807 41,807
FHLB advances.................... 156 760 3,837 4,753
--------- --------- ------- -------
Other borrowings 17 38 1,157 170 1,382
--------- --------- ------- ------- -------
Total interest-bearing liabilities 82,477 13,335 8,320 220 104,352
--------- --------- ------- ------- -------
Excess (deficiency) of
interest-earning assets over
interest-bearing liabilities....... (24,082) 7,455 8,009 20,393 11,775
Cumulative excess (deficiency)
of interest-earning assets over
interest-bearing liabilities (24,082) (16,627) 8,618 11,775
Cumulative ratio at December 31,
1998 as a percent of total assets.. (19.86)% (13.71)% (7.11)% 9.71%
</TABLE>
19
<PAGE>
The following tables provide information about the Company's
significant financial instruments at June 30, 1999 and December 31, 1998 that
are sensitive to changes in interest rates. The table presents principal cash
flows and related weighted average interest rates (on a tax equivalent basis) by
expected maturity dates.
<TABLE>
<CAPTION>
MATURING IN YEARS ENDING JUNE 30
FAIR
2000 2001 2002 2003 2004 THEREAFTER TOTAL VALUE
---- ---- ---- ---- ---- ---------- ----- -----
(DOLLARS IN 000'S)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Investment securities
available for sale
Fixed rate $1,337 $1,595 $894 $1,706 $1,108 $5,817 $12,457 $12,457
Average interest rate 9.35% 6.79% 6.04% 5.75% 5.77% 6.10% 6.46%
Investment securities held
to maturity
Fixed rate 215 122 19 20 253 208 837 822
Average interest rate 6.52% 6.59% 5.23% 5.36% 6.96% 6.26% 6.54%
Loans
Fixed rate 16,775 9,781 7,902 5,627 3,654 19,431 63,169 63,493
Average interest rate 8.66% 9.03% 8.77% 8.57% 8.41% 7.78% 8.44%
Variable rate 10,449 3,263 1,670 1,184 1,244 19,818 37,629 37,827
Average interest rate 9.11% 9.14% 8.93% 8.59% 8.59% 8.04% 8.51%
Liabilities
Deposits
NOW, Money Market and
Savings Deposits
Variable rate 44,860 44,860 44,860
Average interest rate 3.32% 3.32%
Certificates of Deposit
Fixed rate 43,954 18,015 656 1,900 1,500 1,094 67,119 67,279
Average interest rate 5.37% 5.35% 5.83% 6.03% 5.70% 6.40% 5.41%
FHLB Advances
Fixed rate 156 638 1,122 2,603 1,234 5,753 5,677
Average interest rate 6.01% 6.05% 5.34% 5.55% 5.49% 5.69%
Other Borrowings
Fixed rate 10 11 11 12 367 1,000 1,411 1,392
Average interest rate 7.25% 7.25% 7.25% 7.25% 7.25% 7.00% 7.07%
Variable rate 8 9 9 10 757 793 788
Average interest rate 7.38% 7.38% 7.38% 7.38% 7.38% 7.38%
</TABLE>
20
<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 $1.090 $271 $968 $766 $606 $3,315 $7,016 $7.047
Average interest rate 10.0% 7.1% 5.5% 6.1% 6.3% 6.5% 6.9%
Investment securities held
to maturity
Fixed rate 631 105 5 292 1,033 1,060
Average interest rate 5.9% 6.8% 7.1% 7.2% 6.4%
Loans
Fixed rate 16,840 8,196 6,936 4,678 2,659 17,005 56,314 57,232
Average interest rate 9.2% 9.1% 8.9% 8.7% 8.5% 7.9% 8.7%
Variable rate 10,793 2,378 2,735 1,082 1,124 19,768 37,880 38,248
Average interest rate 9.9% 9.3% 9.2% 9.6% 8.9% 8.3% 8.9%
Liabilities
Deposits
NOW, Money Market and
Savings Deposits
Variable rate 41,807 41,807 41,807
Average interest rate 3.6% 3.6%
Certificates of Deposit
Fixed rate 40,497 10,921 1,616 1,020 2,306 $50 56,410 56,723
Average interest rate 6.6% 5.6% 5.9% 6.1% 5.9% 5.7% 5.6%
FHLB Advances
Fixed rate 156 638 122 2,603 1,234 4,753 4,773
Average interest rate 6.0% 6.1% 6.0% 5.6% 5.5% 5.6%
Other borrowings
Fixed rate 10 10 11 12 373 170 586 581
Average interest rate 7.3% 7.3% 7.3% 7.3% 7.3% 7.0% 7.2%
Variable rate 7 8 9 10 10 752 796 790
Average interest rate 7.4% 7.4% 7.4% 7.4% 7.4% 7.4% 7.4%
</TABLE>
21
<PAGE>
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.
Cash and interest-bearing deposits, when combined with investments,
remained relatively constant during 1998 as a percentage of total assets.
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.
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 $5.8 Million and $4.8 Million at
June 30, 1999 and December 31, 1998, respectively.
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, 1998 and December 31, 1997.
During 1998 and 1997, cash and cash equivalents which are defined as
cash and due from banks and interest-bearing time deposits increased $3.1
million and $4.2 million, respectively. Cash was provided primarily from a net
increase in deposit accounts of $18.5 million in 1998 and $17.1 million in 1997.
Cash was used primarily to fund a net increase in loans of $14.5 million in 1998
and $15.1 million in 1997.
At December 31, 1998 and 1997, commitments to fund loan originations
were approximately $12.7 million and $5.6 million,
22
<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 June 30, 1999, we had a capital to asset ratio of 6.4%. At June 30,
1999, First Community had core capital of approximately 7.6% and had risk-based
capital in excess of 10.2%. 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 were exercisable until January 29, 1999 and the warrants
are exercisable from September 15, 1999 to December 13, 1999. The net proceeds
to the Company from the sale of the stock in the rights offering, after
deducting the expenses, was approximately $133,000. The purpose of the rights
offering was to raise additional capital for the Bank to support additional
growth and 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 are 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 $11.00 per share. All of the notes were sold and the net proceeds were
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
The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative
Instruments and Hedging Activities. This Statement requires companies to record
derivatives on the balance sheet at their fair value. SFAS No. 133 also
acknowledges that the method of recording a gain or loss depends on the use of
the derivative. If certain conditions are met, a derivative may be specifically
designated as (a) a hedge of the exposure to changes in the fair value of a
recognized asset or liability or an unrecognized firm commitment, (b) a hedge of
the exposure to variable cash flows of a forecasted transaction, or (c) a hedge
of the foreign currency exposure of a net investment in a foreign operation, an
unrecognized firm commitment, an available-for-sale security, or a
foreign-currency-denominated forecasted transaction.
For a derivative designated as hedging the exposure to changes in the
fair value of a recognized asset or liability or a firm commitment (referred to
as a fair value hedge), the gain or loss is recognized in earnings in the period
of change together with the offsetting loss or gain on the hedged item
attributable to the risk being hedged. The effect of that accounting is to
reflect in earnings the extent to which the hedge is not effective in achieving
offsetting changes in fair value.
For a derivative designated as hedging the exposure to variable cash
flows of a forecasted transaction (referred to as a cash flow hedge), the
effective portion of the derivative's gain or loss is initially reported as a
component of other comprehensive income (outside earnings) and subsequently
reclassified into earnings when the forecasted transaction affects earnings. The
ineffective portion of the gain or loss is reported in earnings immediately.
For a derivative designated as hedging the foreign currency exposure of
a net investment in a foreign operation, the gain or loss is reported in other
comprehensive income (outside earnings) as part of the cumulative translation
adjustment. The accounting for a fair value hedge described above applies to a
derivative designated as a hedge of the foreign currency exposure of an
unrecognized firm commitment or an available-for-sale security. Similarly, the
accounting for a cash flow hedge described above applies to a derivative
designated as a hedge of the foreign currency exposure of a
foreign-currency-denominated forecasted transaction.
For a derivative not designated as a hedging instrument, the gain or
loss is recognized in earnings in the period of change.
The new Statement applies to all entities. If hedge accounting is
elected by the entity, the method of assessing the effectiveness of the hedging
derivative and the measurement approach of determining the hedge's
ineffectiveness must be established at the inception of the hedge.
SFAS No. 133 amends SFAS No. 52 and supersedes SFAS Nos. 80, 105 and
119. SFAS No. 107 is amended to include the disclosure provisions about the
concentrations of credit risk from SFAS No. 105. Several Emerging Issues Task
Force consensuses are also changed or nullified by the provisions of SFAS No.
133.
SFAS No. 133 will be effective for all fiscal years beginning after
June 15, 1999. Early application is encouraged; however, this Statement may not
be applied retroactively to financial statements of prior periods.
23
<PAGE>
FASB has issued Statement of Financial Accounting Standards No. 134,
Accounting for Mortgage-Backed Securities Retained after the Securitization of
Mortgage Loans Held for Sale by a Mortgage Banking Enterprise. This Statement
establishes accounting standards for certain activities of mortgage banking
enterprises and for other enterprises with similar mortgage operations. This
Statement amends SFAS No. 65.
SFAS No. 65, as previously amended by SFAS Nos. 115 and 125, required a
mortgage banking enterprise to classify a mortgage-backed security as a trading
security following the securitization of the mortgage loan held for sale. This
Statement further amends SFAS No. 65 to require that after the securitization of
mortgage loans held for sale, an entity engaged in mortgage banking activities
must classify the resulting mortgage-backed security or other retained interests
based on the entity's ability and intent to sell or hold those investments.
The determination of the appropriate classification for securities
retained after the securitization of mortgage loans by a mortgage banking
enterprise now conforms to SFAS No. 115. The only requirement the new Statement
adds is that if an entity has a sales commitment in place, the security must be
classified into trading.
This Statement is effective for the first fiscal quarter beginning
after December 15, 1998. On the date this Statement is initially applied, an
entity may reclassify mortgage-backed securities and other beneficial interests
retained after the securitization of mortgage loans held for sale from the
trading category, except for those with sales commitments in place. Those
securities and other interests shall be classified based on the entity's present
ability and intent to hold the investments.
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and related data presented herein have been
prepared in accordance with generally accepted accounting principles. These
principles require the measurement of financial position and operating results
in terms of historical dollars, without considering changes in the relative
purchasing power of money over time due to inflation.
The primary assets and liabilities of the Company are monetary in
nature. Consequently, interest rates generally have a more significant impact
on performance than the effects of inflation. Interest rates, however, do not
necessarily move in the same direction or with the same magnitude as the price
of goods and services. In a period of rapidly rising interest rates, the
liquidity and the maturity structure of the Company's assets and liabilities are
critical to the maintenance of acceptable performance levels.
YEAR 2000 COMPLIANCE
The Company'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 June 30, 1999, 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 by its primary service provider that
all reprogramming efforts were completed at December 31, 1998, allowing the
Company adequate time for testing. The Company completed 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
24
<PAGE>
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 and 1998 and year-to-date 1999 were
immaterial.
25
<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 June 30, 1999, the Company had approximately $137.9 million of
assets, deposits of approximately $120.7 million and shareholders' equity of
approximately $8.8 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 June 30, 1999, First Community had 66
employees of which 51 were full-time. The Company and FCREM have no employees.
First Community's deposits are insured to the maximum extent permitted
by law by the Savings Association Insurance Fund ("SAIF") of the Federal Deposit
Insurance Corporation ("FDIC"). First Community is a member of the Federal Home
Loan Bank ("FHLB") of Indianapolis. First Community is subject to comprehensive
regulation, examination and supervision by the Indiana Department of Financial
Institutions ("DFI") and the FDIC. The Company is subject to regulation by the
Federal Reserve Board. The Federal Reserve Board, as a condition of the
acquisition of First Community, required the Company to make a commitment not to
incur debt in excess of a 30% debt-to-equity ratio on an unconsolidated basis.
The business of First Community consists primarily of attracting
deposits from the general public, originating residential real estate,
commercial and consumer loans and purchasing other types of investments. In
addition, First Community originates first mortgage income-producing property
real estate loans, second mortgage one-to-four family home loans, secured home
improvement loans, and savings deposit secured loans. Consumer loans include,
among others, new and used automobile and other secured and unsecured personal
loans. First Community offers small commercial loans to area businesses in
addition to new home construction loans and business lines of credit. First
Community also invests in various US Treasury, federal agency, state, municipal
and other investment securities permitted by applicable laws and regulations.
The principal sources of funds for First Community's lending activities include
deposits received from the general public, amortization and repayment of loans,
maturity of investment securities and FHLB advances.
First Community's primary sources of income are interest on loans,
investment securities and interest-bearing deposits in other financial
institutions and service charges on deposit accounts. Its principal expenses
are interest paid on deposit accounts and borrowings, salaries and employee
benefits, premises and equipment expenses and other overhead expenses incurred
in the operation of First Community.
26
<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 1998
----------------------- -----------------------
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% $34,118 36.54%
Construction and land development 6,773 8.55 7,739 8.29
Commercial loans 17,883 22.59 23,889 25.59
Installment loans 22,896 28.93 24,968 26.74
Tax-exempt loans and leases 3,377 4.27 3,480 3.73
------- ------- ------- -------
Loans 79,900 100.94 94,194 100.89
Allowance for losses (848) (1.07) (955) (1.02)
Deferred loan origination costs 100 .13 125 .13
------- ------- ------- -------
Loans, net $79,152 100.00% $93,364 100.00%
======= ======= ======= =======
</TABLE>
The following table sets forth certain information at December 31,
1998, 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.
27
<PAGE>
<TABLE>
<CAPTION>
REMAINING MATURITIES
----------------------------------------------------------------
BALANCE
OUTSTANDING AT
DECEMBER 31, OVER ONE YEAR
1998 ONE YEAR TO FIVE YEARS OVER FIVE YEARS
OR LESS
----------------------------------------------------------------
(DOLLARS IN 000'S)
<S> <C> <C> <C> <C>
Real estate loans $47,721 $9,549 $9,306 $28,866
Commercial loans 15,286 7,357 4,652 3,277
Installment loans 27,724 10,727 15,830 1,167
Tax-exempt loans and leases 3,463 0 0 3,463
------- ------- ------- -------
Total $94,194 $27,633 $29,788 $36,773
======= ======= ======= =======
</TABLE>
28
<PAGE>
The following table sets forth, as of December 31, 1998, the dollar
amount of all loans maturing after December 31, 1999 showing those having a
fixed interest rate and floating or adjustable interest rates.
FLOATING OR
ADJUSTABLE
FIXED RATE RATE
---------- -----------
TYPE OF LOAN (DOLLARS IN 000'S)
Real estate loans $22,316 $25,405
-
Commercial loans 6,184 9,102
Installment loans 24,351 3,373
Tax-exempt loans and leases 3,463 0
------- -------
56,314 37,880
-
Less amount due within one year 16,840 10,793
------- -------
Loans due after one year $39,474 $27,087
======= =======
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 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.
29
<PAGE>
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. Other
monthly payments generally may not exceed forty percent (40%) of the applicant's
stable gross income.
Single-pay loans may not be renewed without a ten percent (10%)
reduction in principal.
INCOME FROM LENDING ACTIVITIES
First Community realizes interest income from its lending activities.
Interest on loans comprised approximately 90.87% of our total interest income
for the year ended December 31, 1998.
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.
30
<PAGE>
The following table summarizes nonperforming assets as of the dates
indicated.
AT DECEMBER 31,
----------------------
1997 1998
---------- ----------
(DOLLARS IN 000'S)
Nonaccrual loans $204 $17
Restructured loans
Past-due loans 90 days
or more (interest accruing) 120 514
-------- -------
Total non-performing assets 324 531
Real estate owned 79 0
Other repossessed assets 9 12
======== =======
Total non-performing assets $412 $543
======== =======
Ratio of non-performing assets to total
assets .42% .45%
Interest on non-performing loans that would
have been included in income $19 $18
======== =======
Interest on non-performing loans that was
included in income $0 $0
======== =======
At December 31, 1998, loans of $1.0 million 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. Impaired loans at December 31, 1998
consisted primarily of a loan for $770,000 collaterized by residential
acquisition and development real estate. The loan was due on January 2, 1999
and interest was due quarterly. Due to the default of a loan modification
agreement which required a $200,000 deposit be held in escrow, First Community
is currently in the process of foreclosure and has requested the court to
appoint a receiver to complete the project. Since December 31, 1998, the
borrower has made payments of $500,000 and has agreed to the appointment of a
receiver in the event borrower is unable to complete the project. Due to the
loan to value ratio, First Community expects no loss on this loan at this time.
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, 1998 compared to the year ended December 31, 1997 primarily because of the
growth in loans and a change in the composition of the loan portfolio. During
1998, First Community made a $239,000 provision for loan losses due primarily to
growth in loans and a change in the mix of the loan portfolio.
31
<PAGE>
Allocation of the Allowance for Loan Losses:
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------------------------------------------
1997 1998
-----------------------------------------------------------
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% $134 36.2%
Construction and land development 68 8.5 176 8.2
Commercial loans 196 22.4 235 25.4
Installment loans 418 28.6 406 26.5
Tax-exempt loans and leases 4 4.2 4 3.7
---------- ----------- --------- -----------
$848 100.0% $955 100.0%
========== =========== ========= ===========
</TABLE>
Summary of Loan Loss Experience:
YEAR ENDED DECEMBER 31,
-----------------------
1997 1998
------ ------
(DOLLARS IN 000'S)
Balance at January 1 $644 $848
Chargeoffs:
Real estate mortgage loans (16) 0
Commercial loans (20) (73)
Installment loans (44) (78)
------- -------
Total Chargeoffs (80) (151)
------- -------
Recoveries:
Commercial 17 3
Installment 12 16
------- -------
Total Recoveries 29 19
------- -------
Net Chargeoffs (51) (132)
------- -------
Provision for loan losses 255 239
------- -------
Balance at December 31 $848 $955
======= =======
Average loans during the year $73,048 $86,185
Ratio of net chargeoffs to total average
loans outstanding during the year .07% 15%
32
<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 1998
---- ----
(DOLLARS IN 000'S)
Available for sale at fair value:
State and municipal obligations $1,371 $6,097
Corporate obligations 1,400 950
------- -------
2,771 7,047
------- -------
Held to maturity at amortized cost:
State and municipal obligations 1,709 1,033
------- -------
1,709 1,033
FHLB stock 778 778
------- -------
Total $5,258 $8,858
======= =======
At December 31, 1998, the amortized cost of securities available for
sale was $7,016,000 and the related gross unrealized gains were $55,000 and
$24,000, respectively. At December 31, 1998, the fair value of securities held
to maturity was $1,060,000 and the related gross unrealized gains were $27,000.
There were no unrealized losses on securities at December 31, 1998.
As of December 31, 1998, there were no state and municipal obligations
representing more than 10% of shareholders' equity included in securities.
33
<PAGE>
The following table sets forth the maturities of investment securities
at December 31, 1998 and the weighted-average yield (on a tax equivalent basis)
on such securities.
AT DECEMBER 31,
CORPORATE STATE AND MUNICIPAL
OBLIGATIONS OBLIGATIONS
------------------ -------------------
AMOUNT YIELD AMOUNT YIELD
-------- -------- -------- --------
(DOLLARS IN 000'S)
Available for Sale: (1)
Maturities:
One year or less $950 10.32% $140 8.09%
Over 1 year to 5 years 2,611 6.02
Over 5 years to 10 years 3,288 6.48
Over 10 years 27 5.46
---- ------
Total available for sale 950 10.32 6,066 6.31
---- ------
Held to Maturity:
Maturities:
One year or less 631 5.88
Over 1 year to 5 years 110 6.85
Over 5 years to 10 years 292 7.16
Over 10 years
------
Total held to maturity 1,033 6.35
------
Total securities $950 10.32% $7,099 6.32%
==== ======
- - - ------------
(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, 1998 (in
000's).
MATURITY PERIOD
Three months or less $3,051
Greater than three months through six months 4,828
Greater than six months through twelve months 3,616
Over twelve months 2,622
-------
Total $14,117
=======
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
34
<PAGE>
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 $5.8 Million from the FHLB as of June 30, 1999 and $4.8 million as
of December 31, 1998.
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, two branches in North Vernon, Indiana in
Jennings County, and a branch in Whiteland (Johnson County). First Community
anticipates opening a branch in Taylorsville (Bartholemew County)during 1999.
DESCRIPTION OF PROPERTY
First Community currently leases its home office in Bargersville,
Indiana, its branch offices in Greenwood, Indiana, and one of its branches in
Franklin, Indiana from FCREM. First Community leases branches in Indianapolis,
Trafalgar and Franklin from third parties, and owns the branch offices in 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. At December 31, 1998, the net
carrying value of our offices, including land, building, improvements,
furniture, fixtures and equipment was $3.4 million.
COMPETITION
The banking business is highly competitive in Johnson County 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
35
<PAGE>
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
36
<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 June 30, 1999,
First Community had a leverage ratio and tangible equity ratio of 7.6% based on
leverage and tangible capital of $9,345,000 and had a total capital to
risk-based assets ratio of 10.2%.
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 Warrants and common stock issuable upon exercise of the Warrants.
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).
37
<PAGE>
MANAGEMENT
<TABLE>
<CAPTION>
NAME AGE PRINCIPAL OCCUPATION DIRECTOR SINCE TERM TO EXPIRE
- - - ---- --- -------------------- -------------- --------------
<S> <C> <C> <C> <C>
Merrill M. Wesemann, M.D. 64 Chairman of the Board 1991 2000
of the Company-Physician
Albert R. Jackson, III 39 President, & CEO 1997 2000
Frank D. Neese 61 President, Indiana 1996 2002
Securities, LLC
Roy Martin Umbarger 51 President, Roy Umbarger & 1996 2002
Sons, Inc.
Albert R. Jackson, Jr. 64 Retired Bank President 1997 2001
Eugene W. Morris 72 President of Farmers 1991 2001
-Mutual Fire Insurance
Linda J. Janesik 43 Chief Financial Officer
</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. He is a 29 year member of the Indiana Army National Guard and
currently Commanding General of the 76th Infantry Brigade (Separate). He holds
the rank of Brigadier General. Mr. Umbarger's current term as a Director of the
Company expires at the 2002 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 has been President of Indiana Securities, LLC, a
registered broker-dealer and 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 2002 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
38
<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.
Ms. Janesik has been Vice President, Treasurer and CFO of the Company and Senior
Vice President, Cashier and CFO of First Community since September 1998. Ms.
Janesik came to First Community with over twenty years experience in corporate
finance. She has held the title of Senior Auditor with the accounting firm of
Ernst & Young from 1978 to 1983, where she specialized in auditing financial
institutions. Ms. Janesik also served as Internal Audit Manager from 1988 to
1992 and Audit Services Director from 1992 to 1997 for Methodist Hospital of
Indiana, Inc. Ms. Janesik's most recent position was that of Executive Director
from 1997 to 1998 of the Methodist Research Institute, Inc. Ms. Janesik served
on the Board of Directors of Methodist Federal Credit Union for 15 years.
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, 1998, 1997, and
1996. No executive officers of the Company received compensation from the
Company during the year ended December 31, 1998.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
--------------------------
NAME AND PRINCIPAL ALL OTHER
POSITION YEAR SALARY($) BONUS($) COMPENSATION($) (1)
- - - ------------------ ---- --------- -------- -------------------
Albert R. Jackson, III 1998 83,825 -0- ___
Chief Executive 1997 67,500 -0- 697
Officer and Chief 1996 62,293 5,000 661
Financial Officer
- - - ------------
(1) Contributions by the Company to the employee's 401(k) retirement plan.
39
<PAGE>
The following table sets forth information with respect to options
granted during the last fiscal year to the officer named in the Summary
Compensation Tables:
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE
OF ASSURED
ANNUAL RATES OF
STOCK PRICE
APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM
(a) (b) (c) (d) (e) (f) (g)
Number of % of Total
Securities Options/SARs
Underlying Granted to Exercise of
Options/SARs Employees in Base Price Expiration
Granted Fiscal Year ($/Sh) Date 5% 10%
Name
<S> <C> <C> <C> <C> <C> <C>
Albert R. Jackson, III $5,000 45% $11.50 February $36,150 $129,800
</TABLE>
<TABLE>
<CAPTION>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
(a) (b) (c) (d) (e)
Number of Value of
Securities Unexercised
Underlying In-the-Money-
Unexercised Options/SARs
Options/SARs at at FY-End
FY-End (#)
Shares Acquired on Value Realized Exercisable/ Exercisable/
Name Exercise (#) ($) Unexercisable Unexercisable
<S> <C> <C> <C>
Albert R. Jackson, III -0- -0- 5,000/0
</TABLE>
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, 1998 cash compensation for non-employee Directors of First
Community was $1,000 per month. The Chairman's compensation was $1,150 per month
for 1998. 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.
40
<PAGE>
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 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 36,940
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, 1,000 shares of Common Stock with an exercise price of $11.00
per share, and 1,000 shares of common stock with an exercise price of $8.00 per
share each to Dr. Wesemann, Eugene Morris, Frank Neese, Albert R. Jackson, Jr.,
and Roy Martin Umbarger. In February 1998 and 1999, the Board granted an option
to purchase 5,000 shares and 2,500 shares of common stock to Albert R. Jackson,
III with an exercise price of $11.50 per share and $9.125 per share,
respectively, and an aggregate of 6,000 shares and 3,000 shares to three (3)
other officers with an exercise price of $11.50 and $9.125 per share,
respectively. During 1998, an option to purchase 2,000 shares with an exercise
price of $11.50 per share expired. 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.
41
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth certain information regarding the
Company's Common Stock beneficially owned as of August 9, 1999 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 22,648(1) 2.2%
Albert R. Jackson, Jr. 18,543(2) 1.8%
Linda J. Janesik 1,000(3) *
Eugene W. Morris 26,366(4) 2.5%
Merrill M. Wesemann, M.D. 98,509(5) 9.4%
251 E Jefferson Street
Franklin, Indiana 46131
Roy Martin Umbarger 35,359(6) 3.4%
Frank D. Neese 109,745(7) 10.3%
320 North Meridian Street
Indianapolis, Indiana 46204
All Executive Officers and
Directors as a group
(7 persons) 309,808 27.2%
*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, currently exercisable options for 7,500 shares granted under the
1996 Stock Option Plan and a Convertible Note currently convertible into
909 shares. 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, 635 shares owned by Mr. Jackson's spouse, currently exercisable
options for 3,050 shares granted under the 1996 Stock Option Plan,
Convertible Notes currently convertible into 5,454 shares and 909 shares
owned by his spouse. Mr. Jackson, Jr. is the father of Mr. Jackson, III.
(3) Includes currently exercisable options for 1,000 shares granted under the
1996 Stock Option Plan.
(4) Includes currently exercisable options for 18,470 shares granted under the
1992 and 1996 Stock Option Plans and a Convertible Note currently
convertible into 909 shares. Mr. Morris is Mr. Umbarger's father-in-law.
(5) Includes 8,087 shares owned by Dr. Wesemann's spouse, currently exercisable
options for 18,470 shares granted under the 1992 and 1996 Stock Option
Plans, Convertible Notes currently convertible into 3,636 shares, and a
Convertible Note currently convertible into 909 shares owned by his spouse.
(6) Includes 1,365 shares owned by Mr. Umbarger's spouse, 721 shares owned as
joint-tenant with a minor son, 656 shares owed by his minor son, 32 shares
owned by his spouse jointly with her daughter currently exercisable options
for 3,050 shares granted under the 1996 Stock Option Plan and Convertible
Notes currently convertible into 4,545 shares. Mr. Umbarger is Mr. Morris'
son-in-law.
(7) Includes currently exercisable options for 3,050 shares granted under the
1996 Stock Option Plan and Convertible Notes currently convertible into
45,454 shares.
42
<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 1997 and 1998. 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
We have engaged Indiana Securities, LLC, as information agent to assist
holders in exercising the Warrants. For all such services we have agreed to pay
Indiana Securities $0.25 per share of Common Stock issued upon exercise of the
Warrants.
The sole members (owners) of Indiana Securities, LLC is Frank Neese and
his daughter. Dawn Neese Barringer Mr. Neese is a director and major
shareholder of the Company. For additional information regarding Mr. Neese's
relationship with us see "Management" and "Security Ownership of Certain
Beneficial Owners and Management."
DESCRIPTION OF SECURITIES
WARRANTS
The Warrants were issued to shareholders of record on October 29, 1998
(the "Record Date") and 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 the revised exercise
price of $8.75 per Share. The Warrants may only be exercised during a 90 day
period commencing on September 15, 1999 and ending at 5:00 o'clock on December
13, 1999 (the "Exercise Period").
A Warrant Holder may exercise the Warrant by completing and executing
the relevant section on the back of the Warrant Certificate and delivering the
Warrant Certificate together with payment in full of the revised exercise price
to the Company during the Exercise Period. The revised exercise price of $8.75
per share must be paid by check, wire transfer, bank draft or money order
payable to the Company. See "Exercise of the Warrants" for additional
instructions on how to exercise the Warrants.
Warrants which have not been exercised as of 5:00 o'clock p.m., EST, on
December 13, 1999 will expire and be of no further effect.
CAPITAL STOCK
The authorized capital stock of the Company consists of four million
shares of Common Stock, no par value, and one million shares of preferred stock.
As of August 9, 1999, there were 1,019,853 shares of Common Stock
outstanding held of record by 282 shareholders.
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 exercise of the 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
43
<PAGE>
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.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the 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, 1998 and 1997, and for each of the three years in the
period ended December 31, 1998 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.
44
<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 1998........................................F-2
Consolidated Statement of Income for the Years Ended
December 31, 1996, 1997 and 1998..................................F-3
Consolidated Statement of Comprehensive Income
for the Years Ended December 31, 1996, 1997 and 1998..............F-4
Consolidated Statement of Stockholders' Equity
for the Years Ended December 31, 1996, 1997 and 1998..............F-5
Consolidated Statement of Cash Flows for the
Years Ended December 31, 1996, 1997 and 1998......................F-6
Notes to Consolidated Financial Statements............................F-7
UNAUDITED FINANCIAL STATEMENTS:
- - - -------------------------------
Consolidated Condensed Balance Sheet as of June 30, 1999 and
December 31, 1998.................................................F-24
Consolidated Condensed Statement of Income for the Three and
Six Months Ended June 30, 1998 and 1999...........................F-25
Consolidated Condensed Statement of Comprehensive Income
for the Three and Six Months Ended June 30, 1998 and 1999.........F-26
Consolidated Condensed Statement of Stockholders'
Equity for the Six Months Ended June 30, 1999.....................F-27
Consolidated Condensed Statement of Cash Flows for the Six Months
Ended June 30, 1998 and 1999......................................F-28
Notes to Unaudited Condensed Consolidated Financial Statements........F-29
45
<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 subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of income, comprehensive income, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1998. 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 subsidiaries as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles.
Indianapolis, Indiana
February 5, 1999
F-1
<PAGE>
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Balance Sheet
<TABLE>
<CAPTION>
December 31 1998 1997
- - - ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and due from banks $ 1,185,790 $ 933,574
Short-term interest-bearing deposits 13,106,281 10,297,654
------------------------------------
Cash and cash equivalents 14,292,071 11,231,228
Investment securities
Available for sale 7,047,098 2,771,058
Held to maturity (fair value of $1,059,682 and $1,734,354) 1,032,525 1,708,679
------------------------------------
Total investment securities 8,079,623 4,479,737
Loans, net of allowance for loan losses of $955,099 and $848,085 93,364,172 79,152,490
Premises and equipment 3,333,331 1,944,779
Federal Home Loan Bank of Indianapolis stock, at cost 777,800 777,800
Foreclosed real estate 78,636
Interest receivable 928,953 700,079
Other assets 495,643 374,965
------------------------------------
Total assets $121,271,593 $98,739,714
====================================
Liabilities
Deposits
Noninterest bearing $ 7,976,350 $ 7,623,814
Interest bearing 98,216,774 80,071,501
------------------------------------
Total deposits 106,193,124 87,695,315
Federal Home Loan Bank of Indianapolis advances 4,753,457 2,929,789
Other borrowings 1,381,933
Interest payable 258,867 250,617
Other liabilities 198,107 313,987
------------------------------------
Total liabilities 112,785,488 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 par value
Authorized--4,000,000 shares
Issued and outstanding--1,011,412 and 989,848 shares 6,869,426 6,722,251
Retained earnings and contributed capital 1,597,830 794,796
Accumulated other comprehensive income 18,849 32,959
------------------------------------
Total stockholders' equity 8,486,105 7,550,006
------------------------------------
Total liabilities and stockholders' equity $121,271,593 $98,739,714
====================================
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE>
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statement of Income
<TABLE>
<CAPTION>
Year Ended December 31 1998 1997 1996
- - - ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest Income
Loans, including fees $7,651,263 $6,779,091 $5,564,766
Securities
Taxable 244,300 183,260 202,022
Tax exempt 133,572 106,252 125,814
Deposits with financial institutions 327,693 230,410 207,940
Dividends 63,609 62,136 57,153
--------------------------------------------------
Total interest income 8,420,437 7,361,149 6,157,695
--------------------------------------------------
Interest Expense
Deposits 4,305,064 3,695,491 2,945,818
Federal Home Loan Bank advances 175,303 111,425 219,980
Other borrowings 28,606
--------------------------------------------------
Total interest expense 4,508,973 3,806,916 3,165,798
--------------------------------------------------
Net Interest Income 3,911,464 3,554,233 2,991,897
Provision for loan losses 239,000 255,000 219,000
--------------------------------------------------
Net Interest Income After Provision for Loan Losses 3,672,464 3,299,233 2,772,897
--------------------------------------------------
Other Income
Fiduciary activities 38,498 26,509 27,353
Service charges on deposit accounts 309,965 253,207 184,400
Net realized gains on securities 5,630
Other operating income 69,869 25,522 31,722
--------------------------------------------------
Total other income 418,332 305,238 249,105
--------------------------------------------------
Other Expenses
Salaries and employee benefits 1,434,507 1,236,794 1,012,761
Premises and equipment 322,422 301,262 212,847
Advertising 119,030 131,989 122,429
Data processing fees 285,763 232,797 191,698
Deposit insurance expense 52,487 45,178 453,368
Printing and office supplies 89,303 64,925 81,541
Legal and professional fees 129,990 97,843 135,068
Telephone expense 72,725 69,197 61,770
Other operating expenses 431,284 310,433 293,853
--------------------------------------------------
Total other expenses 2,937,511 2,490,418 2,565,335
--------------------------------------------------
Income Before Income Tax 1,153,285 1,114,053 456,667
Income tax expense 350,251 375,609 115,401
--------------------------------------------------
Net Income $ 803,034 $ 738,444 $ 341,266
==================================================
Basic Earnings Per Share $.81 $.75 $.35
Diluted Earnings Per Share .80 .74 .34
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statement of Comprehensive Income
<TABLE>
<CAPTION>
Year Ended December 31 1998 1997 1996
- - - ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $803,034 $738,444 $341,266
----------------------------------------------
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 $(9,255),
$13,937 and $(2,630) (14,110) 21,249 (6,641)
Less: Reclassification adjustment for gains included in
net income, net of tax expense (benefit) of $2,230 3,400
----------------------------------------------
(14,110) 21,249 (10,041)
==============================================
Comprehensive income $788,924 $717,195 $331,225
==============================================
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statement of 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, 1996 923,291 $6,068,970 $ 351,494 $21,751 $6,442,215
Net income 341,266 341,266
Unrealized losses on securities (10,041) (10,041)
Exercise of stock options 19,534 112,516 112,516
--------------------------------------------------------------------------------
Balances, December 31, 1996 942,825 6,181,486 692,760 11,710 6,885,956
Net income 738,444 738,444
Unrealized gains on securities 21,249 21,249
Cash dividends ($.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)
--------------------------------------------------------------------------------
Balances, December 31, 1997 989,848 6,722,251 794,796 32,959 7,550,006
Net income 803,034 803,034
Unrealized losses on securities (14,110) (14,110)
Exercise of stock options 15,420 85,427 85,427
Tax benefit on stock options exercised 33,349 33,349
Rights exercised, net of cost 6,144 28,399 28,399
--------------------------------------------------------------------------------
Balances, December 31, 1998 1,011,412 $6,869,426 $1,597,830 $18,849 $8,486,105
================================================================================
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31 1998 1997 1996
- - - ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities
Net income $ 803,034 $ 738,444 $ 341,266
Adjustments to reconcile net income to net cash provided by operating
activities
Provision for loan losses 239,000 255,000 219,000
Depreciation and amortization 156,851 137,713 82,860
Deferred income tax 52,712 498 10,278
Investment securities amortization 20,293 4,362 7,215
Loss on disposal of premises and equipment 3,179
Investment securities gains (5,630)
Net change in
Interest receivable (228,874) (173,893) 91,485
Interest payable 8,250 63,534 12,988
Other assets (164,137) 27,866 89,746
Other liabilities (115,880) 238,056 (27,278)
-------------------------------------------------
Net cash provided by operating activities 774,428 1,291,580 821,930
-------------------------------------------------
Investing Activities
Purchases of securities available for sale (4,963,542) (1,000,000)
Proceeds from maturities of securities available for sale 645,000 650,000 677,750
Proceeds from sales of securities available for sale 2,176,965
Proceeds from maturities and paydowns of securities held to maturity 675,000 828,248 608,936
Net change in loans (14,532,929) (15,062,301) (10,587,119)
Purchases of premises and equipment (1,548,582) (290,617) (533,467)
Purchase of stock of Federal Home Loan Bank of Indianapolis (177,300)
Proceeds from sale of other real estate and repossessions 160,883 180,024 26,992
-------------------------------------------------
Net cash used by investing activities (19,564,170) (14,694,646) (7,807,243)
-------------------------------------------------
Financing Activities
Net change in
Noninterest-bearing, NOW, and savings deposits 13,833,819 6,597,456 5,023,029
Certificates of deposit 4,663,990 10,545,590 6,366,136
Short-term borrowings (908,138)
Proceeds from borrowings 3,386,000 1,750,000
Repayment of borrowings (180,399) (1,199,041) (2,224,485)
Cash dividends (94,282)
Rights exercised, net of cost 28,399
Stock options exercised 118,776 112,516
-------------------------------------------------
Net cash provided by financing activities 21,850,585 17,599,723 8,369,058
-------------------------------------------------
Net Change in Cash and Cash Equivalents 3,060,843 4,196,657 1,383,745
Cash and Cash Equivalents, Beginning of Year 11,231,228 7,034,571 5,650,826
-------------------------------------------------
Cash and Cash Equivalents, End of Year $14,292,071 $11,231,228 $7,034,571
=================================================
Additional Cash Flows Information
Interest paid $4,500,723 $3,743,382 $3,526,976
Income tax paid 479,213 187,406 110,000
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 1 -- Nature of Operations and Summary of Significant Accounting Policies
The accounting and reporting policies of First Community Bancshares, Inc.
("Company") and its wholly owned subsidiaries, First Community Bank and Trust
("Bank") and First Community Real Estate Management, Inc. ("FCREMI"), 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. FCREMI was incorporated on May 26, 1998 to
hold and manage the real estate used by the Company and the Bank.
Consolidation--The consolidated financial statements include the accounts of the
Company, the Bank and FCREMI 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 accumulated other comprehensive
income, 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 SUBSIDIARIES
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, 1998, 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 assets are carried at the lower of cost or fair value less estimated
selling costs. When foreclosed assets are 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 SUBSIDIARIES
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 subsidiaries.
Earnings per share have been computed based upon the weighted average common
shares outstanding during each year.
Note 2 -- 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, 1998, was
$454,000.
Note 3 -- Investment Securities
<TABLE>
<CAPTION>
1998
----------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
December 31 Cost Gains Losses Value
- - - ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for sale
State and municipal $6,066 $55 $(24) $6,097
Corporate obligations 950 950
----------------------------------------------------------------
Total available for sale 7,016 55 (24) 7,047
Held to maturity--state and municipal 1,033 27 1,060
----------------------------------------------------------------
Total investment securities $8,049 $82 $(24) $8,107
================================================================
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
================================================================
</TABLE>
F-9
<PAGE>
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
The amortized cost and fair value of securities held to maturity and available
for sale at December 31, 1998, 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.
<TABLE>
<CAPTION>
1998
--------------------------------------------------------------
Available for Sale Held to Maturity
--------------------------------------------------------------
Amortized Fair Amortized Fair
Maturity Distribution at December 31 Cost Value Cost Value
- - - ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less $1,090 $1,091 $ 631 $ 634
Due after one through five years 2,611 2,624 110 114
Due after five through ten years 3,288 3,305 292 312
Due after ten years 27 27
--------------------------------------------------------------
Totals $7,016 $7,047 $1,033 $1,060
==============================================================
</TABLE>
No securities were pledged at December 31, 1998 and 1997.
Proceeds from the sales of securities available for sale during 1996 were
$183,000. Gross gains of $3,000 were realized in those sales. Proceeds from
securities held to maturity called at a premium during 1996 were $278,000. Gross
gains of $3,000 were realized in those calls. Proceeds from due from broker
during 1996 from sales of securities available for sale during 1995 were
$1,994,000.
Note 4 -- Loans and Allowance
<TABLE>
<CAPTION>
December 31 1998 1997
- - - ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Commercial, commercial real estate and industrial loans $23,889 $17,883
Real estate loans 34,118 28,971
Construction loans 7,739 6,773
Individuals' loans for household and other personal expenditures 24,968 22,896
Tax-exempt loans and leases 3,480 3,377
--------------------------------
Total loans 94,194 79,900
Deferred loan origination costs 125 100
Allowance for loan losses (955) (848)
--------------------------------
Total loans, net $93,364 $79,152
================================
</TABLE>
F-10
<PAGE>
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
December 31 1998 1997 1996
- - - --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Allowance for loan losses
Balances, January 1 $848 $644 $518
Provision for losses 239 255 219
Recoveries on loans 19 29 18
Loans charged off (151) (80) (111)
----------------------------------------
Balances, December 31 $955 $848 $644
========================================
</TABLE>
Information on impaired loans is summarized below.
<TABLE>
<CAPTION>
December 31 1998 1997
- - - ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Impaired loans for which the discounted cash flows
or collateral value exceeds the carrying value of the loan $1,027 $0
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31 1998 1997 1996
- - - ----------------------------------------------------------------------------------------
<S> <C> <C>
Average balance of impaired loans $1,092 $25 $112
Interest income recognized on impaired loans 114
Cash-basis interest included above 87
</TABLE>
Note 5 -- Premises and Equipment
<TABLE>
<CAPTION>
December 31 1998 1997
- - - ----------------------------------------------------------------------------------------
<S> <C> <C>
Land $1,018 $ 432
Buildings 1,603 853
Leasehold improvements 54 285
Equipment 1,054 751
-----------------------------
Total cost 3,729 2,321
Accumulated depreciation (396) (376)
-----------------------------
Net $3,333 $1,945
==============================
</TABLE>
F-11
<PAGE>
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 6 -- Deposits
<TABLE>
<CAPTION>
December 31 1998 1997
- - - -----------------------------------------------------------------------------------------------
<S> <C> <C>
Demand deposits $ 20,341 $16,992
Savings deposits 29,442 18,957
Certificates and other time deposits of $100,000 or more 14,117 10,519
Other certificates and time deposits 42,293 41,227
----------------------------------
Total deposits $106,193 $87,695
==================================
</TABLE>
Certificates and other time deposits maturing in years ending December 31:
1999 $40,497
2000 10,921
2001 1,616
2002 1,020
2003 2,306
Thereafter 50
-------------
$56,410
=============
Note 7 -- FHLB Advances
<TABLE>
<CAPTION>
Interest
Amount Rate
- - - -----------------------------------------------------------------------------------------
<S> <C> <C>
Maturities in years ending December 31
1999 $ 156 6.01%
2000 638 6.05
2001 122 6.01
2002 2,603 5.55
2003 1,234 5.49
---------------
$4,753 5.63%
===============
</TABLE>
The Bank has an available line of credit with the FHLB totaling $2,000,000. The
line of credit expires May 7, 1999 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, 1998.
The FHLB advances and drawings on the available line of credit are secured by
first mortgage loans totaling $27,393,000. Advances are subject to restrictions
or penalties in the event of prepayment.
F-12
<PAGE>
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 8 -- Other Borrowings
December 31 1998
- - - ---------------------------------------------------------------------
Convertible notes due December 31, 2008 $ 170
Notes payable 1,212
--------------
Total long-term debt $1,382
==============
The convertible notes are unsecured and bear an interest rate of 7%. The notes
were issued December 31, 1998 and are convertible at the option of the holder
into shares of common stock of the Company at the rate of $11.00 per share.
Notes payable include a note dated July 15, 1998 with an original balance of
$800,000 with an interest rate of 1.125% under prime, adjustable every five
years for a term of 30 years and a note dated December 18, 1998 with an original
balance of $416,000 at a fixed interest rate of 7.25% with monthly installments
due through November 2003 with a final balloon payment due in December 2003. The
notes are secured by real estate of the Company.
Maturities in years ending December 31
1999 $ 16
2000 18
2001 20
2002 22
2003 384
Thereafter 922
--------------
$1,382
==============
F-13
<PAGE>
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 9 -- Income Tax
<TABLE>
<CAPTION>
Year Ended December 31 1998 1997 1996
- - - -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income tax expense
Currently payable
Federal $205 $270 $ 54
State 92 106 51
Deferred
Federal 52 8 20
State 1 (8) (10)
-----------------------------------------
Total income tax expense $350 $376 $115
=========================================
Reconciliation of federal statutory to actual tax expense
Federal statutory income tax at 34% $392 $379 $155
Tax exempt interest (93) (69) (66)
Effect of state income taxes 62 65 27
Other (11) 1 (1)
-----------------------------------------
Actual tax expense $350 $376 $115
=========================================
</TABLE>
A cumulative net deferred tax asset is included in other assets. The components
of the asset are as follows:
<TABLE>
<CAPTION>
December 31 1998 1997
- - - --------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Allowance for loan losses $346 $312
Alternative minimum tax credit carryforward 38
Other 28 9
------------------------
Total assets 374 359
------------------------
Liabilities
Depreciation 156 103
State income tax 15 16
Loan fees 51 35
Securities available for sale 12 22
------------------------
Total liabilities 234 176
------------------------
$140 $183
========================
</TABLE>
Tax expense applicable to investment security gains for the year ended December
31, 1996 was $2,230.
F-14
<PAGE>
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 10 -- 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:
1998 1997
- - - -----------------------------------------------------------------------------
Commitments to extend credit $12,723 $5,606
Standby letters of credit 123 640
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, 1998.
Note 11 -- Year 2000
Like all entities, the Company and subsidiaries are exposed to risks associated
with the Year 2000 Issue, which affects computer software and hardware;
transactions with customers, vendors, and other entities; and equipment
dependent upon microchips. The Company has begun, but not yet completed, the
process of identifying and remediating potential Year 2000 problems. It is not
possible for any entity to guarantee the results of its own remediation efforts
or to accurately predict the impact of the Year 2000 Issue on third parties with
which the Company and subsidiaries do business. If remediation efforts of the
Company or third parties with which the Company and subsidiaries do business are
not successful, the Year 2000 Issue could have negative effects on the Company's
financial condition and results of operations in the near term.
F-15
<PAGE>
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 12 -- Stockholders' Equity
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.
On July 15, 1998, the Board of Directors approved the issuance of the following
securities:
Rights to stockholders to purchase one share for every ten shares owned as
of October 29, 1998, the record date, subject to a minimum offer and
purchase of 100 shares of common stock, at a purchase price of $10.00 per
share. The rights are exercisable for a ninety (90) day period expiring on
March 30, 1999 following their issuance and subject to the minimum purchase
requirement, are freely transferable.
Warrants to stockholders to purchase one share for every ten shares owned on
October 29, 1998, the record date, subject to a minimum offer and purchase
of 100 shares of common stock, with an exercise price of $10.00 per share.
The warrants will be exercisable for a 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.
The dividends which the Company may pay are restricted by FRB capital
requirements and 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, 1998, stockholder's equity of the
Bank was $8,131,000, of which a minimum of $1,625,000 was available for payment
of dividends.
Note 13 -- Regulatory Capital
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies and is 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, 1998 and 1997,
the Bank is categorized as well capitalized and met all subject capital adequacy
requirements. There are no conditions or events since December 31, 1998 that
management believes have changed the Bank's classification.
F-16
<PAGE>
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
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>
1998
------------------------------------------------------------------------
Required for Adequate To Be Well
Actual 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) $9,100 10.0% $7,295 8.0% $9,119 10.0%
Tier 1 capital 1 (to risk-weighted assets) 8,145 8.9 3,648 4.0 5,472 6.0
Tier 1 capital 1 (to average assets) 8,145 7.5 4,344 4.0 6,517 6.0
1 As defined by regulatory agencies
1997
------------------------------------------------------------------------
Required for Adequate To Be Well
Actual Capital 1 Capitalized 1
------------------------------------------------------------------------
December 31 Amount Ratio Amount Ratio Amount Ratio
- - - ---------------------------------------------------------------------------------------------------------------------
Total capital 1 (to risk-weighted assets) $8,139 11.3% $5,789 8.0% $7,236 10.0%
Tier 1 capital 1 (to risk-weighted assets) 7,291 10.1 2,895 4.0 4,342 6.0
Tier 1 capital 1 (to average assets) 7,291 7.8 3,758 4.0 5,638 6.0
1 As defined by regulatory agencies
</TABLE>
Note 14 -- 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 $16,000, $8,000 and $6,000 for 1998, 1997 and
1996.
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 SUBSIDIARIES
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
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:
<TABLE>
<CAPTION>
1998 1997
----------------------------------
<S> <C> <C>
Risk-free interest rates 5.55% and 5.67% 6.67%
Dividend yields .73%
Volatility factors of expected market price of common stock 9.00% 8.00%
Weighted-average expected life of the options 9 years 9 years
</TABLE>
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:
1998 1997
-----------------------
Net income As reported $803 $738
Pro forma 779 726
Basic Earnings per share As reported .81 .75
Pro forma .78 .73
Diluted earnings per share As reported .80 .74
Pro forma .77 .72
F-18
<PAGE>
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
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, 1998, 1997 and
1996.
<TABLE>
<CAPTION>
Year Ended December 31 1998 1997 1996
- - - ----------------------------------------------------------------------------------------------------------------------------
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 51,511 $ 6.14 46,261 $ 5.54 66,771 $5.54
Granted 16,000 11.56 5,250 11.43
Exercised (15,420) 5.54 20,510 5.54
Expired (2,000) 11.50
============= ============= =============
Outstanding, end of year 50,091 $ 7.77 51,511 $ 6.14 46,261 $5.54
============= ============= =============
Options exercisable at year end 41,091 51,511 46,261
Weighted-average fair value of options
granted during the year $4.50 $4.00
</TABLE>
As of December 31, 1998, options outstanding of 30,841 have an exercise price of
$5.54 and weighted-average remaining contractual lives of 3.5 years; options
outstanding of 19,250 have exercise prices ranging from $11.00 to $11.50 and
weighted-average remaining contractual lives of 9.0 years.
As of December 31, 1998, options exercisable of 30,841 have an exercise price of
$5.54 and weighted-average remaining contractual lives of 3.5 years; options
exercisable of 10,250 have exercise prices ranging from $11.00 to $11.43 and
weighted-average remaining contractual lives of 8.9 years.
Note 15 -- Related Party Transactions
The Bank has entered into transactions with certain directors, executive
officers, significant stockholders 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, 1998 $ 745
Changes in composition of related parties 377
New loans, including renewals 441
Payments, etc., including renewals (526)
------------
Balances, December 31, 1998 $1,037
============
Deposits from related parties held by the Banks at December 31, 1998 and 1997
totaled $1,094,000 and $980,000.
F-19
<PAGE>
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands, Except Per Share Data)
Note 16 -- Earnings Per Share
Earnings per share ("EPS") were computed as follows:
<TABLE>
<CAPTION>
Year Ended December 31, 1998
------------------------------------------
Weighted Average Per Share
Income Shares Amount
------------------------------------------
<S> <C> <C> <C>
Basic Earnings Per Share
Income available to common stockholders $803 994,432 $.81
=============
Effect of Dilutive Stock Options 12,383
Effect of Convertible Debt 168
------------------------------
Diluted Earnings Per Share
Income available to common stockholders and assumed conversions $803 1,006,983 $.80
==========================================
</TABLE>
Options to purchase 19,250 shares of common stock at prices ranging from $11.00
to $11.50 per share were outstanding at December 31, 1998, 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.
<TABLE>
<CAPTION>
Year Ended December 31, 1997
------------------------------------------
Weighted Average
Shares Per Share
Income Amount
------------------------------------------
<S> <C> <C> <C>
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
==========================================
</TABLE>
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.
<TABLE>
<CAPTION>
Year Ended December 31, 1996
------------------------------------------
Weighted Average
Shares Per Share
Income Amount
------------------------------------------
<S> <C> <C> <C>
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
==========================================
</TABLE>
F-20
<PAGE>
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 17 -- 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.
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.
Other Borrowing--The fair value of the borrowing is estimated using a discounted
cash flow calculation based on the prime interest rate.
The estimated fair values of the Company's financial instruments are as follows:
<TABLE>
<CAPTION>
1998 1997
------------------------------------------------
Carrying Fair Carrying Fair
December 31 Value Value Value Value
- - - ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets
Cash and cash equivalents $14,292 $14,292 $11,231 $11,231
Investment securities available for sale 7,047 7,047 2,771 2,771
Investment securities held to maturity 1,033 1,060 1,709 1,734
Loans, net 93,364 94,650 79,152 80,403
Stock in FHLB 778 778 778 778
Interest receivable 929 929 700 700
Liabilities
Deposits 106,193 106,506 87,695 87,806
FHLB advances 4,753 4,773 2,930 2,908
Other borrowings 1,382 1,371
Interest payable 259 259 251 251
</TABLE>
F-21
<PAGE>
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 18 -- 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:
<TABLE>
<CAPTION>
Condensed Balance Sheet
December 31 1998 1997
- - - ----------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash on deposit with subsidiary $ 215 $ 88
Investment in common stock of subsidiaries 8,211 7,324
Other assets 230 139
------------------------------
Total assets $8,656 $7,551
==============================
Liabilities
Convertible notes $ 170
Other liabilities $ 1
------------------------------
Total liabilities 170 1
Stockholders' Equity 8,486 7,550
------------------------------
Total liabilities and stockholders' equity $8,656 $7,551
==============================
</TABLE>
Condensed Statement of Income
<TABLE>
<CAPTION>
Year Ended December 31 1998 1997 1996
- - - -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income
Dividends from subsidiary $100 $165
Other interest income and dividends 1 1 $ 1
-------------------------------------
Total income 101 166 1
-------------------------------------
Expenses
Salaries and employee benefits 41 44 20
Professional fees 59 46 55
Other expenses 15 18 12
-------------------------------------
Total expenses 115 108 87
-------------------------------------
Income (loss) before income tax benefit and equity in
undistributed income of subsidiaries (14) 58 (86)
Income tax benefit (45) (42) (34)
-------------------------------------
Income (loss) before equity in undistributed income
of subsidiaries 31 100 (52)
Equity in undistributed income of subsidiaries 772 638 393
-------------------------------------
Net Income $803 $738 $341
=====================================
</TABLE>
F-23
<PAGE>
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Condensed Statement of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31 1998 1997 1996
- - - ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities
Net income $803 $738 $341
Adjustments to reconcile net income to net cash provided
(used) by operating activities (863) (620) (421)
---------------------------------------
Net cash provided (used) by operating activities (60) 118 (80)
---------------------------------------
Investing Activity--capital contributions to subsidiary (130)
---------------------------------------
Financing Activities
Cash dividends (94)
Stock options exercised 119 113
Rights exercised, net of costs 28
Proceeds from borrowings 170
---------------------------------------
Net cash provided (used) by financing activities 317 (94) 113
---------------------------------------
Net Change in Cash on Deposit 127 24 33
Cash on Deposit at Beginning of Year 88 64 31
---------------------------------------
Cash on Deposit at End of Year $215 $ 88 $ 64
=======================================
</TABLE>
F-24
<PAGE>
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Condensed Balance Sheet
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------------------------
<S> <C> <C>
Assets
Cash and due from banks $ 1,387,246 $ 1,185,790
Short-term interest-bearing deposits 17,388,507 13,106,281
------------------------------
Cash and cash equivalents 18,775,753 14,292,071
Investment securities
Available for sale 12,456,505 7,047,098
Held to maturity 837,247 1,032,525
------------------------------
Total investment securities 13,293,752 8,079,623
Loans 100,930,354 94,319,271
Allowance for loan losses 1,045,786 955,099
------------------------------
Net Loans 99,884,568 93,364,172
Premises and equipment 3,438,579 3,333,331
Federal Home Loan Bank of Indianapolis stock, at cost 777,800 777,800
Interest receivable 1,008,412 928,953
Other assets 736,315 495,643
------------------------------
Total assets $ 137,915,179 $ 121,271,593
==============================
Liabilities
Deposits
Noninterest-bearing $ 8,674,869 $ 7,976,350
Interest-bearing 111,985,330 98,216,774
------------------------------
Total deposits 120,660,199 106,193,124
Federal Home Loan Bank of Indianapolis advances 5,753,457 4,753,457
Other borrowings 2,203,775 1,381,933
Interest payable 266,545 258,867
Other liabilities 253,348 198,107
------------------------------
Total liabilities 129,137,324 112,785,488
------------------------------
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 - 1,021,287 and 1,011,412 shares 6,967,489 6,869,426
Retained earnings and contributed capital 1,921,916 1,597,830
Accumulated other comprehensive income (loss) (111,550) 18,849
------------------------------
Total stockholders' equity 8,777,855 8,486,105
------------------------------
Total liabilities and stockholders' equity $ 137,915,179 $ 121,271,593
==============================
</TABLE>
See notes to consolidated condensed financial statements.
F-25
<PAGE>
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Condensed Statement of Income
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------------------------
1999 1998 1999 1998
-------------------------------------------------
<S> <C> <C> <C> <C>
Interest Income
Loans, including fees $2,117,343 $1,879,631 $4,234,492 $3,680,570
Investment securities
Taxable 62,372 75,013 103,674 132,608
Tax exempt 92,269 19,443 160,857 37,045
Interest-bearing time deposits 129,325 112,308 211,703 213,462
Dividends 15,513 15,513 32,315 32,182
-------------------------------------------------
Total interest income 2,416,822 2,101,908 4,743,041 4,095,867
-------------------------------------------------
Interest Expense
Deposits 1,226,219 1,091,937 2,351,125 2,128,026
FHLB advances 80,821 44,913 157,032 87,295
Other borrowings 39,490 66,887
-------------------------------------------------
Total interest expense 1,346,530 1,136,850 2,575,044 2,215,321
-------------------------------------------------
Net Interest Income 1,070,292 965,058 2,167,997 1,880,546
Provision for loan losses 75,000 69,000 150,000 129,000
-------------------------------------------------
Net Interest Income After Provision for Loan Losses 995,292 896,058 2,017,997 1,751,546
-------------------------------------------------
Other Income
Trust fees 21,575 6,058 25,315 28,653
Service charges on deposit accounts 80,287 76,328 155,455 148,956
Other operating income 9,723 11,073 25,945 20,076
-------------------------------------------------
Total other income 111,585 93,459 206,715 197,685
-------------------------------------------------
Other Expenses
Salaries and employee benefits 399,093 344,073 780,215 651,932
Premises and equipment 93,879 79,189 183,703 155,459
Advertising 44,320 36,942 85,062 63,237
Data processing fees 82,646 63,749 163,735 128,871
Deposit insurance expense 15,334 13,369 29,343 25,877
Printing and office supplies 31,125 28,633 59,825 56,200
Legal and professional fees 72,960 40,369 112,626 63,934
Telephone expense 22,895 16,711 46,524 33,560
Other operating expense 112,407 103,785 246,247 194,615
-------------------------------------------------
Total other expenses 874,659 726,820 1,707,280 1,373,685
-------------------------------------------------
Income Before Income Tax 232,218 262,697 517,432 575,546
Income tax expense 51,818 83,005 132,047 187,860
-------------------------------------------------
Net Income $ 180,400 $ 179,692 385,385 $ 387,686
=================================================
Basic earnings per share $ .18 $ .18 $ .38 $ .39
Diluted earnings per share
.17 .18 .37 .39
</TABLE>
See notes to consolidated condensed financial statements.
F-26
<PAGE>
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Condensed Statement of Comprehensive Income
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------------------------
1999 1998 1999 1998
-------------------------------------------------
<S> <C> <C> <C> <C>
Net Income $ 180,400 $ 179,692 $ 385,385 $ 387,686
Other comprehensive income, net of tax
Unrealized losses on securities available for sale
Unrealized holding losses arising during
the period, net of tax benefit of $74,547,
$701, $85,527 and $4,592 (113,657) (1,069) (130,399) (7,001)
-------------------------------------------------
Comprehensive income $ 66,743 $ 178,623 $ 254,986 $ 380,685
=================================================
</TABLE>
F-27
<PAGE>
FIRST COMMUNITY BANCSHARES, INC AND SUBSIDIARIES
Consolidated Condensed Statement of Stockholders' Equity
(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, 1999 1,011,412 $ 6,869,426 $ 1,597,830 $ 18,849 $ 8,486,105
Net income for the period 385,385 385,385
Unrealized losses on securities (130,399) (130,399)
Cash dividend ($.06 per share) (61,299) (61,299)
Purchase of stock (721) (6,129) (6,129)
Rights exercised, net of cost
of $1,768 10,596 104,192 104,192
-----------------------------------------------------------------------
Balances, June 30, 1999 1,021,287 $ 6,967,489 $ 1,921,916 $ (111,550) $ 8,777,855
=======================================================================
</TABLE>
See notes to consolidated condensed financial statements.
F-28
<PAGE>
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Condensed Statement of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------------------
1999 1998
----------------------------
<S> <C> <C>
Operating Activities
Net income $ 385,385 $ 387,686
Adjustments to reconcile net income to net cash provided by
operating activities
Provision for loan losses 150,000 129,000
Depreciation and amortization 94,777 67,212
Investment securities amortization 31,674 699
Gain on sale of foreclosed real estate (7,241)
Gain on sale of fixed assets 2,318
Net change in:
Interest receivable (79,459) (56,027)
Interest payable 7,678 83,726
Other assets (155,144) (69,506)
Other liabilities 24,602 (117,434)
----------------------------
Net cash provided by operating activities 454,590 425,356
----------------------------
Investing Activities
Purchases of securities available for sale (6,146,730) (1,414,479)
Proceeds from maturities of securities available for sale 490,000 70,000
Purchases of securities held to maturity (225,000)
Proceeds from paydowns and maturities of securities held to maturity 420,000 540,000
Net change in loans (6,735,655) (7,052,170)
Proceeds from sale of foreclosed real estate 72,500 56,636
Purchases of property and equipment (202,343) (475,546)
----------------------------
Net cash used by investing activities (12,327,228) (8,275,559)
----------------------------
Financing Activities
Net change in
Noninterest-bearing, NOW and savings deposits 3,752,477 752,392
Certificates of Deposit 10,714,598 4,307,723
Proceeds from borrowings 1,830,000
Repayment of borrowings (8,158)
Purchase of stock (6,129)
Cash dividends (30,660)
Rights exercised, net of costs 104,192
----------------------------
Net cash provided by financing activities 16,356,320 5,060,115
----------------------------
Net Change in Cash and Cash Equivalents 4,483,682 (2,790,088)
Cash and Cash Equivalents, Beginning of Period 14,292,071 11,231,228
----------------------------
Cash and Cash Equivalents, End of Period $ 18,775,753 $ 8,441,140
============================
Supplemental cash flow disclosures
Interest paid $ 2,567,366 $ 2,131,595
Income tax paid 246,570 135,550
Dividend payable 30,639
</TABLE>
See notes to consolidated condensed financial statements
F-29
<PAGE>
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
June 30, 1999
(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 holds and manages real estate
used by the Company and the Bank. A summary of significant accounting policies
is set forth in Note 1 of Notes to Financial Statements included in the December
31, 1998, Annual Report on Form 10-K. All significant intercompany accounts and
transactions have been eliminated in consolidation.
The interim consolidated financial statements have been prepared in accordance
with instructions to Form 10-Q, and therefore do not include all information and
footnotes necessary for a fair presentation of financial position, results of
operations and cash flows in conformity with generally accepted accounting
principles.
The interim consolidated financial statements at June 30, 1999, and for the six
and three months ended June 30, 1999 and 1998, have not been audited by
independent accountants, but reflect, in the opinion of management, all
adjustments (which include only normal recurring adjustments) necessary to
present fairly the financial position, results of operations and cash flows for
such periods.
Note 2: Earnings Per Share
- - - --------------------------
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
June 30, 1999 June 30, 1998
------------------ ------------------
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 $ 180,400 1,021,850 $ .18 $ 179,692 989,848 $ .18
======= =======
Effect of dilutive stock options 7,160 13,867
Effect of convertible debt 10,568 80,455
--------------------- -------------------
Diluted earnings per share
Income available to common
shareholders and assumed
conversions $ 190,968 1,109,465 $ .17 $ 179,692 1,003,715 $ .18
=============================== =============================
</TABLE>
F-30
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
June 30, 1999 June 30, 1998
------------------ ------------------
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 $ 385,385 1,020,862 $ .38 $ 387,686 989,848 $ .39
======= =======
Effect of dilutive stock options 10,530 14,182
Effect of convertible debt 13,836 40,227
--------------------- -------------------
Diluted earnings per share
Income available to common
shareholders and assumed
conversions $ 399,221 1,071,619 $ .37 $ 387,686 1,004,030 $ .39
=============================== =============================
</TABLE>
F-31
<PAGE>
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 $8.75 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>
=============================== ===================================
FIRST COMMUNITY
BANCSHARES, INC.
[LOGO]
-------------
AMENDED PROSPECTUS
-------------
SEPTEMBER ___, 1999
=============================== ===================================
<PAGE>
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Sections 23-1-37-1 through 23-1-37-15 of the Indiana Business
Corporation Law permits a corporation to indemnify directors and officers
against liability incurred in certain legal proceedings if the individual's
conduct was in good faith and the individual reasonably believed, in the case of
conduct in the individual's official capacity with the corporation, that such
conduct was in the best interest of the corporation, and in all other cases
believed such conduct was at least not opposed to the best interest of the
corporation. If the proceeding is criminal, the individual must have believed
that the individual's conduct was lawful or at least had no reasonable cause to
believe that such conduct was unlawful. The statute requires a corporation to
indemnify an individual who is wholly successful on the merits or otherwise in
the defense of any proceeding against reasonable expense incurred by such
individual, unless the Articles of Incorporation provide otherwise. The
corporation may pay for or reimburse the reasonable expenses incurred by a
director or officer who is a party to a proceeding in advance of final
disposition of the proceeding if certain conditions are satisfied. Unless
otherwise provided in the Articles of Incorporation, a director or officer who
is a party to a proceeding may apply for a court ordered indemnification. The
court may order indemnification if it determines that the director is entitled
to mandatory indemnification, in which case the indemnification will include
reasonable expense incurred to obtain the indemnification order; or if it
determines that the director is fairly and reasonably entitled to
indemnification in view of all the relevant circumstances. Except in the case of
mandatory indemnification, a corporation may indemnify a director or officer
only after it has determined the individual meets the standard of conduct
described above. In addition, a corporation may also indemnify and advance
expenses to an officer, whether or not a director, to the extent, consistent
with public policy, that may be provided by its articles of incorporation,
bylaws, general or specific action of its board of directors or contract.
Section 23-1-37-14 of the Indiana Business Corporation Law empowers an Indiana
corporation to purchase and maintain insurance on behalf of any director or
officer against any liability asserted against, or incurred by, any individual
serving in such capacity at the request of the corporation or arising out of his
or her status as such, whether or not the corporation would have had the power
to indemnify against such liability under the provisions of the Indiana Business
Corporation Law.
The Company carries liability insurance covering officers and
directors. There is a deductible amount of $25,000 for the Company per claim.
The policy contains certain exclusions including, but not limited to, certain
claims by shareholders.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following fees and expenses shall be borne by the Company in
connection with this Offering. All fees other than Securities and Exchange
Commission fees are estimates.
Securities and Exchange Commission Registration Fee..............$ 1,525
Printing and Engraving........................................... 5,000
Accounting Fees and Expenses..................................... 15,000
Legal Fees and Expenses.......................................... 46,000
Transfer Agent and Registrar Fees and Expenses................... 5,000
Expenses of Registration Under State Blue Sky Laws............... 11,000
Miscellaneous.................................................... ,4,975
---------
Total...................................................$ 88,500
=========
II-1
<PAGE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
In February 1998 the Company granted options for the purchase of 11,000
shares of Common Stock to 4 employees in reliance upon Section 4(2) of the
Securities Act.
In May 1998 the Company granted options for the purchase of 1,000
shares of Common Stock to each of the 5 directors who are not otherwise employed
by the Company in reliance upon Section 4(2) of the Securities Act.
In September 1998, the Company issued 15,420 shares of Common Stock at
$5.54 per share upon exercise of options by a former director of the Company. .
The shares were issued in reliance upon Section 4(2) of the Securities Act.
In February 1999 the Company granted options to purchase 4,500 shares
of Common Stock to 3 employees in reliance upon Section 4(2) of the Securities
Act of 1933.
In May 1999 the Company granted an option to purchase 1,000 shares of
Common Stock to each of the 5 non-employee directors in reliance upon Section
4(2) of the Securities Act of 1933.
II-2
<PAGE>
ITEM 27. EXHIBITS
3.1 Articles of Incorporation of First Community Bancshares, Inc.
(Incorporated herein by reference to the Registration Statement on Form
S-4 of First Community Bancshares, Inc., Registration No. 33-47691,
declared effective July 30, 1992).
3.2 Amended Bylaws of First Community Bancshares, Inc. (Incorporated herein
by reference to the Form 10-K of First Community Bancshares, Inc. for
the fiscal year ended December 31, 1992 and filed with the Securities
and Exchange Commission on March 31, 1993)(Commission File No.
0-19618).
4.1 Form of Rights Certificate*
4.2 Form of Warrant
4.3 Form of Note*
5.1 Legal Opinion of Henderson, Daily, Withrow & DeVoe dated October 23,
1998.*
10.6 First Community Bancshares, Inc. 1992 Stock Option Plan, as amended and
approved by Shareholders on May 19, 1993 (Incorporated herein by
reference to the Form 10-K of First Community Bancshares, Inc. for the
fiscal year ended December 31, 1993 and filed with the Securities and
Exchange Commission on March 30, 1994)(Commission File No. 0-19618).
10.7 Agreement To Purchase Real Estate by and between First Community Bank &
Trust and Mutual Building and Loan Association (Incorporated herein by
reference to the Form 10-K of First Community Bancshares, Inc. for the
fiscal year ended December 31, 1993 and filed with the Securities and
Exchange Commission on March 30, 1994).
10.8 Deferred Director Fee Agreement by and between First Community Bank &
Trust Company and Merrill M. Wesemann Dated November 23, 1994
(Incorporated herein by reference to the Form 10-K of First Community
Bancshares, Inc. for the fiscal year ended December 31, 1994 and filed
with the Securities and Exchange Commission on March 13, 1995).
10.9 First Community Bancshares, Inc. 1996 Stock Option Plan (Incorporated
herein by reference to the First Community Bancshares, Inc. proxy
statement for the 1996 annual shareholders meeting filed with the
Securities and Exchange Commission on March 13, 1996).
10.10 Amendment to the First Community Bancshares, Inc. 1992 Stock Option
Plan, as amended and approved by Shareholders on March 13, 1996
(Incorporated herein by reference to the First Community Bancshares,
Inc. proxy statement for the 1996 annual shareholders meeting filed
with the Securities and Exchange Commission on March 13, 1996).
21 Subsidiaries of First Community Bancshares, Inc.*
23.1 Consent of Olive LLP.
23.2 Consent of Henderson, Daily, Withrow & DeVoe (included in Exhibit
5.1).*
* Previously filed.
II-3
<PAGE>
ITEM 28. UNDERTAKINGS
The undersigned Company hereby undertakes that:
(1) Each post-effective amendment to this Registration Statement shall
include any Prospectus required by Section 10(a)(3) of the Securities Act and
will reflect in the Prospectus any facts or events that represent a fundamental
change in the information in the Registration Statement and will include any
additional or changed material information on the Plan of Distribution.
(2) For purposes of determining any liability under the Securities Act,
each filing of the Company's annual report pursuant to Section 13(a) or Section
15(d) of the Securities Exchange Act of 1934 that is incorporated by reference
in the registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at the time shall be deemed to be the initial bona fide offering thereof.
(3) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Company pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(4) For the purposes of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(5) Shall file a post-effective amendment to remove from registration
any of the Securities that remain unsold at the end of the Offering.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Company pursuant to the provisions described under Item 15 above or
otherwise, the Company has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
Company of expenses incurred or paid by a director, officer or controlling
person of the Company in the successful defense of any action, suit or
proceeding) is asserted against the Company by such director, officer or
controlling person in connection with the securities being registered, the
Company will, unless in the opinion of its counsel the matter has been settled
by controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
II-4
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Company certifies that it has reasonable grounds to believe that it meets all
the requirements for filing on Form SB-2 and authorizes this Amendment No. 3 to
Registration Statement to be signed on its behalf by the undersigned thereto
duly authorized in the City of Greenwood, State of Indiana on August 23, 1999.
FIRST COMMUNITY BANCSHARES, INC.
By: /s/ Albert R. Jackson, III
----------------------------------------
Albert R. Jackson, III, Chief Executive
Officer and Director
By: /s/ Linda J. Janesik
----------------------------------------
Linda J. Janesik, Chief Financial Officer
In accordance with the requirements of the Securities Act of 1933, this
Amendment No. 3 to Registration Statement has been signed by the following
persons in the capacities and on the dates stated:
Signatures and Title(s) Date
/s/ Albert R. Jackson, III
- - - ------------------------------------------------
Albert R. Jackson, III, Chief Executive August 23, 1999
Officer and Director
* August 23, 1999
- - - ------------------------------------------------
Merrill M. Wesemann, M.D., Director and Chairman
* August 23, 1999
- - - ------------------------------------------------
Eugene W. Morris, Director and President
* August 23, 1999
- - - ------------------------------------------------
Roy Martin Umbarger, Director and Vice President
* August 23, 1999
- - - ------------------------------------------------
Frank D. Neese, Director
* August 23, 1999
- - - ------------------------------------------------
Albert R. Jackson, Jr., Director
*By: /s/ Albert R. Jackson, III
-------------------------------
Attorney-in Fact
II-5
Exhibit 4.2
Warrant No. _______
COMMON SHARE PURCHASE WARRANT
-----------------------------
FIRST COMMUNITY BANCSHARES, INC.
--------------------------------
Warrant to Purchase _____ Common Shares
This is to certify that, for value received
________________________, or his/its registered assigns (the "Holder"), is
entitled to purchase, subject to the provisions of this Warrant ("Warrant"),
from First Community Bancshares, Inc., an Indiana corporation (the "Company"),
at any time on or after September 15, 1999 and prior to 5:00 p.m.,
Indianapolis, Indiana time, on the Expiration Date, at the Exercise Price, up
to _____ shares (subject to adjustment as provided herein) of the Company
("Warrant Stock").
1. CERTAIN DEFINITIONS. As used in this Warrant:
(a) "Common Shares" shall mean shares of common stock of
the Company and also includes shares of any capital stock of the Company
hereafter authorized which are not limited to a fixed sum or percentage in
respect of the rights of the holder thereof to participate in dividends and in
the distribution of assets upon the voluntary or involuntary liquidation,
dissolution or winding up of the Company.
(b) "Exercise Price" shall mean the exercise price
calculated according to Sections 3 and 4 of this Warrant.
(c) "Expiration Date" means December 13, 1999.
2. EXERCISE OF WARRANT; RESTRICTIONS.
(a) This Warrant may be exercised, in whole or in part,
from time to time, but subject to the restrictions and conditions specified
herein, by presentation and surrender of this Warrant to the Company at its
principal office (or such other office as the Company may designate by notice
in writing to the Holder at the Holder's address appearing on the books of the
Company), with the Subscription Form annexed hereto completed for purchase of
the designated number of shares of Common Shares and duly executed and
accompanied by payment of the Exercise Price due in connection with such
exercise. Upon receipt by the Company of this Warrant, in proper form for
exercise, and upon payment of the Exercise Price, the Holder shall, on the
exercise date specified on the Subscription Form, be deemed to be the Holder of
record of the Common Shares issuable upon such exercise, notwithstanding that
certificates representing such Common Shares shall not then be actually issued
and
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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 $8.75 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.
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(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
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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.
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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
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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:
- - - ---------------------------
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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:
--------------------------
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Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the use of our report dated February 5, 1999 on the consolidated
financial statements of First Community Bancshares, Inc. and subsidiaries (the
"Company") and to the reference made to us under the caption "Experts" in
Amendment No. 3 to the Registration Statement on Form SB-2 filed by First
Community Bancshares, Inc. and subsidiaries with the United States Securities
and Exchange Commission.
/s/ Olive LLP
Indianapolis, Indiana
August 24, 1999
