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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, 1997
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 IRS Employer Id. No.)
of Incorporation 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, 1998 $9,335,000
Shares of common stock outstanding as of March 18, 1998: 989,848
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.
1
FORM 10-K TABLE OF CONTENTS
Page
Forward Looking Statement 3
PART I
Item 1. Business 3
Item 2. Properties 13
Item 3. Legal Proceedings 13
Item 4. Submission of Matters to a Vote of Security Holders 13
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters. 14
Item 6. Selected Financial Data 15
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 23
Item 8. Financial Statements and Supplementary Data 23
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 23
PART III
Item 10. Directors and Executive Officers of the Registrant 23
Item 11. Executive Compensation 23
Item 12. Security Ownership of Certain Beneficial Owners and
Management 23
Item 13. Certain Relationships and Related Transactions 23
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K 23
Signatures 25
2
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; regulatory changes; or unanticipated results in pending legal
proceedings.
PART I
ITEM 1. BUSINESS
GENERAL
First Community Bancshares, Inc. (the "Registrant") is 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.
At December 31, 1997, the Registrant had approximately $98.7 million of
assets, deposits of approximately $87.7 million and stockholders' equity of
approximately $7.6 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, 1997, First Community had 54 full
time equivalent employees. The Registrant has no full time 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.
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
LENDING ACTIVITIES
First Community's loans, before adjusting for direct loan origination costs
and the allowance for loan losses, totaled $79,900,000 at December 31, 1997.
Of this amount, approximately $46,894,000 or 58.69% represented fixed rate
loans and adjustable rate loans comprised $33,006,000 or 41.31%.
The following table sets forth information concerning the composition of First
Community's loan portfolio in dollar amounts and percentages.
At December 31
---------------------------------------
1997 1996
------------------ ------------------
Percent of Percent of
Amount Total Amount Total
------ ---------- ------ ----------
(Dollars in 000's)
TYPE OF LOAN
Real estate loans
Residential mortgages
(1-4 single family homes) $28,971 36.60% $22,675 35.17%
Multi-family residential mortgages 335 .52
Construction and land development 6,773 8.55 3,621 5.62
Commercial loans 17,883 22.59 17,401 26.99
Installment loans 22,896 28.93 19,084 29.60
Tax-exempt loans and leases 3,377 4.27 1,922 2.99
------- ------ ------- ------
Loans 79,900 100.94 65,038 100.89
Allowance for losses (848) (1.07) (644) (1.00)
Deferred loan origination costs 100 .13 70 .11
------- ------ ------- ------
Loans, net $79,152 100.00% $64,464 100.00%
======= ====== ======= ======
The following table sets forth certain information at December 31, 1997,
regarding the dollar amount of loans maturing in First Community's loan
portfolio based on contractual maturities. Demand loans having no stated
schedule of repayments and no stated maturity and overdrafts are reported as
due in one year or less. This schedule does not reflect the effects of
possible prepayments or enforcement of due-on-sale clauses. Management
expects prepayments will cause actual maturities to be shorter. Certain
mortgage loans such as construction loans and second mortgage loans are
included in the commercial and installment loan totals below. In addition,
commercial real estate loans are included in mortgage loans below.
Remaining Maturities
--------------------------------------------------------
Balance
Outstanding at
December 31, One Year Over One Year
1997 or Less To Five Years Over Five Years
--------------------------------------------------------
(Dollars in 000's)
Real estate loans $37,340 $7,719 $ 8,151 $21,470
Commercial loans 14,257 7,902 3,307 3,048
Installment loans 24,926 7,420 15,022 2,484
Tax-exempt loans and leases 3,377 24 3,353
------- ------- ------- -------
Total $79,900 $23,065 $26,480 $30,355
======= ======= ======= =======
4
The following table sets forth, as of December 31, 1997, the dollar amount of
all loans maturing after December 31, 1998 showing those having a fixed
interest rate and floating or adjustable interest rates.
Floating or
Fixed Rate Adjustable Rate
---------- ---------------
(Dollars in thousands)
TYPE OF LOAN
Real estate loans $15,086 $22,254
Commercial loans 5,616 8,641
Installment loans 22,815 2,111
Tax-exempt loans and leases 3,377 0
------- -------
46,894 33,006
Less amount due within one year 14,389 8,676
------- -------
Loans due after one year $32,505 $24,330
======= =======
The original contractual loan payment period for adjustable interest rate
residential loans originated by First Community normally ranges from 15 to 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
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 on
September 24, 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 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 92.1% of
First Community's total interest income for the year ended December 31, 1997.
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
The following table summarizes nonperforming assets as of the dates indicated.
At December 31
------------------
1997 1996
-------- --------
(Dollars in 000's)
Nonaccrual loans $204 $ 99
Restructured loans
Past-due loans 90 days
or more (interest accruing) 120
---- ----
Total non-performing loans 324 99
Real estate owned 79 140
Other repossessed assets 9 14
---- ----
Total non-performing assets $412 $253
==== ====
Ratio of non-performing assets to
total assets .42% .32%
Interest on non-performing loans that
would have been included in income $ 19 $ 24
==== ====
Interest on non-performing loans that
was included in income $ 0 $ 0
==== ====
At December 31, 1997, no loans were identified as impaired by management.
Loans are considered to be impaired when it becomes probable that First
Community will be unable to collect all amounts due according to the
contractual terms of the loan agreement.
In banking, loan losses are one of the costs of doing business. Although
First Community's management emphasizes the early detection and chargeoff of
loan losses, it is inevitable that at any time certain losses exist in the
portfolio which have not been specifically identified. Accordingly, the
provision for loan losses is charged to earnings on an anticipatory basis, and
recognized loan losses are deducted from the allowance so established. Over
time, all net loan losses must be charged to earnings. During the year, an
estimate of the loss experience for the year serves as a starting point in
determining the appropriate level for the provision. However, the amount
actually provided in any period may be greater or less than net loan
chargeoffs, based on management's judgment as to the appropriate level of the
allowance for loan losses. The determination of the adequacy of the allowance
for loan loss is based on management's continuing review and evaluation of the
loan portfolio, and its judgment as to the impact of current economic
conditions on the portfolio. The evaluation by management includes
consideration of past loan loss experience, changes in the composition of the
loan portfolio and the current condition and amount of loans outstanding.
The allowance for loan losses increased during the year ended December 31,
1997 compared to the year ended December 31, 1996 primarily because of the
growth in loans and a change in the composition of the loan portfolio. During
1997, First Community made a $255,000 provision for loan losses due primarily
to growth in loans and a change in the mix of the loan portfolio.
7
Allocation of the Allowance for Loan Losses:
At December 31
-------------------------------------------
1997 1996
---------------------- ---------------------
Percentage of Percentage of
Loans to Total Loans to Total
Amount Loans Amount Loans
------ -------------- ------ --------------
(Dollars in 000's)
Real estate mortgage loans $162 36.3% $139 35.4%
Construction and land development 68 8.5 32 5.6
Commercial loans 196 22.4 171 26.7
Installment loans 418 28.6 300 29.3
Tax-exempt loans and leases 4 4.2 2 3.0
---- ----- ---- -----
$848 100.0% $644 100.0%
==== ===== ==== =====
Summary of Loan Loss Experience:
Year Ended December 31
----------------------
1997 1996
-------- ------
(Dollars in 000's)
Balance at January 1 $ 644 $ 518
Chargeoffs:
Real estate mortgage loans (16) (2)
Commercial loans (20) (30)
Installment loans (44) (79)
------- -------
Total Chargeoffs (80) (111)
Recoveries:
Commercial 17 8
Installment 12 10
------- -------
Total Recoveries 29 18
------- -------
Net Chargeoffs (51) (93)
------- -------
Provision for loan losses 255 219
------- -------
Balance at December 31 $ 848 $ 644
======= =======
Average loans during the year $73,048 $59,861
Ratio of net chargeoffs to total
average loans outstanding during
the year .07% .16%
8
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
------------------
1997 1996
-------- --------
(Dollars in 000's)
Available for sale at fair value:
State and municipal obligations $1,371 $1,756
Corporate obligations 1,400 630
------ -----
2,771 2,386
------ -----
Held to maturity at amortized cost:
Federal agency mortgage pools 174
State and municipal obligations 1,709 2,367
------ -----
1,709 2,541
FHLB stock 778 778
------ -----
Total $5,258 $5,705
====== =====
At December 31, 1997, the amortized cost of securities available for sale was
$2,716,000 and the related gross unrealized gains were $55,000. At December
31, 1997, the fair value of securities held to maturity was $1,734,000 and the
related gross unrealized gains were $25,000. There were no unrealized losses
on securities at December 31, 1997.
As of December 31, 1997, there were no state and municipal obligations
representing more than 10% of shareholders' equity included in securities.
The following table sets forth the maturities of investment securities at
December 31, 1997 and the weighted-average yield (on a tax equivalent basis)
on such securities.
Corporate State and Municipal
Obligations Obligations
-------------------------------------
Amount Yield Amount Yield
------ ----- ------ -----
(Dollars in 000's)
Available for Sale:(1)
Maturities:
One year or less $ 450 10.00% $ 170 5.63%
Over 1 year to 5 years 950 10.32 425 9.33
Over 5 years to 10 years 180 10.63
Over 10 years 541 10.25
------- ------- -----
Total available for sale 1,400 10.21 1,316 9.41
------- ------- -----
Held to Maturity:
Maturities:
One year or less 675 5.44
Over 1 year to 5 years 742 6.04
Over 5 years to 10 years 292 7.18
Over 10 years
------- ------- -----
Total held to maturity 1,709 6.00
------- ------- -----
Total securities $ 1,400 10.21% $ 3,025 7.48%
======= ======= =====
- --------------
(1) Available for sale amounts shown in the maturity distribution table are at
amortized cost for computation of yields.
9
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 although First Community does obtain
deposits on a bid basis from customers or potential customers wishing to
deposit amounts of at least $100,000. Approximately $10,519,000 or 12% of the
deposits of First Community at December 31, 1997 was represented by
certificates of deposit provided by a limited number of depositors on a bid
basis. These deposits are short term in nature, and because such deposits are
acquired through bid, they may be lost to a higher bidder.
The following table indicates the amount of certificates of deposit of
$100,000 or more by time remaining until maturity at December 31, 1997 (in
000's).
MATURITY PERIOD
Three months or less $ 1,808
Greater than three months through six months 1,524
Greater than six months through twelve months 5,273
Over twelve months 1,914
-------
Total $10,519
=======
Interest earned on statement savings accounts is paid from the date of deposit
to the date of withdrawal, compounded and credited monthly. Interest earned
on money market demand deposit accounts is compounded and credited monthly.
The interest rate on these accounts is established by First Community.
In recent years, many deposits in long-term fixed-rate accounts have been
withdrawn prior to maturity or such certificates have not been renewed at
maturity due to the more attractive rates offered on various money market
accounts. Early withdrawal penalties are 30 days' interest on accounts
maturing in one year or less and 90 days interest on accounts maturing in
greater than one year.
BORROWINGS. The FHLB of Indianapolis functions as a central credit facility
providing credit for member financial institutions. As a member, First
Community is required to own capital stock in the FHLB and is authorized to
apply for advances on the security of such stock and certain of its home
mortgages and other assets (principally, securities which are obligations of,
or guaranteed by, the United States) provided certain standards related to
creditworthiness have been met. Advances are made pursuant to several
different credit programs. Each credit program has its own interest rate and
range of maturities. The FHLB prescribes the acceptable uses to which the
advances pursuant to each program may be made as well as limitations on the
amounts of advances. Acceptable uses prescribed by the FHLB have included
expansion of residential mortgage lending and meeting short-term liquidity
needs. Depending on the program, limitation on the amounts of advances are
based either on a fixed percentage of a member's net worth or on the FHLB's
assessment of the member's creditworthiness. The FHLB is required to review
its credit limitations and standards at least once every six months. First
Community had outstanding borrowings of $2,930,000 from the FHLB as of
December 31, 1997.
10
SERVICE AREA
First Community's primary service areas are Johnson County and Jennings
County, Indiana. These areas are among the most affluent and rapidly growing
areas of Indiana. The major portion of First Community's customers reside in
Johnson County, particularly in the Bargersville, Franklin and Greenwood
areas, which account for about one-half of the county's population, according
to the 1990 U.S. Census. First Community has branches in Trafalgar, Franklin,
and Greenwood, Indiana in Johnson County, a branch at a retirement center in
Indianapolis, Indiana, and a branch in North Vernon, Indiana in Jennings
County.
COMPETITION
The banking business is highly competitive in Johnson County, which is First
Community's primary market, where it competes with 14 commercial banks, 3
savings banks, and 2 credit unions. In Jennings County, First Community
competes with 5 commercial banks, one savings bank and 2 credit unions. To a
lesser extent, First Community competes with mortgage banking companies,
consumer finance companies, and certain governmental agencies.
REGULATION AND SUPERVISION OF THE 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
11
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.
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%. First Community had a
leverage ratio and tangible equity ratio of 7.4% based on leverage and
tangible capital of $7,291,000 at December 31, 1997. First Community had a
total capital to risk-based assets ratio of 10.1%.
12
ITEM 2. PROPERTIES
First Community owns its home office at 210 East Harriman, Bargersville,
Indiana, and its branch offices at 298 State Road 135 North in Greenwood,
Indiana and at 21 Madison Avenue in North Vernon, Indiana. At December 31,
1997, the net carrying value of First Community's Offices, including land,
building, improvements, furniture, fixtures and equipment was $1,945,000.
First Community leases space for its branch offices in Franklin, Indianapolis,
and Trafalgar, Indiana under leases expiring between May, 1998 and March,
1999.
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.
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, 1997.
13
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.
BID PRICE PER SHARE
------------------------------------
1997 1996
---- ----
HIGH LOW HIGH LOW
---- --- ---- ---
QUARTER
First Quarter $11.43 $10.48 $10.48 $9.52
Second Quarter 11.43 10.48 10.48 9.52
Third Quarter 11.43 10.48 11.43 9.52
Fourth Quarter 11.43 10.48 11.43 10.48
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, 1997, the stockholder's equity of First Community was $7,324,000,
of which a minimum of $1,080,000 was available for dividends.
The number of record holders of the Registrant's common stock as of March 18,
1998 was 290.
The Registrant did not issue any unregistered shares of common stock during
the year ended December 31, 1997.
14
ITEM 6. SELECTED FINANCIAL DATA (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
At December 31
-----------------------------------------------
1997 1996 1995 1994 1993
------- -------- -------- -------- --------
Summary of Financial Condition Data:
Total assets $98,740 $80,079 $71,393 $57,857 $43,617
Loans, net 79,152 64,464 54,118 39,147 26,879
Cash and interest-bearing deposits 11,231 7,035 5,651 6,443 5,441
Securities including FHLB stock 5,258 5,705 7,016 9,812 9,909
Deposits 87,695 70,552 59,163 46,184 36,616
FHLB advances 2,930 2,379 4,603 5,314 2,507
Long-term debt 0 0 0 0 450
Stockholders' equity 7,550 6,886 6,442 6,145 3,818
Year Ended December 31
-----------------------------------------------
1997 1996 1995 1994 1993
------- -------- -------- -------- --------
Summary of Selected Operating Data:
Total interest income $7,361 $6,158 $5,074 $3,255 $2,583
Total interest expense 3,807 3,166 2,953 1,699 1,308
------ ------ ------ ------ ------
Net interest income 3,554 2,992 2,121 1,556 1,275
Provision for loan losses 255 219 208 418 92
------ ------ ------ ------ ------
Net interest income after provision
for loan losses 3,299 2,773 1,913 1,138 1,183
Total non-interest income 305 249 237 127 96
Total non-interest expense 2,490 2,565 1,863 1,723 1,085
------ ------ ------ ------ ------
Income (loss) before income taxes 1,114 457 287 (458) 194
Income taxes (benefit) 376 116 11 (281) 30
------ ------ ------ ------ ------
Net income (loss) $ 738 $ 341 $ 276 $ (177) $ 164
====== ====== ====== ====== ======
Basic earnings per share* $ 0.75 $ 0.35 $ 0.29 $(0.26) $ 0.25
Diluted earnings per share* $ 0.74 $ 0.34 $ 0.28 $(0.26) $ 0.24
Year Ended December 31
-----------------------------------------------
1997 1996 1995 1994 1993
------- -------- -------- -------- --------
Other Selected Data:
Return on average assets .85% .46% .44% (.38)% .46%
Return on average equity 10.02 5.04 4.54 (4.48) 4.35
Average equity to average assets 8.45 9.14 9.64 8.57 10.53
Dividend payout ratio 13.33
* 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 the only subsidiary of the Registrant and operates as an
Indiana commercial bank. As a bank holding company, the Registrant depends
upon the operations of its subsidiary for all revenue and reports its results
of operations on a consolidated basis with its subsidiary.
First Community's profitability depends primarily upon the difference between
income on its loans and investments and the cost of its deposits and
borrowings. This difference is referred to as the spread or net interest
margin. The difference between the amount of interest earned on loans and
investments and the interest incurred on deposits and borrowings is referred
to as net interest income. Interest income from loans and investments is a
function of the amount of loans and investments outstanding during the period
and the interest rates earned. Interest expense
15
related to deposits and borrowings is a function of the amount of deposits and
borrowings outstanding during the period and the interest rates paid.
RESULTS OF OPERATIONS
The following discussion of Results of Operations covers the results of
operations for the years ended December 31, 1997, 1996 and 1995.
Net income for the year ended December 31, 1997 was $738,000 compared to
$341,000 and $276,000 for the years ended December 31, 1996 and 1995,
respectively. Earnings increased from 1995 to 1997 primarily as a result of
growth in First Community's loans and certain other items more fully discussed
below.
The increase in net interest income of $562,000 in 1997 resulted primarily
from an increase in lending and the income derived therefrom. Net loans
outstanding increased $14,688,000 in 1997, with the most significant areas of
growth being in mortgage and construction loans. The increase in provision
for loan losses from $219,000 to $255,000 is a reflection of an increase in
the loan portfolio and not a deterioration of the same. The increase in
income from service fees of $69,000 resulted from a significant increase in
the number of deposit accounts and fees associated with the same. The
decrease in deposit insurance expense of $408,000 was due to the FDIC special
assessment for all institutions with SAIF insured deposits which the Bank
incurred in 1996 only. The assessment amounted to additional expense in 1996
of $344,000. Income taxes increased $260,000 because of an increase in First
Community's overall taxable income.
The increase in net interest income of $871,000 in 1996 resulted primarily
from an increase in lending and the income derived therefrom. Net loans
outstanding increased $10,346,00 in 1996, with growth in the majority of the
lending areas. The increase in provision for loan losses from $208,000 to
$219,000 is a reflection of an increase in the loan portfolio and not a
deterioration of the same. The increase in income from service fees of
$51,000 resulted from a significant increase in the number of deposit accounts
and fees associated with the same. The increase in other expenses is
primarily attributable to the signing of the omnibus appropriations bill on
September 30, 1996, which imposed a FDIC special assessment for all
institutions with SAIF insured deposits. This assessment amounted to $344,000
and is included in deposit insurance expense for the year ending December 31,
1996. Other expenses also increased due to overall growth. Income taxes
increased $105,000 in 1996 due to an increase in First Community's overall
taxable income.
Net interest income increased $565,000 in 1995 due primarily to an increase in
loans. The increase in net interest income resulted primarily from an
increase in lending and the income derived therefrom. Net loans outstanding
increased $14,971,000 in 1995, with the most significant areas of growth being
in commercial and installment lending. The decrease in provision for loan
loss from $418,000 to $208,000 is a reflection of the increase in the quality
of the loan portfolio and a decrease in loan charge offs. The increase in
income from other service fees of $55,000 resulted from a significant increase
in the number of deposit accounts and fees associated with the same. In
addition, other income increased $43,000 due to the settlement of a suit with
a former provider of services. First Community owned a parcel of land in
Trafalgar, Indiana and sold this for a gain of $22,000 in March of 1995. The
increases in other expenses are a direct result of the overall growth of First
Community. Legal and professional fees decreased $124,000 due to a decrease
in the number and scope of legal matters in 1995. Income taxes increased
$292,000 in 1995 because of an increase in First Community's overall taxable
income.
16
The following table sets forth the average balance sheet amounts, the related
interest income or expense and average rates earned or paid for the years
ended December 31, 1997 and 1996.
1997 1996
--------------------------------------------------------
Interest/ Interest/
Average Income Average Average Income Average
Balance Expense Rate Balance Expense Rate
--------------------------------------------------------
(Dollars in Thousands on Fully Taxable Equivalent Basis)
Assets:
Interest-bearing deposits $ 5,848 $ 230 3.9% $ 5,287 $ 208 3.9%
Investment securities:(1)
Taxable 2,604 245 9.4 2,972 259 8.7
Tax-exempt 2,505 143 5.7 2,959 168 5.7
------- ------- ------- -------
Total investment securities 5,109 388 7.6 5,931 427 7.2
------- ------- ------- -------
Loans:(2)
Commercial 25,794 2,589 10.0 20,989 2,112 10.1
Real estate mortgage 21,043 1,887 9.0 17,807 1,592 8.9
Installment 23,825 2,161 9.1 19,052 1,748 9.2
Tax-exempt loans and leases 2,386 192 8.0 2,013 151 7.5
------- ------- ------- -------
Total loans 73,048 6,829 9.3 59,861 5,603 9.4
------- ------- ------- -------
Total earning assets 84,005 7,447 8.9 71,079 6,238 8.8
------- -------
Allowance for loan losses (720) (569)
Cash and due from banks 985 838
Premises and equipment 1,876 1,458
Other assets 980 1,192
------- -------
Total assets $87,126 $73,998
======= =======
Liabilities:
Interest-bearing deposits:
NOW accounts $ 9,281 $ 243 2.6 $ 7,719 $ 202 2.6
Savings 15,655 694 4.4 14,322 638 4.5
Certificates of deposit and
other time 46,958 2,758 5.9 36,480 2,106 5.8
------- ------- ------- -------
Total interest-bearing deposits 71,894 3,695 5.1 58,521 2,946 5.0
FHLB advances 1,830 112 6.1 3,503 220 6.3
------- ------- ------- -------
Total interest-bearing liabilities 73,724 3,807 5.2 62,024 3,166 5.1
------- -------
Noninterest-bearing demand deposits 5,587 4,875
Other liabilities 451 337
------- -------
Total liabilities 79,762 67,236
Stockholders' equity 7,364 6,762
------- -------
Total liabilities and stockholders'
equity $87,126 $73,998
======= =======
Net interest income $ 3,640 4.3%(3) $ 3,072 4.3%(3)
======= =======
Adjustments to convert tax-exempt
investment securities to fully
taxable equivalent basis, using
marginal rate of 34% after
adjustment for effect of
non-deductible interest expense
attributed to such assets. $ 86 $ 801
======= =======
(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.
17
CHANGES IN INTEREST INCOME AND EXPENSE COMPARING DECEMBER 31, 1997 AND 1996
AND DECEMBER 31, 1996 AND 1995. The following tables analyze the changes in
interest income and interest expense comparing the years ended December 31,
1997 and 1996 and December 31, 1996 and 1995. It distinguishes between the
changes due to differences in volume (outstanding balances), the changes due
to changes in interest rates, and changes attributable to both rate and
volume, which cannot be separately identified and have been allocated
proportionately to the change due to volume and the change due to rate.
Increase (Decrease) in Net Interest Income
------------------------------------------
Year ended December 31, 1997
compared to year Net Due to Due to
ended December 31, 1996 Change Rate Volume
------ ------ ------
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
====== ==== ======
Increase (Decrease) in Net Interest Income
------------------------------------------
Year ended December 31, 1996
compared to year Net Due to Due to
ended December 31, 1995 Change Rate Volume
------ ------ ------
Interest-earning assets: (Dollars in 000's)
Loans $1,131 $ (94) $1,225
Investment securities (145) 93 (238)
Interest-bearing deposits 38 0 38
------ ---- ------
Total 1,024 (1) 1,025
------ ---- ------
Interest-bearing liabilities:
Savings 152 (28) 180
Interest-bearing checking 46 (5) 51
Certificates of deposit (8) (105) 97
FHLB advances 22 (24) 46
------ ---- ------
Total 212 (162) 374
------ ---- ------
Net change in net interest income $ 812 $ 161 $ 651
====== ==== ======
ASSET/LIABILITY MANAGEMENT
One of the actions undertaken by First Community's management has been to
adopt asset/liability management policies in an attempt to reduce the
susceptibility of First Community's net interest spread to the adverse impact
of volatile interest by attempting to match maturities (or time-to-repricing)
of assets with maturities or repricing of liabilities and then actively
managing any mismatch. Accomplishing this objective requires attention to
both the asset and liability sides of the balance sheet. The balance between
maturity of assets and maturity of liabilities is measured by the
interest-rate gap.
At December 31, 1997, First Community's one-year cumulative interest-rate gap
as a percent of total assets was a negative 24.26%. This interest-rate gap
represents substantial risk for First Community in an environment of rising
interest rates. A negative interest-rate gap means First Community's earnings
are vulnerable to periods of rising interest rates because during such periods
the interest expense paid on liabilities will generally increase more rapidly
than the interest income earned on assets. Conversely, in a falling
interest-rate environment, the total expense paid on liabilities will
generally decrease more rapidly than the interest income earned on assets. A
positive interest-rate gap would have the opposite effect.
18
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, 1997, First Community had $40,779,000 or 51.04% of its total loan
portfolio invested in installment and commercial loans as compared to
$36,485,000 or 56.10% of total loans invested in installment and commercial
loans at December 31, 1996. Increasing short-term installment and commercial
loans increases the overall risk of the loan portfolio. Such risk relates
primarily to collection and to the loans that often are secured by rapidly
depreciating assets. At December 31, 1997, First Community's ratio of
non-performing assets to total assets was .42% at December 31, 1997 and .32%
at December 31, 1996.
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. A substantial amount of deposits
have been obtained on a bid basis and those deposits have increased from
$7,355,000 at December 31, 1996 to $10,519,000 at December 31, 1997.
The following schedule illustrates the interest-rate sensitivity of
interest-earning assets and interest-bearing liabilities at December 31, 1997.
Mortgages which have adjustable or renegotiable interest rates are shown as
subject to change every one to three years based upon the contracted-for
adjustment period. This schedule does not reflect the effects of possible
prepayments on enforcement of due-on-sale clauses.
At December 31, 1997 Maturing or Repricing
One Year 1 - 3 3 - 5 Over 5
or Less Years Years Years Total
-------- ----- ----- ------ -----
(Dollars in 000's)
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%
19
The following table provides information about the Registrant's significant
financial instruments at December 31, 1997 that are sensitive to changes in
interest rates. The table presents principal cash flows and related weighted
average interest rates (on a tax equivalent basis) by expected maturity dates.
1998 1999 2000 2001 2002 Thereafter Total Fair Value
- -------------------------------------------------------------------------------------------------------
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%
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 $43,617,000 at December 31, 1993 to
$98,740,000 at December 31, 1997 and deposits from $36,616,000 at December
31, 1993 to $87,695,000 at December 31, 1997. 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 a second branch
in Franklin, Indiana on October 31, 1996.
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
20
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
decreased as a percentage of total assets primarily due to a shift to higher
yielding loans to improve margins. Management's goal is to maintain cash,
interest-bearing deposits and investments at a level sufficient to satisfy
needs for liquidity and other short-term obligations.
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, 1997 and December 31, 1996.
During 1997 and 1996, cash and cash equivalents which are defined as cash and
due from banks and interest-bearing time deposits increased $4,196,000 and
$1,384,000, respectively. Cash was provided primarily from a net increase in
deposit accounts of $17,143,000 in 1997 and $11,389,000 in 1996. Cash was
used primarily to fund a net increase in loans of $15,062,000 in 1997 and
$10,587,000 in 1996.
At December 31, 1997 and 1996, commitments to fund loan originations were
approximately $5,606,000 and $9,022,000, respectively. In the opinion of
management, First Community has sufficient cash flow and borrowing capacity to
meet funding commitments and to maintain proper liquidity levels based upon
First Community's favorable liquidity ratio and the ability to borrow from the
FHLB.
First Community is a member of the FHLB of Indianapolis. Through that
affiliation, First Community has the ability to borrow up to $21,259,000 at
December 31, 1997 from the FHLB and the balance of its borrowings at December
31, 1997 was $2,930,000, an increase of $551,000 from outstanding borrowings
at December 31, 1996.
First Community also depends upon major depositors to maintain its liquidity.
Deposits from major depositors are obtained on a bid basis which usually
results in First Community paying 10 to 15 basis points above the market rate
but 15 to 25 basis points below the cost of FHLB borrowings. Management
intends to decrease the dollar amount of such deposits in the future by
focusing on increasing the amount of deposits with lower interest rates.
ACCOUNTING MATTERS
The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standard ("SFAS") No. 123, Stock Based Compensation. In
December, 1994, the FASB decided to require expanded disclosures rather than
recognition of compensation cost for fixed, at the money, options rather than
recognition of compensation expense as was originally proposed in the ED. This
statement establishes a fair value based method of accounting for stock-based
compensation plans. The FASB encourages employers to recognize the related
compensation expense: however, employers are permitted to continue to apply
the provisions of Accounting Principles Board ("APB") Opinion No. 25.
Employers that choose to continue to follow APB No. 25 are required to
disclose in notes to the financial statements the pro forma effects on their
net income and earnings per share of the new accounting method. SFAS No. 123
is effective for the Registrant in 1996. The Registrant elected to continue
to apply the provisions of APB's Opinion No. 25 in accounting for its stock
option plans and accordingly made the disclosures required by SFAS No. 123 in
its 1997 financial statements.
In February 1997, the FASB issued SFAS No. 128, Earnings per Share,
establishing standards for computing and presenting earnings per share ("EPS")
and applies to entities with publicly held common stock or potential common
stock, such as the shares issuable under the stock option plan, as well as any
other entity that chooses to present EPS in its financial statements.
This Statement simplifies the current standards of APB Opinion No. 15,
Earnings per Share, and makes them comparable to international EPS standards.
It eliminates the presentation of primary EPS and requires presentation of
basic EPS (the principal difference being that common sock equivalents are not
considered in the computation of basic EPS). It also requires dual
presentation of basic and diluted EPS on the face of the income statement for
all
21
entities with complex capital structures and requires a reconciliation of
the numerator and denominator of the basic EPS computation to the numerator
and denominator of the diluted EPS computation.
Basic EPS includes no dilution and is computed by dividing income available to
common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if the potential common shares were exercised or converted into
common stock or resulted in the issuance of common stock that then shared in
the earnings of the entity. Diluted EPS is computed similarly to that of
fully diluted EPS pursuant to Opinion No. 15. The adoption of SFAS No. 128
did not have a material impact on financial position or results of operations.
During 1997, FASB issued SFAS No. 130, Reporting Comprehensive Income,
establishing standards for the reporting of comprehensive income and its
components in financial statements. SFAS No. 130 is applicable to all entities
that provide a full set of financial statements. Enterprises that have no
items of other comprehensive income in any period presented are excluded from
the scope of this Statement.
SFAS No. 130 is effective for interim and annual periods beginning after
December 15, 1997. Earlier application is permitted. The Registrant will
adopt SFAS No. 130 during fiscal year 1998.
Also in 1997, the FASB issued SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information, which supersedes SFAS No. 14, Financial
Reporting for Segments of a Business Enterprise. It establishes standards for
the way that public enterprises report information about operating segments in
annual financial statements and requires reporting of selected information
about operating segments in interim financial statements issued to the public.
It also establishes standards for disclosures regarding products and services,
geographic areas and major customers. SFAS No. 131 defines operating segments
as components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision-maker in
deciding how to allocate resources an in assessing performance.
This standard is effective for financial statement periods beginning after
December 15, 1997, and requires comparative information for earlier years to
be restated. Due to recent issuance of this standard, management has been
unable to fully evaluate the impact, if any, it may have on the Registrant's
future financial statement disclosures.
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and related data presented herein have been prepared
in accordance with generally accepted accounting principles. These principles
require the measurement of financial position and operating results in terms
of historical dollars, without considering changes in the relative purchasing
power of money over time due to inflation.
The primary assets and liabilities of the 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, like most companies, faces a potentially serious information
systems (computer) problem because many software applications and operational
programs written in the past may not properly recognize calendar dates
beginning in the year 2000. This problem could force computers to either shut
down or provide incorrect data or information. The Registrant has begun the
process of identifying the changes required to computer programs and hardware.
While the Registrant believes it is taking all appropriate steps to assure
year 2000 compliance, it is dependent on vendor compliance. The bulk of the
Registrant's computer processing is provided under contract by Computer
Services, Inc. ("CSI"). CSI expects to be in year 2000 compliance by December
31, 1998. The Registrant is requiring all software and systems vendors to
represent that the services and products provided are, or will be, year 2000
compliant, and will be testing compliance. The Registrant's expense in
connection with year 2000 compliance is not expected to be material to its
overall financial condition.
22
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The information required for this item is included in Item 7, "Discussion and
Analysis of Financial Condition and Results of Operations", under the caption
"Asset/Liability Management" on pages 18 to 20.
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.
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, 1997.
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, 1997 and 1996 F-2
Consolidated Statement of Income for the years ended
December 31, 1997, 1996 and 1995. F-3
Consolidated Statement of Changes In Stockholders' Equity
for the years ended December 31, 1997, 1996 and 1995. F-4
Consolidated Statement of Cash Flows for the years ended
December 31, 1997, 1996 and 1995. F-5
Notes to consolidated financial statements. F-6
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).
23
10.7 Agreement To Purchase Real Estate by and between First Community
Bank & Trust and Mutual Building and Loan Association (Incorporated
herein by reference to the Form 10-K of First Community Bancshares,
Inc. for the fiscal year ended December 31, 1993 and filed with the
Securities and Exchange Commission on March 30, 1994).
10.8 Deferred Director Fee Agreement by and between First Community Bank
& Trust Company and Merrill M. Wesemann Dated November 23, 1994
(Incorporated herein by reference to the Form 10-K of First
Community Bancshare, 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 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).
27 Financial Data Schedule (Included in electronic version only).
24
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 30th day of March, 1998.
FIRST COMMUNITY BANCSHARES, INC.
By: /s/ Albert R. Jackson , III
------------------------------------
Albert R. Jackson, III, Chief Executive
Officer, Chief Financial Officer,
Director and Secretary
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 30, 1998
- ---------------------------------------
Albert R. Jackson, III, Chief Executive
Officer, Chief Financial Officer,
Director and Secretary
/s/ Merrill M. Wesemann March 30, 1998
- ---------------------------------------
Merrill M. Wesemann, MD,
Director and Chairman
/s/ Eugene W. Morris March 30, 1998
- ---------------------------------------
Eugene W. Morris, Director and President
/s/ Roy Martin Umbarger March 30, 1998
- ---------------------------------------
Roy Martin Umbarger, Director and
Vice President
/s/ Frank D. Neese March 30, 1998
- ---------------------------------------
Frank D. Neese, Director
/s/ Albert R. Jackson, Jr. March 30, 1998
- ---------------------------------------
Albert R. Jackson, Jr., Director
25
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARY
TABLE OF CONTENTS
PAGE
- --------------------------------------------------------------------------
INDEPENDENT AUDITOR'S REPORT 1
FINANCIAL STATEMENTS
Consolidated balance sheet 2
Consolidated statement of income 3
Consolidated statement of changes in stockholders' equity 4
Consolidated statement of cash flows 5
Notes to consolidated financial statements 6
INDEPENDENT AUDITOR'S REPORT
To the Stockholders and
Board of Directors
First Community Bancshares, Inc.
Bargersville, Indiana
We have audited the accompanying consolidated balance sheet of First Community
Bancshares, Inc. and subsidiary as of December 31, 1997 and 1996, and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for each of the three years in the period ended December 31, 1997.
These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements described above present fairly, in
all material respects, the consolidated financial position of First Community
Bancshares, Inc. and subsidiary as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the three years
in the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
Indianapolis, Indiana
February 6, 1998
F-1
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
DECEMBER 31 1997 1996
- ------------------------------------------------------------------------------
Assets
Cash and due from banks $ 933,574 $ 1,059,473
Short-term interest-bearing deposits 10,297,654 5,975,098
-------------------------
Cash and cash equivalents 11,231,228 7,034,571
Investment securities
Available for sale 2,771,058 2,386,358
Held to maturity 1,708,679 2,540,803
-------------------------
Total investment securities 4,479,737 4,927,161
Loans 80,000,575 65,108,481
Allowance for loan losses (848,085) (644,132)
-------------------------
Net loans 79,152,490 64,464,349
Premises and equipment 1,944,779 1,791,873
Federal Home Loan Bank of
Indianapolis stock, at cost 777,800 777,800
Foreclosed real estate 78,636 139,500
Interest receivable 700,079 526,186
Other assets 374,965 417,268
-------------------------
Total assets $98,739,714 $80,078,708
=========================
LIABILITIES
Deposits
Noninterest bearing $ 7,623,814 $ 5,833,251
Interest bearing 80,071,501 64,719,018
-------------------------
Total deposits 87,695,315 70,552,269
Federal Home Loan Bank of
Indianapolis advances 2,929,789 2,378,830
Interest payable 250,617 187,083
Other liabilities 313,987 74,570
-------------------------
Total liabilities 91,189,708 73,192,752
-------------------------
COMMITMENTS AND CONTINGENT LIABILITIES
STOCKHOLDERS' EQUITY
Preferred stock, no-par value
Authorized and unissued-1,000,000 shares
Common stock, no-par par value
Authorized-4,000,000 shares
Issued and outstanding-989,848
and 942,825 shares 6,722,251 6,181,486
Retained earnings and contributed capital 794,796 692,760
Net unrealized gain on securities
available for sale 32,959 11,710
-------------------------
Total stockholders' equity 7,550,006 6,885,956
-------------------------
Total liabilities and stockholders' equity $98,739,714 $80,078,708
=========================
See notes to consolidated financial statements.
F-2
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31 1997 1996 1995
- ----------------------------------------------------------------------------------
INTEREST INCOME
Loans, including fees $6,779,091 $5,564,766 $4,416,698
Securities
Taxable 183,260 202,022 188,212
Tax exempt 106,252 125,814 253,979
Deposits with financial institutions 230,410 207,940 170,432
Dividends 62,136 57,153 44,834
------------------------------------------
Total interest income 7,361,149 6,157,695 5,074,155
------------------------------------------
INTEREST EXPENSE
Deposits 3,695,491 2,945,818 2,755,847
Federal Home Loan Bank advances 111,425 219,980 197,750
------------------------------------------
Total interest expense 3,806,916 3,165,798 2,953,597
------------------------------------------
NET INTEREST INCOME 3,554,233 2,991,897 2,120,558
Provision for loan losses 255,000 219,000 207,500
------------------------------------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 3,299,233 2,772,897 1,913,058
------------------------------------------
OTHER INCOME
Fiduciary activities 26,509 27,353 21,453
Service charges on deposit accounts 253,207 184,400 132,926
Net realized gains (losses)
on securities 5,630 (13,553)
Other operating income 25,522 31,722 96,373
------------------------------------------
Total other income 305,238 249,105 237,199
------------------------------------------
OTHER EXPENSES
Salaries and employee benefits 1,236,794 1,012,761 838,495
Premises and equipment 301,262 212,847 178,143
Advertising 131,989 122,429 114,790
Data processing fees 232,797 191,698 175,822
Deposit insurance expense 45,178 453,368 106,781
Printing and office supplies 64,925 81,541 68,995
Legal and professional fees 97,843 135,068 108,879
Telephone expense 69,197 61,770 50,064
Other operating expenses 310,433 293,853 220,889
------------------------------------------
Total other expenses 2,490,418 2,565,335 1,862,858
------------------------------------------
INCOME BEFORE INCOME TAX 1,114,053 456,667 287,399
Income tax expense 375,609 115,401 11,046
------------------------------------------
NET INCOME $ 738,444 $ 341,266 $ 276,353
==========================================
BASIC EARNINGS PER SHARE $.75 $.35 $.29
DILUTED EARNINGS PER SHARE .74 .34 .28
See notes to consolidated financial statements.
F-3
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
RETAINED
COMMON STOCK EARNINGS NET UNREALIZED
---------------------- AND GAIN ON
SHARES CONTRIBUTED SECURITIES
OUTSTANDING AMOUNT CAPITAL AVAILABLE FOR SALE TOTAL
- --------------------------------------------------------------------------------------------------------
BALANCES, JANUARY 1, 1995 738,715 $6,068,970 $ 76,017 $6,144,987
Net income for 1995 276,353 276,353
Five-for-four stock split 184,576
Cash dividends in lieu of issuing
fractional shares (876) (876)
Net change in unrealized gain on
securities available for sale $21,751 21,751
-----------------------------------------------------------------
BALANCES, DECEMBER 31, 1995 923,291 6,068,970 351,494 21,751 6,442,215
Net income for 1996 341,266 341,266
Stock options exercised 19,534 112,516 112,516
Net change in unrealized gain on
securities available for sale (10,041) (10,041)
-----------------------------------------------------------------
BALANCES, DECEMBER 31, 1996 942,825 6,181,486 692,760 11,710 6,885,956
Net income for 1997 738,444 738,444
Cash dividends ($.10 per share) (94,282) (94,282)
5% stock dividend 47,023 540,765 (540,765)
Cash dividends in lieu of issuing
fractional shares (1,361) (1,361)
Net change in unrealized gain on
securities available for sale 21,249 21,249
-----------------------------------------------------------------
BALANCES, DECEMBER 31, 1997 989,848 $6,722,251 $794,796 $32,959 $7,550,006
=================================================================
See notes to consolidated financial statements.
F-4
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31 1997 1996 1995
- --------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 738,444 $ 341,266 $ 276,353
Adjustments to reconcile net
income to net cash provided
by operating activities
Provision for loan losses 255,000 219,000 207,500
Depreciation and amortization 137,713 82,860 71,926
Deferred income tax 498 10,278 (20,419)
Investment securities amortization 4,362 7,215 62,383
Gain on disposal of premises and equipment (20,716)
Investment securities (gains) losses (5,630) 13,553
Net change in
Interest receivable (173,893) 91,485 (126,381)
Interest payable 63,534 12,988 52,542
Other assets 27,866 89,746 (23,718)
Other liabilities 238,056 (27,278) 9,732
------------------------------------------
Net cash provided by operating
activities 1,291,580 821,930 502,755
------------------------------------------
INVESTING ACTIVITIES
Purchases of securities available for sale (1,000,000) (1,670,000)
Proceeds from maturities of securities
available for sale 650,000 677,750 230,000
Proceeds from sales of securities
available for sale 2,176,965 622,021
Proceeds from maturities and paydowns
of securities held to maturity 828,248 608,936 1,542,787
Proceeds from sales of securities held
to maturity 125,000
Net change in loans (15,062,301) (10,587,119) (15,317,327)
Purchases of premises and equipment (290,617) (533,467) (25,746)
Proceeds from disposal of premises
and equipment 64,663
Purchase of stock of Federal Home
Loan Bank of Indianapolis (177,300) (87,600)
Proceeds from sale of other real estate
and repossessions 180,024 26,992 50,908
Other investing activities (4,803)
------------------------------------------
Net cash used by investing activities (14,694,646) (7,807,243) (14,470,097)
------------------------------------------
FINANCING ACTIVITIES
Net change in
Noninterest-bearing, NOW, and savings
deposits 6,597,456 5,023,029 8,518,439
Certificates of deposit 10,545,590 6,366,136 4,460,633
Short-term borrowings (908,138) 908,138
Proceeds from Federal Home Loan
Bank advances 1,750,000 3,000,000
Repayment of Federal Home Loan Bank advances (1,199,041) (2,224,485) (3,711,098)
Cash dividends (94,282)
Cash dividends in lieu of issuing fractional
shares (876)
Stock options exercised 112,516
------------------------------------------
Net cash provided by financing activities 17,599,723 8,369,058 13,175,236
------------------------------------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 4,196,657 1,383,745 (792,106)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 7,034,571 5,650,826 6,442,932
------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $11,231,228 $7,034,571 $5,650,826
==========================================
ADDITIONAL CASH FLOWS INFORMATION
Interest paid $ 3,743,382 $3,526,976 $2,901,055
Income tax paid (refunded) 187,406 110,000 (40,921)
See notes to consolidated financial statements.
F-5
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
- - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of First Community Bancshares, Inc.
("Company") and its wholly owned subsidiary, First Community Bank and Trust
("Bank"), conform to generally accepted accounting principles and reporting
practices followed by the banking industry. The more significant of the
policies are described below.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The Company is a bank holding company whose principal activity is the
ownership and management of the Bank. The Bank operates under a state bank
charter and provides full banking services, including trust services. As a
state bank, the Bank is subject to regulation by the Department of Financial
Institutions, State of Indiana and the Federal Deposit Insurance Corporation.
DESCRIPTION OF BUSINESS-The Bank generates commercial, mortgage and consumer
loans and receives deposits from customers located primarily in Johnson and
Jennings Counties, Indiana and surrounding counties. The Bank's loans are
generally secured by specific items of collateral including real property,
consumer assets and business assets.
CONSOLIDATION-The consolidated financial statements include the accounts of
the Company and the Bank after elimination of all material intercompany
transactions.
INVESTMENT SECURITIES-Debt securities are classified as held to maturity when
the Company has the positive intent and ability to hold the securities to
maturity. Securities held to maturity are carried at amortized cost. Debt
securities not classified as held to maturity are classified as available for
sale. Securities available for sale are carried at fair value with unrealized
gains and losses reported separately through stockholders' equity, net of tax.
Amortization of premiums and accretion of discounts are recorded as interest
income from securities. Realized gains and losses are recorded as net security
gains (losses). Gains and losses on sales of securities are determined on the
specific-identification method.
F-6
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
LOANS are carried at the principal amount outstanding. A loan is impaired
when, based on current information or events, it is probable that the Bank
will be unable to collect all amounts due (principal and interest) according
to the contractual terms of the loan agreement. Payments with insignificant
delays not exceeding 90 days outstanding are not considered impaired. Certain
nonaccrual and substantially delinquent loans may be considered to be
impaired. The Bank considers its investment in one-to-four family residential
loans and consumer loans to be homogeneous and therefore excluded from
separate identification for evaluation of impairment. Interest income is
accrued on the principal balances of loans. The accrual of interest on
impaired and nonaccrual loans is discontinued when, in management's opinion,
the borrower may be unable to meet payments as they become due. When interest
accrual is discontinued, all unpaid accrued interest is reversed when
considered uncollectible. Interest income is subsequently recognized only to
the extent cash payments are received. Certain loan fees and direct costs are
being deferred and amortized as an adjustment of yield on the loans over the
contractual lives of the loans. When a loan is paid off or sold, any
unamortized loan origination fee balance is credited to income.
ALLOWANCE FOR LOAN LOSSES is maintained to absorb potential loan losses based
on management's continuing review and evaluation of the loan portfolio and its
judgment as to the impact of economic conditions on the portfolio. The
evaluation by management includes consideration of past loan loss experience,
changes in the composition of the portfolio, and the current condition and
amount of loans outstanding, and the probability of collecting all amounts
due. Impaired loans are measured by the present value of expected future cash
flows, or the fair value of the collateral of the loan, if collateral
dependent.
The determination of the adequacy of the allowance for loan losses is based on
estimates that are particularly susceptible to significant changes in the
economic environment and market conditions. Management believes that as of
December 31, 1997, the allowance for loan losses is adequate based on
information currently available. A worsening or protracted economic decline
in the area within which the Company operates would increase the likelihood of
additional losses due to credit and market risks and could create the need for
additional loss reserves.
PREMISES AND EQUIPMENT are carried at cost net of accumulated depreciation.
Depreciation is computed using the straight-line method based principally on
the estimated useful lives of the assets. Maintenance and repairs are expensed
as incurred while major additions and improvements are capitalized. Gains and
losses on dispositions are included in current operations.
FEDERAL HOME LOAN BANK STOCK is a required investment for institutions that
are members of the Federal Home Loan Bank ("FHLB") system. The required
investment in the common stock is based on a predetermined formula.
FORECLOSED REAL ESTATE is carried at the lower of cost or fair value less
estimated selling costs. When foreclosed real estate is acquired, any
required adjustment is charged to the allowance for loan losses. All
subsequent activity is included in current operations.
STOCK OPTIONS are granted for a fixed number of shares to employees with an
exercise price equal to the fair value of the shares at the date of grant. The
Company accounts for and will continue to account for stock option grants in
accordance with Accounting Principle Board Opinion ("APB") No. 25, Accounting
for Stock Issued to Employees, and, accordingly, recognizes no compensation
expense for the stock option grants.
F-7
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
INCOME TAX in the consolidated statement of income includes deferred income
tax provisions or benefits for all significant temporary differences in
recognizing income and expenses for financial reporting and income tax
purposes. The Company files consolidated income tax returns with its
subsidiary.
EARNINGS PER SHARE have been computed based upon the weighted average common
shares and potential common shares outstanding during each year.
- - RESTRICTION ON CASH AND DUE FROM BANKS
The Bank is required to maintain reserve funds in cash and/or on deposit with
the Federal Reserve Bank ("FRB"). The reserve required at December 31, 1997,
was $360,000.
- - INVESTMENT SECURITIES
1997
------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
DECEMBER 31 COST GAINS LOSSES VALUE
- ------------------------------------------------------------------------------
Available for sale
State and municipal $1,316 $55 $1,371
Corporate obligations 1,400 1,400
-----------------------------------------
Total available for sale 2,716 55 2,771
Held to maturity-state and municipal 1,709 25 1,734
-----------------------------------------
Total investment securities $4,425 $80 $0 $4,505
=========================================
F-8
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
1996
------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
DECEMBER 31 COST GAINS LOSSES VALUE
- ------------------------------------------------------------------------------
Available for sale
State and municipal $1,737 $24 $ (5) $1,756
Corporate obligations 630 630
-----------------------------------------
Total available for sale 2,367 24 (5) 2,386
-----------------------------------------
Held to maturity
State and municipal 2,367 2 (44) 2,325
Mortgage-backed securities 174 (1) 173
-----------------------------------------
Total held to maturity 2,541 2 (45) 2,498
-----------------------------------------
Total investment securities $4,908 $26 $(50) $4,884
=========================================
The amortized cost and fair value of securities held to maturity and available
for sale at December 31, 1997, by contractual maturity, are shown below.
Expected maturities will differ from contractual maturities because issuers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
1997
---------------------------------------
AVAILABLE FOR SALE HELD TO MATURITY
---------------------------------------
AMORTIZED FAIR AMORTIZED FAIR
MATURITY DISTRIBUTION AT DECEMBER 31 COST VALUE COST VALUE
- ------------------------------------------------------------------------------
Due in one year or less $ 620 $ 620 $ 675 $ 675
Due after one through five years 1,375 1,389 742 750
Due after five through ten years 180 187 292 309
Due after ten years 541 575
-------------------------------------
Totals $2,716 $2,771 $1,709 $1,734
=====================================
No securities were pledged at December 31, 1997. Securities with a carrying
value of $174,000 were pledged at December 31, 1996 to secure FHLB advances.
Proceeds from sales of securities available for sale during 1996 were
$183,000. Gross gains of $3,000 were realized on those sales.
Proceeds from securities held to maturity called at a premium during 1996 were
$278,000. Gross gains of $3,000 were realized on those calls.
F-9
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
Proceeds, including due from broker of $1,994,000, from sales of securities
available for sale during 1995 were $2,616,000. Gross gains of $4,000 and
gross losses of $18,000 were realized on those sales.
During 1995, the Company sold two securities held to maturity with an
amortized cost of $125,000 due to substandard credit worthiness. No gains or
losses were realized on these sales.
- - LOANS AND ALLOWANCE
DECEMBER 31 1997 1996
- --------------------------------------------------------------------------
Commercial, commercial real estate
and industrial loans $17,883 $17,401
Real estate loans 28,971 23,010
Construction loans 6,773 3,621
Individuals' loans for household
and other personal expenditures 22,896 19,084
Tax-exempt loans and leases 3,377 1,922
-----------------------
79,900 65,038
Deferred loan origination costs 101 70
-----------------------
Total loans $80,001 $65,108
=======================
DECEMBER 31 1997 1996 1995
- --------------------------------------------------------------------------
Allowance for loan losses
Balances, January 1 $644 $518 $362
Provision for losses 255 219 208
Recoveries on loans 29 18 36
Loans charged off (80) (111) (88)
-----------------------------------
Balances, December 31 $848 $644 $518
===================================
At December 31, 1997, the Company had no impaired loans. At December 31,
1996, the Company had an impaired loan of $67,000 and had recorded an
allowance for losses of $7,000. The average balance of impaired loans for the
years ended December 31, 1997, 1996 and 1995 were $25,000, $112,000 and
$26,000. The Company had no interest income or cash receipts on impaired
loans during the years ended December 31, 1997, 1996 and 1995.
F-10
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
The Company had no commitments to loan additional funds to the borrowers of
impaired loans.
The Bank has entered into transactions with certain directors, executive
officers, significant stockholders of the Company and their affiliates or
associates (related parties). Such transactions were made in the ordinary
course of business on substantially the same terms and conditions, including
interest rates and collateral, as those prevailing at the same time for
comparable transactions with other customers, and did not, in the opinion of
management, involve more than normal credit risk or present other unfavorable
features.
The aggregate amount of loans, as defined, to such related parties were as
follows:
- --------------------------------------------------------------------------
Balances, January 1, 1997 $649
New loans, including renewals 429
Payments, etc., including renewals (333)
----
Balances, December 31, 1997 $745
====
- - PREMISES AND EQUIPMENT
DECEMBER 31 1997 1996
- --------------------------------------------------------------------------
Land $ 432 $ 264
Buildings 853 786
Leasehold improvements 285 343
Equipment 751 686
-----------------------
Total cost 2,321 2,079
Accumulated depreciation (376) (287)
-----------------------
Net $1,945 $1,792
=======================
F-11
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
- - DEPOSITS
DECEMBER 31 1997 1996
- --------------------------------------------------------------------------
Demand deposits $16,992 $14,212
Savings deposits 18,957 15,139
Certificates and other time
deposits of $100,000 or more 10,519 7,355
Other certificates and time deposits 41,227 33,846
-----------------------
Total deposits $87,695 $70,552
=======================
Certificates and other time deposits maturing in years ending December 31:
1998 $38,544
1999 8,711
2000 2,572
2001 1,120
2002 799
-------
$51,746
=======
- - FHLB ADVANCES
INTEREST
AMOUNT RATE
- --------------------------------------------------------------------------
Maturities in years ending December 31
1998 $ 177 6.01%
1999 156 6.01
2000 638 6.05
2001 122 6.01
2002 1,603 5.77
2003 234 5.85
------
$2,930 5.87%
======
The FHLB advances are secured by first mortgage loans totaling $21,259,000.
Advances are subject to restrictions or penalties in the event of prepayment.
The Bank has an available line of credit with the FHLB totaling $2,000,000.
The line of credit expires May 7, 1998 and bears interest at a rate equal to
the then current variable advance rate. There were no drawings on this line
of credit at December 31, 1997.
F-12
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
- - INCOME TAX
YEAR ENDED DECEMBER 31 1997 1996 1995
- --------------------------------------------------------------------------
Income tax expense
Currently payable
Federal $270 $ 54 $15
State 106 51 16
Deferred
Federal 8 20 (31)
State (8) (10) 11
-------------------
Total income tax expense $376 $115 $11
===================
Reconciliation of federal statutory to actual tax expense
Federal statutory income tax at 34% $379 $155 $98
Tax exempt interest (69) (66) (108)
Effect of state income taxes 65 27 18
Other 1 (1) 3
-------------------
Actual tax expense $376 $115 $11
===================
A cumulative net deferred tax asset is included in other assets. The
components of the asset are as follows:
DECEMBER 31 1997 1996
- --------------------------------------------------------------------------
ASSETS
Allowance for loan losses $312 $227
Net operating loss carryforward 20
Alternative minimum tax credit carryforward 38 54
Other 9
--------------------
Total assets 359 301
====================
LIABILITIES
Depreciation 103 75
State income tax 16 13
Loan fees 35 8
Securities available for sale 22 8
Total liabilities 176 104
--------------------
$183 $197
====================
F-13
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
At December 31, 1997, the Company had an alternative minimum tax credit
carryforward of $38,000 available to offset future regular federal income tax
liabilities which has an unlimited carryover period.
Tax expense (benefit) applicable to investment security gains and losses for
the years ended December 31, 1996 and 1995 was $2,230 and $(5,400).
- - COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business there are outstanding commitments and
contingent liabilities, such as commitments to extend credit and standby
letters of credit, which are not included in the accompanying financial
statements. The Bank's exposure to credit loss in the event of nonperformance
by the other party to the financial instruments for commitments to extend
credit and standby letters of credit is represented by the contractual or
notional amount of those instruments. The Bank uses the same credit policies
in making such commitments as it does for instruments that are included in the
consolidated balance sheet.
Financial instruments whose contract amount represents credit risk as of
December 31 were as follows:
1997 1996
- --------------------------------------------------------------------------
Commitments to extend credit $5,606 $9,022
Standby letters of credit 640 401
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected
to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Bank evaluates each
customer's credit worthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Bank upon extension of credit, is based
on management's credit evaluation. Collateral held varies but may include
accounts receivable, inventory, property and equipment, and income-producing
commercial properties.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party.
The Company and Bank are also subject to claims and lawsuits which arise
primarily in the ordinary course of business. It is the opinion of management
that the disposition or ultimate resolution of such claims and lawsuits will
not have a material adverse effect on the consolidated financial position of
the Company.
In connection with the approval of its bank holding company application, the
Company must obtain Federal Reserve approval prior to incurring debt which
would cause its debt to equity ratio to exceed 30 percent. The Company is in
compliance with this commitment at December 31, 1997.
F-14
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
- - Stockholders' Equity
On April 26, 1995, the Board of Directors declared a 5-for-4 stock split
effective June 1, 1995. Net income per share and weighted average shares
outstanding have been restated to reflect the stock split.
On November 19, 1997, the Board of Directors declared a 5% stock dividend
payable on February 1, 1998. Net income per share and weighted average shares
outstanding have been restated to reflect the 5% stock dividend.
The dividends which the Company may pay are restricted by 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, 1997, stockholder's
equity of the Bank was $7,324,000, of which a minimum of $1,080,000 was
available for payment of dividends.
- - Regulatory Capital
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies and are assigned to a capital category. The
assigned capital category is largely determined by three ratios that are
calculated according to the regulations: total risk adjusted capital, Tier 1
capital, and Tier 1 leverage ratios. The ratios are intended to measure
capital relative to assets and credit risk associated with those assets and
off-balance sheet exposures of the entity. The capital category assigned to
an entity can also be affected by qualitative judgments made by regulatory
agencies about the risk inherent in the entity's activities that are not part
of the calculated ratios.
There are five capital categories defined in the regulations, ranging from
well capitalized to critically undercapitalized. Classification of a bank in
any of the undercapitalized categories can result in actions by regulators
that could have a material effect on a bank's operations. At December 31,
1997 and 1996, the Bank is categorized as well capitalized and met all subject
capital adequacy requirements. There are no conditions or events since
December 31, 1997 that management believes have changed the Bank's
classification.
F-15
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
The Bank's actual and required capital amounts and ratios are as follows:
1997
----------------------------------------------------
REQUIRED FOR TO BE WELL
ACTUAL ADEQUATE CAPITAL(1) CAPITALIZED(1)
----------------------------------------------------
DECEMBER 31 AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- -------------------------------------------------------------------------------------------------
Total capital(1) (to risk-weighted assets) $7,291 10.1% $5,789 8.0% $7,236 10.0%
Tier 1 capital(1) (to risk-weighted assets) 8,139 11.3% 2,895 4.0 4,342 6.0
Tier 1 capital(1) (to average assets) 8,139 8.7% 3,758 4.0 5,638 6.0
(1) As defined by regulatory agencies
1996
----------------------------------------------------
REQUIRED FOR TO BE WELL
ACTUAL ADEQUATE CAPITAL(1) CAPITALIZED(1)
----------------------------------------------------
DECEMBER 31 AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- -------------------------------------------------------------------------------------------------
Total capital(1) (to risk-weighted assets) $6,665 10.9% $4,885 8.0% $6,106 10.0%
Tier 1 capital(1) (to risk-weighted assets) 7,309 12.0% 2,443 4.0 3,664 6.0
Tier 1 capital(1) (to average assets) 7,309 9.4% 3,125 4.0 3,906 5.0
(1) As defined by regulatory agencies
- - Employee Benefits
Effective January 1, 1995, the Bank adopted a retirement savings 401(k) plan
in which substantially all employees may participate. The Bank matches
employees' contributions as determined each year by the Bank's Board of
Directors. The Bank's expense for the plan was $8,000, $6,000 and $4,000 for
1997, 1996 and 1995.
The Company adopted a stock option plan in 1992 whereby 46,921 shares of
common stock, after restatement for stock dividends and splits, were reserved
for the granting of options to certain officers, directors and key employees.
The options were exercisable within five years from the date of grant, and the
right to purchase shares under such options vested at a rate of 40% after the
first year and 20% each year thereafter with the options being fully vested
after four years. Additional options to purchase common shares may be granted
not to exceed 10% of the Company's outstanding shares of common stock, less
previously granted options.
F-16
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands, Except Per Share Data)
On February 15, 1993, the 1992 stock option plan, which is accounted for in
accordance with APB No. 25, Accounting for Stock Issued to Employees, and
related interpretations, was amended to increase the aggregate number of
shares under the plan from 46,921 to 66,771 shares. In addition, the
amendment provided for immediate vesting of all outstanding stock options and
stock options granted pursuant to the agreement. On May 15, 1996, the 1992
stock option plan was amended to extend the exercise period from five years to
ten years from the date of grant.
On May 15, 1996, the stockholders approved the 1996 stock option plan,
reserving 105,000 shares of Company stock for the granting of options to
certain key employees, directors and advisors. The exercise price of the
shares may not be less than the fair market value of the shares upon the grant
of the option. Options granted to key employees and advisors require approval
of the Compensation Committee of the Board of Directors ("Committee"). Options
granted to key employees and advisors become 25% exercisable one year from the
date of the grant and continue to vest 25% each year thereafter until fully
vested. Without any action by the Committee, each outside director will be
automatically granted an option to purchase 1,000 shares of Company stock on
each anniversary date of service on the Board of Directors beginning with
their 1997 anniversary. These options vest at the date of grant. Each option
granted under the plan shall expire no later than ten years from the date the
option is granted.
Although the Company has elected to follow APB No. 25, Standard Financial
Accounting Standards ("SFAS") No. 123 requires pro forma disclosures of net
income and earnings per share as if the Company had accounted for its employee
stock options under that Statement. The fair value of each option grant was
estimated on the grant date using an option-pricing model with the following
assumptions:
1997
--------------
Risk-free interest rates 6.67%
Dividend yields .73%
Volatility factors of expected market price of common stock 8.00%
Weighted-average expected life of the options 9 years
Under SFAS No. 123, compensation cost is recognized in the amount of the
estimated fair value of the options and amortized to expense over the options'
vesting period. The pro forma effect on net income and earnings per share of
this statement are as follows:
1997
--------------
Net income As reported $738
Pro forma 726
Basic Earnings per share As reported .75
Pro forma .73
Diluted earnings per share As reported .74
Pro forma .72
F-17
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands, Except Per Share Data)
The following is a summary of the status of the Company's stock option plans
and changes in the plans as of and for the years ended December 31, 1997, 1996
and 1995.
YEAR ENDED DECEMBER 31 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
OPTIONS SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
- ---------------------------------------------------------------------------------------------------------------------
Outstanding, beginning of year 46,261 $5.54 66,771 $5.54 66,771 $5.54
Granted 5,250 11.43
Exercised 20,510 5.54
Expired 15,420 5.54
------- ------- -------
Outstanding, end of year 36,091 $6.72 46,261 $5.54 66,771 $5.54
======= ======= =======
Options exercisable at year end 46,261 66,771
Weighted-average fair value of
options granted during the year $4.00
As of December 31, 1997, options outstanding of 30,841 and 5,250 have exercise
prices of $5.54 and $11.43 and weighted-average remaining contractual lives of
4.5 and 9.4 years.
- - Earnings Per Share
Earnings per share ("EPS") were computed as follows:
YEAR ENDED DECEMBER 31, 1997
-------------------------------
WEIGHTED
AVERAGE PER SHARE
INCOME SHARES AMOUNT
-------------------------------
BASIC EARNINGS PER SHARE
Income available to common stockholders $738 989,848 $.75
EFFECT OF DILUTIVE STOCK OPTIONS 12,102 ====
-----------------
DILUTED EARNINGS PER SHARE
Income available to common stockholders
and assumed conversions $738 1,001,950 $.74
===============================
F-18
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands, Except Per Share Data)
Options to purchase 5,250 shares of common stock at $11.43 per share were
outstanding at December 31, 1997, but were not included in the computation of
diluted EPS because the options' exercise price was greater than the average
market price of the common shares.
YEAR ENDED DECEMBER 31, 1996
-------------------------------
WEIGHTED
AVERAGE PER SHARE
INCOME SHARES AMOUNT
-------------------------------
BASIC EARNINGS PER SHARE
Income available to common stockholders $341 986,043 $.35
EFFECT OF DILUTIVE STOCK OPTIONS 14,757 ====
-----------------
DILUTED EARNINGS PER SHARE
Income available to common stockholders
and assumed conversions $341 1,000,800 $.34
===============================
YEAR ENDED DECEMBER 31, 1995
-------------------------------
WEIGHTED
AVERAGE PER SHARE
INCOME SHARES AMOUNT
-------------------------------
BASIC EARNINGS PER SHARE
Income available to common stockholders $276 969,455 $.29
EFFECT OF DILUTIVE STOCK OPTIONS 21,174 ====
-----------------
DILUTED EARNINGS PER SHARE
Income available to common stockholders
and assumed conversions $276 990,629 $.28
===============================
- - FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument:
CASH AND CASH EQUIVALENTS-The fair value of cash and cash equivalents
approximates carrying value.
INVESTMENT SECURITIES-Fair values are based on quoted market prices.
LOANS-The fair value for loans are estimated using discounted cash flow
analyses, using interest rates currently being offered for loans with similar
terms to borrowers of similar credit quality.
F-19
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
FHLB STOCK-Fair value of FHLB stock is based on the price at which it may be
resold to the FHLB.
INTEREST RECEIVABLE/PAYABLE-The fair values of interest receivable/payable
approximate carrying values.
DEPOSITS-The fair values of noninterest-bearing and interest-bearing demand
accounts are equal to the amount payable on demand at the balance sheet date.
Fair values for certificates of deposit are estimated using a discounted cash
flow calculation that applies interest rates currently being offered on
certificates to a schedule of aggregated expected monthly maturities on such
time deposits.
FHLB ADVANCES-The fair value of advances is estimated using a discounted cash
flow calculation, based on current rates for similar debt.
The estimated fair values of the Company's financial instruments are as
follows:
1997 1996
---------------------------------
CARRYING FAIR CARRYING FAIR
DECEMBER 31 VALUE VALUE VALUE VALUE
- ---------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $11,231 $11,231 $7,035 $7,035
Investment securities available
for sale 2,771 2,771 2,386 2,386
Investment securities held to maturity 1,709 1,734 2,541 2,498
Loans, net 79,152 80,403 64,464 65,305
Stock in FHLB 778 778 778 778
Interest receivable 700 700 526 526
LIABILITIES
Deposits 87,695 87,806 70,552 70,633
FHLB advances 2,930 2,908 2,379 2,351
Interest payable 251 251 187 187
F-20
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
- - CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY)
Presented below is condensed financial information as to financial position,
results of operations and cash flows of the Company:
CONDENSED BALANCE SHEET
DECEMBER 31 1997 1996
- --------------------------------------------------------------------------
ASSETS
Cash on deposit $ 88 $ 64
Investment in subsidiary 7,324 6,665
Other assets 139 161
----------------------
Total assets $7,551 $6,890
======================
LIABILITIES-other liabilities $ 1 $ 4
STOCKHOLDERS' EQUITY 7,550 6,886
----------------------
Total liabilities and stockholders' equity $7,551 $6,890
======================
CONDENSED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31 1997 1996 1995
- --------------------------------------------------------------------------
Income
Dividends from subsidiary $165 $ 30
Other interest income and dividends 1 $ 1 1
----------------------
Total income 166 1 31
----------------------
Expenses
Salaries and employee benefits 44 20 19
Professional fees 46 55 20
Other expenses 18 12 22
----------------------
Total expenses 108 87 61
----------------------
Income (loss) before income tax benefit
and equity in undistributed income of
subsidiary 58 (86) (30)
Income tax benefit (42) (34) (24)
----------------------
Income (loss) before equity in
undistributed income of subsidiary 100 (52) (6)
Equity in undistributed income of subsidiary 638 393 282
----------------------
NET INCOME $738 $341 $276
======================
F-21
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
CONDENSED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31 1997 1996 1995
- --------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $738 $341 $276
Adjustments to reconcile net income to
net cash provided (used) by operating
activities (620) (421) (296)
----------------------
Net cash provided (used) by
operating activities 118 (80) (20)
----------------------
FINANCING ACTIVITIES
Cash dividends (94)
Cash dividends in lieu of issuing
fractional shares (1)
Stock options exercised 113
----------------------
Net cash provided (used) by
financing activities (94) 113 (1)
----------------------
NET CHANGE IN CASH ON DEPOSIT 24 33 (21)
CASH ON DEPOSIT AT BEGINNING OF YEAR 64 31 52
----------------------
CASH ON DEPOSIT AT END OF YEAR $ 88 $ 64 $ 31
======================
F-22