SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 0-19618
FIRST COMMUNITY BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
Indiana 35-1833586
(State or Other Jurisdiction of Incorporation (IRS Employer Id. No.)
or Organization)
210 East Harriman
Bargersville, Indiana 46106
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (317) 422-5171
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
No Par Value
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in part III of this Form 10-K or any amendment to this
Form 10-K [ ].
Aggregate market value of common stock held by non-affiliates computed by
reference to the sale price of such stock as of March 18, 1999 $7,426,000
----------
Shares of common stock outstanding as of March 18, 1999: $1,021,448
----------
DOCUMENT INCORPORATED BY REFERENCE.
The Registrant's definitive proxy statement for the 1998 annual meeting of
shareholders is incorporated by reference into Part III of this report.
<PAGE>
FORM 10-K TABLE OF CONTENTS
Page
----
Forward Looking Statement ..................................................3
PART I
Item 1. Business..........................................................3
Item 2. Properties.......................................................12
Item 3. Legal Proceedings................................................12
Item 4. Submission of Matters to a Vote of Security Holders..............12
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters......................................................13
Item 6. Selected Financial Data..........................................14
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................14
Item 7A. Quantitative and Qualitative Disclosures About Market Risk........24
Item 8. Financial Statements and Supplementary Data......................24
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.........................................24
PART III
Item 10. Directors and Executive Officers of the Registrant...............24
Item 11. Executive Compensation...........................................24
Item 12. Security Ownership of Certain Beneficial Owners and Management...24
Item 13. Certain Relationships and Related Transactions...................24
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K..25
Signatures.................................................................27
2
<PAGE>
FORWARD LOOKING STATEMENT
This Annual Report on Form 10-K ("Form 10-K") contains statements which
constitute forward looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements appear in a number of
places in this Form 10-K and include statements regarding the intent, belief,
outlook, estimate or expectations of the Registrant (as defined below), its
directors or its officers primarily with respect to future events and the future
financial performance of the Registrant. Readers of this Form 10-K are cautioned
that any such forward looking statements are not guarantees of future events or
performance and involve risks and uncertainties, and that actual results may
differ materially from those in the forward looking statements as a result of
various factors. The accompanying information contained in this Form 10-K
identifies important factors that could cause such differences. These factors
include changes in interest rates; loss of deposits and loan demand to other
financial institutions; substantial changes in financial markets; changes in
real estate values and the real estate market; or regulatory changes.
PART I
Item 1. Business
General
First Community Bancshares, Inc. (the "Registrant") is primarily a one-bank
holding company incorporated in August 1991. The Registrant's primary asset is
its wholly-owned banking subsidiary, First Community Bank & Trust ("First
Community"), an Indiana-chartered commercial bank formerly known as Bargersville
Federal Savings Bank. The Registrant is also the sole shareholder of First
Community Real Estate Management, Inc. ("FCREM"), which owns and leases branch
offices to First Community.
At December 31, 1998, the Registrant had approximately $121.3 million of assets,
deposits of approximately $106.2 million and stockholders' equity of
approximately $8.5 million. First Community's primary business consists of
attracting deposits from the general public and originating real estate,
commercial and consumer loans and purchasing investments through its offices
located in Bargersville, Greenwood, Franklin, Indianapolis, Trafalgar and North
Vernon, Indiana. As of December 31, 1998, First Community had 60 full time
equivalent employees. Neither the Registrant nor FCREM has any 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 Registrant is subject to regulation by
the Federal Reserve Board. The Federal Reserve Board, as a condition of the
acquisition of First Community, required the Registrant to make a commitment not
to incur debt in excess of a 30% debt-to-equity ratio on an unconsolidated
basis. As of December 31, 1998, the Registrant's debt-to-equity ratio on an
unconsolidated basis was 2%.
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.
3
<PAGE>
Lending Activities
First Community's loans, before adjusting for direct loan origination costs and
the allowance for loan losses, totaled $94.2 million at December 31, 1998. Of
this amount, approximately $56.3 million or 59.77% represented fixed rate loans
and adjustable rate loans comprised $37.9 million or 40.23%.
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
--------------------------------------------------------------
1998 1997
--------------------------------------------------------------
Percent of Percent of
Amount Total Amount Total
--------------------------------------------------------------
(Dollars in 000's)
<S> <C> <C> <C> <C>
TYPE OF LOAN
Real estate loans
Residential mortgages
(1-4 single family homes) $34,118 36.54% $28,971 36.60%
Construction and land development 7,739 8.29 6,773 8.55
Commercial loans 23,889 25.59 17,883 22.59
Installment loans 24,968 26.74 22,896 28.93
Tax-exempt loans and leases 3,480 3.73 3,377 4.27
--------------------------------------------------------------
Loans 94,194 100.89 79,900 100.94
Allowance for losses (955) (1.02) (848) (1.07)
Deferred loan origination costs 125 .13 100 .13
--------------------------------------------------------------
Loans, net $93,364 100.00% $79,152 100.00%
=============== =============== =============== ==============
</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 mortgage loans below.
<TABLE>
<CAPTION>
Remaining Maturities
--------------------------------------------------------------------------
Balance
Outstanding at
December 31, One Year Over One Year Over Five
1998 or Less To Five Years Years
--------------------------------------------------------------------------
(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 3,463
==========================================================================
Total $ 94,194 $ 27,633 $ 29,788 $ 36,773
==========================================================================
</TABLE>
4
<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.
<TABLE>
<CAPTION>
Floating or Adjustable
Fixed Rate Rate
--------------------------------------------------
TYPE OF LOAN (Dollars in 000's)
<S> <C> <C>
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
--------------------------------------------------
56,314 37,880
Less amount due within one year 16,840 10,793
--------------------------------------------------
Loans due after one year $39,474 $27,087
==================================================
</TABLE>
The original contractual loan payment period for adjustable interest rate
residential loans originated by First Community normally ranges from 15 to 30
years. Current fixed rate mortgage originations may not exceed a 30-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. First Community services 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.
5
<PAGE>
Installment and Commercial Lending. First Community makes various types of
installment loans including loans to depositors secured by pledges of their
deposit accounts, new and used automobile loans, both direct and indirect, and
secured and unsecured personal loans. Although installment and commercial loans
are considered by management to involve more risk than residential mortgage
loans, such loans have shorter maturities and typically have higher yields than
mortgage loans.
Commercial loans include loans secured by commercial real estate or deposits,
single-payment loans, construction loans and loans for business purchases,
operations, inventory and lines of credit. All non-residential mortgage loans
are at a greater interest rate than single-family residential loans.
All installment and commercial loans in excess of $300,000 are approved by the
full Board of Directors or the loan committee of the Bank. 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, and a range of $7,500 to $200,000 for secured. 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 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
First Community's 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.
6
<PAGE>
The following table summarizes nonperforming assets as of the dates indicated.
<TABLE>
<CAPTION>
At December 31
--------------------------------------
1998 1997
--------------------------------------
(Dollars in 000's)
<S> <C> <C>
Nonaccrual loans $ 17 $204
Restructured loans
Past-due loans 90 days or more (interest accruing) 514 120
--------------------------------------
Total non-performing loans 531 324
Real estate owned 79
Other repossessed assets 12 9
--------------------------------------
Total non-performing assets $543 $412
======================================
Ratio of non-performing assets to total assets .45% .42%
Interest on non-performing loans that would have been included in income
$ 18 $ 19
======================================
Interest on non-performing loans that was included in income $ 0 $ 0
======================================
</TABLE>
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 collateralized 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 finish the project. Since December 31, 1998, the borrower has made
payments of $500,000 and has agreed to the appointment of a receiver if the
borrower is unable to complete the project. Due to the loan to value ratio,
First Community expects no loss 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.
7
<PAGE>
Allocation of the Allowance for Loan Losses:
<TABLE>
<CAPTION>
At December 31
----------------------------------------------------------------------
1998 1997
----------------------------------------------------------------------
Percentage of Percentage of
Loans to Total Loans to Total
Amount Loans Amount Loans
---------------------------------------------------------------------
(Dollars in 000's)
<S> <C> <C> <C> <C>
Real estate mortgage loans $134 36.2% $162 36.3%
Construction and land development 176 8.2 68 8.5
Commercial loans 235 25.4 196 22.4
Installment loans 406 26.5 418 28.6
Tax-exempt loans and leases 4 3.7 4 4.2
---------------------------------------------------------------------
$955 100.0% $848 100.0%
=====================================================================
</TABLE>
Summary of Loan Loss Experience:
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------------------
1998 1997
----------------------------------
(Dollars in 000's)
<S> <C> <C>
Balance at January 1 $ 848 $ 644
Chargeoffs:
Real estate mortgage loans (16)
Commercial loans (73) (20)
Installment loans (78) (44)
----------------------------------
Total Chargeoffs (151) (80)
----------------------------------
Recoveries:
Commercial 3 17
Installment 16 12
----------------------------------
Total Recoveries 19 29
----------------------------------
Net Chargeoffs (132) (51)
----------------------------------
Provision for loan losses 239 255
----------------------------------
Balance at December 31 $ 955 $ 848
==================================
Average loans during the year $86,185 $ 73,048
Ratio of net chargeoffs to total average loans
outstanding during the year .15% .07%
</TABLE>
8
<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:
December 31
---------------------------------
1998 1997
--------------------------------
(Dollars in 000's)
Available for sale at fair value:
State and municipal obligations $6,097 $1,371
Corporate obligations 950 1,400
--------------------------------
7,047 2,771
--------------------------------
Held to maturity at amortized cost:
State and municipal obligations 1,033 1,709
--------------------------------
1,033 1,709
FHLB stock 778 778
--------------------------------
Total $8,858 $5,258
================================
At December 31, 1998, the amortized cost of securities available for sale was
$7,016,000 and the related gross unrealized gains and losses 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 held to maturity 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.
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.
<TABLE>
<CAPTION>
Corporate State and Municipal
Obligations Obligations
---------------------------- -----------------------------
Amount Yield Amount Yield
-------------- ------------- -------------- --------------
(Dollars in 000's)
<C> <C> <C> <C> <C>
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%
============== ==============
</TABLE>
(1) Available for sale amounts shown in the maturity distribution table are at
amortized cost for computation of yields.
9
<PAGE>
Sources of Funds
Savings deposits are the primary source of First Community's funds for use in
lending and for other general business purposes. In addition to savings
deposits, certificates of deposit obtained on a bid basis and 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 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, limitations 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 $4.8 million from the FHLB
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
10
<PAGE>
Trafalgar, Franklin, and Greenwood, Indiana in Johnson County, a branch at a
retirement center in Indianapolis, Indiana, and two branches in North Vernon,
Indiana in Jennings County. First Community anticipates opening a branch in
Whiteland (Johnson County) and Taylorsville (Bartholemew County) during 1999.
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. First Community also competes with mortgage banking companies,
consumer finance companies, and certain governmental agencies.
Regulation and Supervision of the Registrant
The Registrant 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
Registrant is examined, regulated and supervised by the Federal Reserve and is
required to file annual reports and other information regarding its business and
operations and the business and operations of its subsidiaries with the Federal
Reserve. The Federal Reserve has the authority to issue cease and desist orders
against a bank holding company if it determines that activities represent an
unsafe and unsound practice or a violation of law.
Under the BHCA, a bank holding company is, with limited exceptions, prohibited
from acquiring direct or indirect ownership or control of voting stock of any
company which is not a bank and from engaging in any activity other than
managing or controlling banks. A bank holding company may, however, own shares
of a company engaged in activities which the Federal Reserve has determined to
be so closely related to banking or managing or controlling banks as to be a
proper incident thereto.
Acquisitions by the Registrant of banks and savings associations are also
subject to regulation. Any acquisition by the Registrant 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 Registrant
to be acquired by bank holding companies, located in any state in the United
States provided that the Registrants' 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.
11
<PAGE>
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 Registrant 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 Registrant. The principal source of the Registrant'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 Registrant or any of its subsidiaries, or investments in the stock
or other securities as collateral for loans.
The commercial banking business is affected not only by general economic
conditions but also by the monetary policies of the Federal Reserve. The
instruments of monetary policy employed by the Federal Reserve include the
discount rate on member bank borrowing and changes in reserve requirements
against member bank deposits. Federal Reserve monetary policies have had a
significant effect on the operating results of commercial banks in the past and
are expected to continue to do so in the future. In view of changing conditions
in the national economy and in the money markets, as well as the effect of
actions by monetary fiscal authorities, including the Federal Reserve, no
prediction can be made as to possible future changes in interest rates, deposit
levels, loan demand or the business and earnings of the Registrant 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 Registrant 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 December 31, 1998,
First Community had a leverage ratio and tangible equity ratio of 7.5% based on
leverage and tangible capital of $8,145,000 and a total capital to risk-based
assets ratio of 10.0%.
Item 2. Properties
First Community leases its home office at 210 East Harriman, Bargersville,
Indiana, and its branch offices in Greenwood, Indiana and one of its branches in
Franklin, Indiana from FCREM. First Community also 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 Registrant 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 First Community's Offices, including land,
building, improvements, furniture, fixtures and equipment was $3.3 million.
Item 3. Legal Proceedings
The Registrant and First Community are a party to certain lawsuits arising in
the ordinary course of their business. The Registrant and First Community
believe that none of their current lawsuits would, if adversely determined, have
a material adverse effect on the Registrant and First Community.
12
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders through the solicitation
of proxies or otherwise, during the quarter ended December 31, 1998.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The following table sets forth the high and low bid prices for the Registrant's
common stock for the quarters during the years indicated, based upon information
obtained by management of the Registrant from the only broker known by the
Registrant to deal in the Registrant's common stock, and on other price
information made available to management of the Registrant. Management of the
Registrant has not verified the accuracy of the following information. There is
no established public trading market for the Registrant's common stock. The
common stock is traded on a limited basis and many trades have involved
privately negotiated transactions. As a result, Registrant is not always aware
of the price at which trades occur. The referenced prices may not reflect an
actual trading range and may reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not necessarily represent actual
transactions.
<TABLE>
<CAPTION>
Bid Price Per Share
---------------------------------------------------------------------
1998 1997
---------------------------------------------------------------------
High Low High Low
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Quarter
First Quarter $ 10.50 $ 10.00 $ 11.43 $ 10.48
Second Quarter 11.00 10.50 11.43 10.48
Third Quarter 11.00 10.50 11.43 10.48
Fourth Quarter 11.00 10.00 11.43 10.48
</TABLE>
The Registrant paid its first cash dividend of $.10 per share on March 15, 1997
to shareholders of record on January 1, 1997. On November 19, 1997, the Board of
Directors declared a 5% stock dividend payable on February 1, 1998. Any future
dividend payments by the Registrant will be dependent upon dividends paid by
First Community and subject to regulatory limitations. The price per share in
the above table has been restated to reflect the 1997 stock dividend.
The dividends which the Registrant may pay are restricted by Federal Reserve
Bank capital requirements and by Indiana law to retained earnings. The ability
of the Registrant to pay dividends to stockholders is dependent on dividends
received from First Community. First Community is restricted by Indiana law and
regulations of the Indiana Department of Financial Institutions and Federal
Deposit Insurance Corporation as to the maximum amount of dividends it may pay
to the balance of undivided profits, adjusted for defined bad debts and by the
Office of Thrift Supervision for the amount of the liquidation account
established at the time of its stock conversion. As a practical matter,
dividends are ordinarily restricted to a lesser amount because of the need to
maintain an adequate regulatory capital structure. At December 31, 1998, the
stockholder's equity of First Community was $8.1 million, of which a minimum of
$1.5 million was available for dividends.
The number of record holders of the Registrant's common stock as of March 18,
1999 was 274.
In February 1998, the Registrant granted options to purchase 11,000 shares of
common stock at an exercise price of $11.50 per share. These options vested at
the time of grant and expire in February 2008. The options were issued in
reliance upon Section 4(2) of the Securities Act of 1933. All other issuances of
unregistered securities were previously disclosed in Form 10-Q.
13
<PAGE>
Item 6. Selected Financial Data (dollars in thousands, except per share data)
<TABLE>
<CAPTION>
At December 31
-------------------------------------------------------------------------
1998 1997 1996 1995 1994
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Summary of Financial Condition Data:
Total assets $121,272 $98,740 $80,079 $71,393 $57,857
Loans, net 93,364 79,152 64,464 54,118 39,147
Cash and interest-bearing deposits 14,292 11,231 7,035 5,651 6,443
Securities including FHLB stock 8,857 5,258 5,705 7,016 9,812
Deposits 106,193 87,695 70,552 59,163 46,184
FHLB advances 4,753 2,930 2,379 4,603 5,314
Other borrowings 1,382 0 0 0 0
Stockholders' equity 8,486 7,550 6,886 6,442 6,145
Year Ended December 31
-------------------------------------------------------------------------
1998 1997 1996 1995 1994
-------------------------------------------------------------------------
Summary of Selected Operating Data:
Total interest income $8,420 $7,361 $6,158 $5,074 $3,255
Total interest expense 4,509 3,807 3,166 2,953 1,699
-------------------------------------------------------------------------
Net interest income 3,911 3,554 2,992 2,121 1,556
Provision for loan losses 239 255 219 208 418
-------------------------------------------------------------------------
Net interest income after provision for
loan losses 3,672 3,299 2,773 1,913 1,138
Total non-interest income 418 305 249 237 127
Total non-interest expense 2,937 2,490 2,565 1,863 1,723
-------------------------------------------------------------------------
Income (loss) before income taxes 1,153 1,114 457 287 (458)
Income taxes (benefit) 350 376 116 11 (281)
-------------------------------------------------------------------------
Net income (loss) $ 803 $ 738 $ 341 $ 276 $ (177)
=========================================================================
Basic earnings per share* $0.81 $ 0.75 $ 0.35 $ 0.29 $ (0.26)
Diluted earnings per share* $0.80 $ 0.74 $ 0.34 $ 0.28 $ (0.26)
Year Ended December 31
-------------------------------------------------------------------------
1998 1997 1996 1995 1994
-------------------------------------------------------------------------
Other Selected Data:
Return on average assets .77% .85% .46% .44% ( .38)%
Return on average equity 9.93 10.02 5.04 4.54 (4.48)
Average equity to average assets 7.75 8.45 9.14 9.64 8.57
Dividend payout ratio 13.33
</TABLE>
* Net income per share has been restated to reflect the 1994 stock dividend,
the 1995 stock split and the stock dividend declared in 1997.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
First Community is a subsidiary of the Registrant and operates as an Indiana
commercial bank. On May 26, 1998, the Registrant formed a new subsidiary, First
Community Real Estate Management, Inc. whose purpose is to purchase and lease
back to First Community properties currently owned by First Community thereby
allowing First Community to redeploy its capital to other uses. To that end, on
July 15, 1998, FCREM borrowed $800,000 at a rate of 1.125% under prime,
adjustable every 5 years for a term of 30 years, from another financial
institution in order to purchase the land and building of First Community's
Bargersville branch office at 210 E. Harriman Ave. in Bargersville, Indiana and
the land and building of its Banta Street office at 597 Banta Street in
Franklin, Indiana. On December 18, 1998, FCREM borrowed $416,000 at a rate of
7.25% with payments due in monthly installments through November 2003 with 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
14
<PAGE>
Road 135 North in Greenwood, Indiana. First Community will make monthly lease
payments to FCREM as lessee of these locations. These lease payments will be
sufficient to service the debt. As a bank holding company, the Registrant
depends upon the operations of its subsidiaries for all revenue and reports its
results of operations on a consolidated basis with its subsidiaries.
First Community's profitability depends primarily upon the difference between
the 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.
As discussed in the "Results of Operations", 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 tax-exempt holdings 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 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 in past years due to a net operating loss
carryforward. In addition, as the interest rates have declined on earning
assets, the rates in interest-bearing deposits have remained relatively constant
due to the competitive nature of the market in which First Community operates.
Results of Operations
The following discussion of Results of Operations is for the years 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 more fully
discussed 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 the same. 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 the same. 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 $14.7 million 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 $10.3 million 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.
15
<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, 1998 and 1997.
<TABLE>
<CAPTION>
1998 1997
--------------------------------------- ---------------------------------------
Interest/ Interest/
Average Income Average Average Income Average
Balance Expense Rate Balance Expense Rate
-------------------------------------------------------------------------------
(Dollars in Thousands on Fully Taxable Equivalent Basis)
<S> <C> <C> <C> <C> <C> <C>
Assets:
Interest-bearing deposits $ 7,838 $ 328 4.2% $ 5,848 $ 230 3.9%
Investment securities:1
Taxable 3,135 307 9.8 2,604 245 9.4
Tax-exempt 3,144 179 5.7 2,505 143 5.7
-------------------------- --------------------------
Total investment securities 6,279 486 7.7 5,109 388 7.6
-------------------------- --------------------------
Loans:2
Commercial 29,567 2,841 9.6 25,794 2,589 10.0
Real estate mortgage 27,042 2,275 8.4 21,043 1,887 9.0
Installment 26,509 2,343 8.8 23,825 2,161 9.1
Tax-exempt loans and leases 3,067 257 8.4 2,386 192 8.0
-------------------------- --------------------------
Total loans 86,185 7,716 9.0 73,048 6,829 9.3
-------------------------- --------------------------
Total earning assets 100,302 8,530 8.5 84,005 7,447 8.9
------------ ------------
Allowance for loan losses (915) (720)
Cash and due from banks 1,112 985
Premises and equipment 2,550 1,876
Other assets 1,366 980
------------- -------------
Total assets $104,415 $87,126
============= =============
Liabilities:
Interest-bearing deposits:
NOW accounts $ 10,458 276 2.6 $ 9,281 243 2.6
Savings 19,971 870 4.4 15,655 694 4.4
Certificates of deposit and other
time 54,495 3,159 5.8 46,958 2,758 5.9
-------------------------- --------------------------
Total interest-bearing deposits 84,924 4,305 5.1 71,894 3,695 5.1
FHLB advances 3,022 175 5.8 1,830 112 6.1
Other borrowings 399 29 7.3
-------------------------- --------------------------
------------
Total interest-bearing liabilities 88,345 4,509 5.1 73,724 3,807 5.2
------------ ------------
Noninterest-bearing demand deposits
7,361 5,587
Other liabilities 621 451
------------- -------------
Total liabilities 96,327 79,762
Stockholders' equity 8,088 7,364
------------- -------------
Total liabilities and
stockholders' equity $104,415 $87,126
============= =============
Net interest income $ 4,021 4.0%3 $3,640 4.3%3
============ ============
Adjustments to convert tax-exempt
investment securities to fully
taxable equivalent basis, using
marginal rate of 34% after
adjustment for effect of
non-deductible interest expense
attributed to such assets. $ 110 $ 86
============ ============
</TABLE>
1 The average balances of investment securities, including available for sale
securities, are computed based 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.
16
<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.
<TABLE>
<CAPTION>
Increase (Decrease) in Net Interest Income
-----------------------------------------------------
Year ended December 31, 1998 compared to year ended Net Due to Due to
December 31, 1997 Change Rate Volume
-----------------------------------------------------
<S> <C> <C> <C>
Interest-earning assets: (Dollars in 000's)
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 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 ended Net Due to Due to
December 31, 1996 Change Rate Volume
-----------------------------------------------------
Interest-earning assets: (Dollars in 000's)
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
=====================================================
</TABLE>
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 rates 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 balance 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 19.86% and 24.26% at December 31, 1998 and 1997,
respectively. This interest-rate gap represents substantial risk for First
Community in an environment of rising interest rates. A negative interest-rate
gap means First Community's earnings are vulnerable during periods of rising
interest rates because during such periods the interest expense paid
17
<PAGE>
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. To this end, 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 51.0% of
total loans invested in installment and commercial loans 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. At December 31,
1998, First Community's ratio of non-performing assets to total assets was .45%
compared to .42% at December 31, 1997.
The primary goal in the management of liabilities has been to extend the
maturities and 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.
The following tables illustrate the interest-rate sensitivity of
interest-earning assets and interest-bearing liabilities at December 31, 1998
and 1997. Mortgages which have adjustable or renegotiable interest rates are
shown as subject to change every one to three years based upon the
contracted-for adjustment period. This schedule does not reflect the effects of
possible prepayments on enforcement of due-on-sale clauses.
<TABLE>
<CAPTION>
At 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-earning 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 13,106 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>
18
<PAGE>
<TABLE>
<CAPTION>
December 31, 1997 Maturing or Repricing
--------------------------------------------------------------------
One Year 1 - 3 3 - 5 Over 5
or Less Years Years Years Total
--------------------------------------------------------------------
(Dollars in 000's)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Adjustable rate mortgages $ 13,323 $ 4,316 $ 4,615 $22,254
Fixed rate mortgages 3,992 1,971 1,901 $ 7,222 15,086
Commercial loans 11,622 1,309 687 639 14,257
Consumer loans 9,383 10,813 4,023 707 24,926
Tax-exempt loans and leases 24 3,353 3,377
Investments 1,295 1,893 238 1,054 4,480
FHLB stock 778 778
Interest-bearing deposits 10,298 10,298
--------------------------------------------------------------------
Total interest-earning assets 50,715 20,302 11,464 12,975 95,456
--------------------------------------------------------------------
Interest-bearing liabilities:
Fixed maturity deposits 38,544 11,283 1,919 51,746
Other deposits 35,949 35,949
FHLB advances 177 794 1,725 234 2,930
--------------------------------------------------------------------
Total interest-bearing liabilities 74,670 12,077 3,644 234 90,625
--------------------------------------------------------------------
Excess (deficiency) of interest-earning
assets over interest-bearing liabilities (23,955) 8,225 7,820 12,741 4,831
Cumulative excess (deficiency) of
interest-earning assets over
interest-bearing liabilities (23,955) (15,730) (7,910) 4,831
Cumulative ratio at December 31, 1997 as a
percent of total assets (24.26)% (15.93)% (8.01)% 4.89%
</TABLE>
19
<PAGE>
The following tables provide information about the Registrant's significant
financial instruments at December 31, 1998 and 1997 that are sensitive to
changes in interest rates. The table presents principal cash flows and related
weighted average interest rates (on a tax equivalent basis) by expected maturity
dates.
<TABLE>
<CAPTION>
Maturing in Years Ending 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% 9.0% 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 5.6% 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>
20
<PAGE>
<TABLE>
<CAPTION>
Maturing in Years Ending December 31,
- ----------------------------------------------------------------------------------------------------------------------
Fair
1998 1999 2000 2001 2002 Thereafter Total Value
- ----------------------------------------------------------------------------------------------------------------------
(Dollars in 000's)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Investment securities
available for sale
Fixed rate $ 620 $1,043 $ 113 $ 109 $ 125 $ 761 $ 2,771 $ 2,771
Average interest rate 8.8% 10.3% 8.7% 9.6% 9.5% 10.3% 9.8%
Investment securities held to
maturity
Fixed rate 675 632 105 5 292 1,709 1,734
Average interest rate 5.4% 5.9% 6.9% 7.1% 7.2% 6.0%
Loans
Fixed rate 14,389 7,760 6,324 4,135 2,365 11,921 46,894 47,800
Average interest rate 9.7% 9.4% 9.1% 8.9% 8.7% 8.0% 9.0%
Variable rate 8,676 2,275 923 1,771 927 18,434 33,006 33,350
Average interest rate 10.3% 10.2% 9.6% 10.0% 9.6% 9.0% 9.5%
Liabilities
Deposits
NOW, Money Market and Savings
Deposits
Variable rate 28,325 28,325 28,325
Average interest rate 3.6% 3.6%
Certificates of Deposit
Fixed rate 38,544 8,711 2,572 1,120 799 51,746 52,997
Average interest rate 5.9% 6.0% 6.1% 5.9% 6.2% 6.0%
FHLB Advances
Fixed rate 177 156 638 122 1,603 234 2,930 2,908
Average interest rate 6.0% 6.0% 6.1% 6.0% 5.8% 5.9% 5.9%
</TABLE>
Deposit/Asset Base. First Community has experienced significant growth in
deposits and assets in the past five years. Management believes this growth can
be attributed to several factors, none of which can be singled out as the
predominant reason for the growth, but each of which is believed to have
contributed to the increase in assets from $57.9 million at December 31, 1994 to
$121.3 million at December 31, 1998 and deposits from $46.2 million at December
31, 1993 to $106.2 million at December 31, 1998. These factors include: (i)
increased population in the geographic area serviced; (ii) increased
per-household disposable income in the geographic area serviced; (iii) movement
of the home office of one of the locally owned banks away from the city in which
the Registrant is located; (iv) the acquisition of certain local financial
institutions by larger metropolitan area banks and the preference of certain
individuals in the service area for dealing with a locally owned institution;
and (v) the expansion into new communities with the opening of the Franklin,
Indianapolis and Trafalgar branches in 1992 and the opening of the North Vernon
branch in 1993. First Community also opened second branches in Franklin, Indiana
on October 31, 1996 and in North Vernon, Indiana on September 1, 1998.
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, have
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 it has adequate liquidity for long-term needs. Short-term
liquidity needs resulting from normal deposit/withdrawal functions are provided
by retaining a portion of cash generated from operations in a FHLB daily
investment account. This account acts as the short-term liquidity source while
providing interest income.
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, 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.
First Community is a member of the FHLB of Indianapolis. Through that
affiliation, First Community has the ability to borrow up to $10 million at
December 31, 1998 from the FHLB and the balance of its borrowings at December
31, 1998 was $4.8 million, an increase of $1.8 million from outstanding
borrowings at December 31, 1997.
On October 30, 1998, the Registrant issued rights and warrants to shareholders
to purchase one share of common stock of the Registrant 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 March 30, 1999 and the warrants will
not become exercisable until September 15, 1999. The net proceeds to the
Registrant from the sale of the stock, after deducting the expenses, were $
28,000, as of December 31, 1998. The purpose of the rights offering was to raise
additional capital for First Community to support additional growth and for
general corporate purposes.
In addition, on October 30, 1998, the Registrant commenced the offer and sale of
up to $1 million in unsecured convertible notes, of which $170,000 were sold, as
of December 31, 1998. 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 Registrant at the conversion price of $11.00 per share. The net
proceeds of this offering will be used to provide capital to FCREM to acquire
and lease branch facilities to First Community and to provide additional capital
to First Community to support asset growth.
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.
22
<PAGE>
o 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.
o 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.
o 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.
o 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.
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
23
<PAGE>
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 Registrant 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 Registrant's assets and liabilities
are critical to the maintenance of acceptable performance levels.
Year 2000 Compliance
The Registrant's lending and deposit activities, like those of most financial
institutions, depend significantly upon computer systems. The Registrant 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
December 31, 1998, the Registrant has completed inventory of all hardware and
software systems and has made all mission critical classifications. The
Registrant has implemented both an employee awareness program and a customer
awareness program aimed at educating people about the efforts being made by the
Registrant as well as bank regulators regarding the Year 2000 Issue.
The Registrant's data processing is performed primarily by a third party
servicer. The Registrant was informed by its primary service provider that all
reprogramming efforts were completed at December 31, 1998, allowing the
Registrant adequate time for testing. The Registrant expects to complete testing
by March 31, 1999.
The Registrant also uses software and hardware which are covered under
maintenance agreements with third party vendors. Consequently, the Registrant is
dependent on the vendors to conduct its business. The Registrant has contacted
each vendor to request time tables for Year 2000 compliance and the expected
costs, if any, to be passed along to the Registrant. Most of the Registrant's
vendors have provided responses as to where they stand regarding Year 2000
readiness. Those who have not responded to the Registrant's status requests are
being contacted again. Depending on the responses received from the third party
vendors, the Registrant 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 Registrant's own systems and
those of its service providers, the Registrant could be affected by the Year
2000 problems affecting any of its depositors or borrowers. Such problems could
include delayed loan payments due to Year 2000 problems affecting the borrower.
Selected borrowers have been sent questionnaires to assess their readiness. The
Registrant 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
Registrant is ultimately required to purchase replacement computer systems,
programs and equipment, or to incur substantial expenses to make its current
systems, program and equipment Year 2000 compliant, its financial position and
results of operation could be adversely impacted. Amounts expensed in 1998 and
1997 were immaterial.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The information required for this item is included in Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Asset/Liability Management" on pages 17 to 21.
Item 8. Financial Statements and Supplementary Data.
The Registrant's Financial Statements are included in a separate section of this
Annual Report beginning on page F-1.
24
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None
PART III
The information required by Part III is hereby incorporated by reference from
the Registrant's definitive proxy statement to be filed with the Commission
pursuant to Regulation 14A within 120 days after December 31, 1998.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) 1. Financial Statements. The following information appears
elsewhere in this Annual Report on Form 10-K on the pages indicated
Page
Independent Auditor's Report on consolidated financial statements. F-1
Consolidated Balance Sheet at December 31, 1998 and 1997 F-2
Consolidated Statement of Income for the years ended December
31, 1998, 1997 and 1996. F-3
Consolidated Statement of Comprehensive Income for the years ended
December 31, 1998, 1997 and 1996. F-4
Consolidated Statement of Stockholders' Equity for the years ended
December 31, 1998, 1997 and 1996. F-5
Consolidated Statement of Cash Flows for the years ended
December 31, 1998, 1997 and 1996. F-6
Notes to consolidated financial statements. F-7
2. Exhibit Index. The following exhibits are included as part of this
Annual Report:
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. with 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).
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).
25
<PAGE>
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.
(Incorporated herein by reference to the Registration
Statement on Form SB-2 of First Community Bancshares,
Inc., Registration No. 333-63239, declared effective
October 30, 1998).
27 Financial Data Schedule (Included in electronic
version only).
26
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized, this 31st day of March, 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
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
Signatures and Title(s) Date
/s/ Albert R. Jackson , III March 31, 1999
- -----------------------------------------
Albert R. Jackson, III, Chief Executive
Officer and Director
/s/ Merrill M. Wesemann March 31, 1999
- -----------------------------------------
Merrill M. Wesemann, MD, Director and Chairman
/s/ Eugene W. Morris March 31, 1999
- -----------------------------------------
Eugene W. Morris, Director and President
/s/ Roy Martin Umbarger March 31, 1999
- -----------------------------------------
Roy Martin Umbarger, Director and Vice President
/s/ Frank D. Neese March 31, 1999
- -----------------------------------------
Frank D. Neese, Director and Secretary
/s/ Albert R. Jackson, Jr. March 31, 1999
- -----------------------------------------
Albert R. Jackson, Jr., Director
27
FIRST COMMUNITY BANCSHARES, INC.
AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 1998 and 1997
<PAGE>
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
Table of Contents
Page
- -------------------------------------------------------------------------------
Independent Auditor's Report F-1
Financial Statements
Consolidated balance sheet F-2
Consolidated statement of income F-3
Consolidated statement of comprehensive income F-4
Consolidated statement of stockholders' equity F-5
Consolidated statement of cash flows F-6
Notes to consolidated financial statements F-7
<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 (1,361) (1,361)
fractional shares
--------------------------------------------------------------------------------
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
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED
DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,186
<INT-BEARING-DEPOSITS> 13,106
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 7,047
<INVESTMENTS-CARRYING> 1,033
<INVESTMENTS-MARKET> 1,060
<LOANS> 94,319
<ALLOWANCE> 955
<TOTAL-ASSETS> 121,272
<DEPOSITS> 106,193
<SHORT-TERM> 172
<LIABILITIES-OTHER> 475
<LONG-TERM> 5,963
0
0
<COMMON> 6,869
<OTHER-SE> 1,617
<TOTAL-LIABILITIES-AND-EQUITY> 121,272
<INTEREST-LOAN> 7,651
<INTEREST-INVEST> 378
<INTEREST-OTHER> 391
<INTEREST-TOTAL> 8,420
<INTEREST-DEPOSIT> 4,305
<INTEREST-EXPENSE> 4,509
<INTEREST-INCOME-NET> 3,911
<LOAN-LOSSES> 239
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,938
<INCOME-PRETAX> 1,153
<INCOME-PRE-EXTRAORDINARY> 1,153
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 803
<EPS-PRIMARY> .81
<EPS-DILUTED> .80
<YIELD-ACTUAL> 4.0
<LOANS-NON> 17
<LOANS-PAST> 514
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 770
<ALLOWANCE-OPEN> 848
<CHARGE-OFFS> 151
<RECOVERIES> 19
<ALLOWANCE-CLOSE> 955
<ALLOWANCE-DOMESTIC> 955
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
