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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, 2000
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
of incorporation or organization) Identification No.)
136 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 6, 2001 $8,059,000
Shares of common stock outstanding as of March 6, 2001: 1,039,926
DOCUMENT INCORPORATED BY REFERENCE.
The Registrant's definitive proxy statement for the 2001 annual meeting of
shareholders is incorporated by reference into Part III of this report.
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............................................................13
Item 6. Selected Financial Data............................................14
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...24
Signatures..................................................................26
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; or regulatory changes.
PART I
Item 1. Business
General
First Community Bancshares, Inc. (the "Registrant") is primarily a one-bank
holding company incorporated in August 1991. The Registrant's primary asset is
its wholly-owned banking subsidiary, First Community Bank & Trust ("First
Community"), an Indiana-chartered commercial bank formerly known as Bargersville
Federal Savings Bank. The Registrant is also the sole shareholder of First
Community Real Estate Management, Inc. ("FCREMI"), which owns and leases branch
offices to First Community.
At December 31, 2000, the Registrant had approximately $149.2 million of assets,
deposits of approximately $123.0 million and stockholders' equity of
approximately $9.3 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,
Whiteland, Edinburgh, and North Vernon, Indiana. The branch office in Edinburgh,
Indiana was opened in January 2000. As of December 31, 2000, First Community had
87 full time equivalent employees. Neither the Registrant nor FCREMI has any
employees.
In November 1999, the Registrant signed a definitive agreement to acquire Blue
River Federal Savings Bank ("Blue River"), Edinburgh, Indiana. This agreement
was subsequently terminated in November 2000. The process for obtaining
regulatory approval had become prolonged and the Registrant had other priorities
which it wanted to give attention. The pre-tax expense of $94,000 related to
these efforts was recognized in the income statement for the year ended December
31, 2000.
First Community's deposits are insured to the maximum extent permitted by law by
the Savings Association Insurance Fund ("SAIF") of the Federal Deposit Insurance
Corporation ("FDIC"). First Community is a member of the Federal Home Loan Bank
("FHLB") of Indianapolis. First Community is subject to comprehensive
regulation, examination and supervision by the Indiana Department of Financial
Institutions ("DFI") and the FDIC. The Registrant is subject to regulation by
the Federal Reserve Board. The Federal Reserve Board, as a condition of the
acquisition of First Community, required the Registrant to make a commitment not
to incur debt in excess of a 30% debt-to-equity ratio on an unconsolidated
basis. As of December 31, 2000, the Registrant's debt-to-equity ratio on an
unconsolidated basis was 10.7%.
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 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.
3
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.
Lending Activities
First Community's loans, before adjusting for direct loan origination costs and
the allowance for loan losses, totaled $124.4 million at December 31, 2000. Of
this amount, approximately $78.3 million or 62.9% represented fixed rate loans
and adjustable rate loans comprised $46.1 million or 37.1%.
The following table sets forth information concerning the composition of First
Community's loan portfolio in dollar amounts and percentages.
At December 31
2000 1999
---------------------- -----------------------
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) $ 46,049 37.27% $ 40,653 36.68%
Construction and land development 3,111 2.52 5,445 4.91
Commercial loans 37,977 30.74 29,836 26.92
Installment loans 34,373 27.82 32,648 29.45
Tax-exempt loans and leases 2,644 2.14 3,004 2.71
Lease financing 224 .18
--------- ------ --------- ------
Loans, gross 124,378 100.67 111,586 100.67
Allowance for loan losses (1,007) (.82) (873) (.79)
Deferred loan origination costs 180 .15 130 .12
--------- ------ --------- ------
Loans, net $ 123,551 100.00% $ 110,843 100.00%
========= ====== ========= ======
The following table sets forth certain information at December 31, 2000,
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.
4
Remaining Maturities
----------------------------------------------------
Balance
Outstanding at
December 31, One Year Over One Year Over Five
2000 or Less To Five Years Years
-------------- ------------ ------------- ----------
(Dollars in 000's)
Real estate loans $ 54,559 $6,042 $9,771 $38,746
Commercial loans 28,134 16,840 7,091 4,203
Installment loans 38,817 14,370 22,418 2,029
Tax-exempt loans and leases 2,644 1,282 1,362
Lease financing 224 210 14
-------------- ------------ ------------- ----------
Total $ 124,378 $37,252 $40,772 $46,354
============== ============ ============= ==========
The following table sets forth, as of December 31, 2000, the dollar amount of
all loans maturing after December 31, 2001 showing those having a fixed interest
rate and floating or adjustable interest rates.
Floating or Adjustable
Fixed Rate Rate
---------- -----------------------
TYPE OF LOAN (Dollars in 000's)
Real estate loans $29,960 $24,599
Commercial loans 10,821 17,313
Installment loans 34,631 4,186
Tax-exempt loans and leases 2,644
Lease financing 224
--------- ----------
78,280 46,098
Less amount due within one year 15,100 22,152
--------- ----------
Loans due after one year $63,180 $23,946
========= ==========
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. First Community has also purchased
participations in tax-exempt leases.
During the year ended December 31, 2000, First Community began selling
commercial real estate loans to other participating financial institutions. This
type of activity is intended to reduce credit risk and for general liquidity
needs of First Community. There were three loan participations with an aggregate
outstanding principal balance of $522,000 as of December 31, 2000.
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 both adjustable rate mortgages
("ARMs") and long term, fixed-rate mortgages.
5
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 the appraised value 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.
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.
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 verification procedures and other matters intended to
minimize underwriting risk.
The most recent loan approval limits were adopted by the Board of Directors in
1997 and are reviewed annually. The limits vary from officer to officer with a
range of $2,500 to $70,000 for unsecured, and a range of $7,500 to $200,000 for
secured. Loans in excess of the above-mentioned limits must be approved by a
committee of loan officers or the board of directors loan committee.
Installment Loan Underwriting. First Community has adopted underwriting
guidelines that apply to all loans made by First Community. However, the
underwriting policies and practices are particularly important in the
installment lending area. Installment loans present risks beyond those presented
by other types of loans because the collateral is usually movable and subject to
rapid depreciation. Such factors increase the importance of properly documenting
such loans and assessing the risks associated with each loan based upon such
documentation.
The documentation required by First Community's underwriting guidelines include
an application, employment income verified by pay stubs, direct verification
with employers when deemed necessary, and may include tax returns or audited
financial statements and evidence of security. The application must include the
minimum loan amount requested, the term requested, monthly payment, purpose of
loan, job history, income, financial statement, and security offered if
applicable. The application must be signed by all borrowers obligated for the
loan. First Community also requires current credit reports from credit bureaus
as part of the underwriting procedure for all loans including indirect
automobile lending. First Community also reviews the applicant's ability to
maintain a stable monthly income and other required monthly payments. Other
monthly payments generally may not exceed forty percent (40%) of the applicant's
stable gross income.
Single-pay loans are normally not renewed without at least a 10% reduction in
principal.
Income from Lending Activities. First Community realizes interest income from
its lending activities. Interest on loans comprised approximately 91.5% of First
Community's total interest income for the year ended December 31, 2000.
6
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.
The following table summarizes nonperforming assets as of the dates indicated.
At December 31
----------------------
2000 1999
------- --------
(Dollars in 000's)
Nonaccrual loans $402 $296
Restructured loans 0 0
Past-due loans 90 days or more (interest accruing) 96 0
------- -------
Total non-performing loans 498 296
Real estate owned 99 0
Other repossessed assets 94 57
------- -------
Total non-performing assets $691 $353
======= =======
Ratio of non-performing assets to total assets .46% .24%
Interest on non-performing loans that would have been included in income
$ 30 $ 25
======= =======
Interest on non-performing loans that was included in income $ 3 $ 0
======= =======
At December 31, 2000, loans of $305,000 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. Due to the loan to value ratios, First
Community expects no loss at this time on its impaired loans.
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, 2000
compared to the year ended December 31, 1999 primarily because of additional
loan balances outstanding in the portfolio. During 2000, First Community made a
$219,000 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
2000 1999
------------------------- -------------------------
Percentage of Percentage of
Loans to Total Loans to Total
Amount Loans Amount Loans
--------- -------------- -------- --------------
(Dollars in 000's)
Real estate mortgage loans $147 37.0% $151 36.5%
Construction and land development 25 2.5 55 4.9
Commercial loans 385 30.7 255 26.7
Installment loans 448 27.6 409 29.2
Tax-exempt loans and leases 2 2.2 3 2.7
--------- --------- -------- ---------
$1,007 100.0% $873 100.0%
========= ========= ======== =========
Summary of Loan Loss Experience:
Year Ended December 31
-------------------------
2000 1999
--------- ---------
(Dollars in 000's)
Balance at January 1 $ 873 $ 955
Chargeoffs:
Real estate mortgage loans (0) (16)
Commercial loans (0) (187)
Installment loans (104) (128)
--------- ---------
Total Chargeoffs (104) (331)
--------- ---------
Recoveries:
Commercial 1 2
Installment 18 46
--------- ---------
Total Recoveries 19 48
--------- ---------
Net Chargeoffs (85) (283)
--------- ---------
Provision for loan losses 219 201
--------- ---------
Balance at December 31 $ 1,007 $ 873
========= =========
Average loans during the year $ 118,025 $ 102,218
Ratio of net chargeoffs to total average loans outstanding during the year .07% .28%
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
-------------------
2000 1999
------- -------
(Dollars in 000's)
Available for sale at fair value:
Federal agencies $ 0 $ 1,956
State and municipal obligations 8,699 11,109
Corporate obligations 500 1,000
------- -------
9,199 14,065
------- -------
Held to maturity at amortized cost:
U.S. treasuries 0 5,491
State and municipal obligations 1,349 1,476
------- -------
1,349 6,967
FHLB stock 778 778
------- -------
Total $11,326 $21,810
======= =======
8
At December 31, 2000, the amortized cost of securities available for sale was
$9,298,000 and the related gross unrealized gains and losses were $38,000 and
$137,000, respectively. At December 31, 2000, the fair value of securities held
to maturity was $1,345,000 and the related gross unrealized gains and losses
were $6,000 and $10,000, respectively.
As of December 31, 2000, there were no individual investments representing more
than 10% of stockholders' equity included in securities. At December 31, 1999
there were two corporate notes with Powerway, Incorporated of 1999 having a
total amortized cost of $1,000,000 and a market value of approximately
$1,000,000. These corporate obligations represented 11.4% of stockholders'
equity at December 31, 1999. Only one corporate note with Powerway, Incorporated
of 1999 remained outstanding at December 31, 2000 having a total amortized cost
of $500,000.
The following table sets forth the maturities of investment securities at
December 31, 2000 and the weighted-average yield (on a tax equivalent basis) on
such securities.
State and Municipal Corporate
Obligations Obligations
-------------------- -------------------
Amount Yield Amount Yield
------------------------------------------
(Dollars in 000's)
Available for Sale(1):
Maturities:
One year or less $ 606 5.26% $ 500 10.0%
Over 1 year to 5 years 5,176 5.26
Over 5 years to 10 years 2,641 6.10
Over 10 years 375 5.92
---------- ---------
Total available for sale 8,798 5.54 500 10.0
---------- ---------
Held to Maturity:
Maturities:
One year or less 24 5.49
Over 1 year to 5 years 1,181 5.83
Over 5 years to 10 years 144 5.78
Over 10 years
----------
Total held to maturity 1,349 5.82
---------- ---------
Total securities $10,147 5.58% $ 500 10.0%
========== =========
(1) Available for sale amounts shown in the maturity distribution table are at
amortized cost for computation of yields.
The Registrant owns certain warrants entitling it to purchase, for a nominal
consideration, shares of common stock (the "Warrant Shares") of a privately held
software development company. There can be no assurance that such warrants or
the Warrant Shares will increase in value or that the amount of any such
increase would be significant.
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. Borrowings are the primary
source of funds for the Registrant and FCREMI.
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.
9
The following table indicates the amount of certificates of deposit of $100,000
or more by time remaining until maturity at December 31, 2000 (in 000's).
Maturity Period
Three months or less $ 2,436
Greater than three months through six months 6,057
Greater than six months through twelve months 2,016
Over twelve months 3,911
--------------
Total $ 14,420
==============
Interest earned on statement savings accounts is paid from the date of deposit
to the date of withdrawal, compounded and credited monthly. Interest earned on
money market demand deposit accounts is compounded and credited monthly. The
interest rate on these accounts is established by First Community.
In recent years, many deposits in long-term fixed-rate accounts have been
withdrawn prior to maturity or such certificates have not been renewed at
maturity due to the more attractive rates offered on various money market
accounts. Early withdrawal penalties are 30 days' interest on accounts maturing
in one year or less and 90 days interest on accounts maturing in greater than
one year.
Borrowings. The FHLB of Indianapolis functions as a central credit facility
providing credit for member financial institutions. As a member, First Community
is required to own capital stock in the FHLB and is authorized to apply for
advances on the security of such stock and certain of its home mortgages and
other assets (principally, securities which are obligations of, or guaranteed
by, the United States) provided certain standards related to creditworthiness
have been met. Advances are made pursuant to several different credit programs.
Each credit program has its own interest rate and range of maturities. The FHLB
prescribes the acceptable uses to which the advances pursuant to each program
may be made as well as limitations on the amounts of advances. Acceptable uses
prescribed by the FHLB have included expansion of residential mortgage lending
and meeting short-term liquidity needs. Depending on the program, limitations on
the amounts of advances are based either on a fixed percentage of a member's net
worth or on the FHLB's assessment of the member's creditworthiness. The FHLB is
required to review its credit limitations and standards at least once every six
months. First Community had outstanding borrowings of $13.0 million from the
FHLB as of December 31, 2000.
As discussed in detail in Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations", FCREMI has borrowings with
financial institutions other than First Community. The total outstanding balance
of these borrowings as of December 31, 2000 was $1.6 million. As also further
discussed in Item 7, the Registrant has borrowings as of December 31, 2000 of
$1.0 million from the sale of unsecured convertible notes.
Service Area
First Community's primary service areas are Johnson County and Jennings County,
Indiana. These areas are believed to be 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 collectively account for about one-half of the county's
population, according to the 1990 U.S. Census. First Community has branches in
Trafalgar, Franklin, Whiteland and Greenwood, Johnson County Indiana, a branch
at a retirement center in Indianapolis, Indiana, and two branches in North
Vernon, Jennings County Indiana. First Community opened a branch in Edinburgh,
Bartholomew County Indiana in January 2000.
Competition
The banking business is highly competitive in Johnson County, where First
Community competes with 11 commercial banks, 4 savings banks, and 2 credit
unions. In Jennings County, First Community competes with 4 commercial banks,
one savings bank and 2 credit unions. In Bartholomew County, First Community
competes with 6 commercial banks, 1 savings bank, and 3 credit unions. First
Community also competes with mortgage banking companies, consumer finance
companies, and certain governmental agencies.
10
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 BHCA prohibits any person from acquiring control, directly or
indirectly, of the Registrant without the approval of the Federal Reserve. The
Federal Reserve has the authority to issue cease and desist orders against a
bank holding company if it determines that its 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 direct or indirect
control of more than five percent of the voting stock of any bank or bank
holding company requires prior approval of the Federal Reserve. Acquisitions of
savings associations are also subject to the approval of the Office of Thrift
Supervision ("OTS").
A bank holding company and its subsidiaries are prohibited from engaging in
certain tying arrangements in connection with the extension of credit, the lease
or sale of property or the provision of any 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 Home Owners' Loan Act ("HOLA"), the
OTS is prohibited from approving any acquisition that would result in the
formation of a multiple savings and loan holding company controlling savings
institutions in more than one state, except under specified conditions. Although
the conditions imposed upon acquisitions in those states which have enacted such
legislation vary, most such statutes are of the "regional reciprocity" type
which require that the acquiring holding company be located (as defined by the
location of its subsidiary savings institutions) in a state within a defined
geographic region and that the state in which the acquiring holding company is
located has enacted reciprocal legislation allowing savings institutions in the
target state to purchase savings institutions in the acquirer's home state on
terms no more restrictive than those imposed by the target state on the
acquirer. Indiana law permits reciprocal interstate savings institution
acquisitions within a region consisting of Indiana and contiguous states.
Financial Services Modernization Act
On November, 12, 1999, President Clinton signed into law the Gramm-Leach-Bliley
Act of 1999 (the "Financial Services Modernization Act"). The general effect of
the Financial Services Modernization Act is to establish a comprehensive
framework to permit affiliations among commercial banks, insurance companies,
securities firms, and other financial service providers by revising and
expanding the existing BHC Act. Under this legislation, bank holding companies
are permitted to conduct any activities determined by the Federal Reserve Board
to be financial in nature or related to financial services. As a result, the
Registrant is able to provide securities and insurance services. Furthermore,
under this legislation, the Registrant is able to acquire, or be acquired by,
brokerage and securities firms and insurance companies. In addition, the
Financial Services Modernization Act broadens the activities that may be
conducted by national banks through the formation of financial subsidiaries. The
Financial Services Modernization Act also modifies the laws governing the
implementation of the Community Reinvestment Act and addresses a variety of
other legal and regulatory issues affecting both day-to-day operations and
long-term activities of financial institutions. Finally, the law contains
significant limitations on a bank's ability to share its customers' personal
financial information, including requirements that each bank clearly disclose
its privacy policies to consumers and, if the bank intends to disclose personal
information to non-affiliated third parties other than in connection with
servicing or processing a financial product or service that a consumer requests
or authorizes, the bank must permit consumers to opt-out of any information
sharing by the bank with unaffiliated third parties.
11
The Registrant does not believe that the legislation has had a material adverse
effect on its operations and does not anticipate significant changes in its
products or services as a result of this legislation. However, to the extent
that this legislation permits banks, securities firms and insurance companies to
affiliate, the financial services industry may experience further consolidation
and may increase the amount of competition that the Registrant faces from larger
institutions and other types of companies offering financial products.
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 and 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. The FDIC also has authority to appoint a conservator or receiver for
undercapitalized institutions, adopt safety and soundness standards on matters
such as loan underwriting and documentation, interest rate risk exposure,
compensation and other employee benefits, and establish risk-based deposit
insurance premiums.
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 acquire or open a 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, the Registrant is
subject to certain restrictions imposed by the Federal Reserve on obtaining
extensions of credit to the Registrant or any of its subsidiaries from First
Community, or using the stock or other securities of First Community 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.
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 ratios of primary capital to total assets. Specifically, First
Community must maintain a leverage ratio of at least 4%, and a total capital to
risk-based assets ratio of at least 8%. As of December 31, 2000, First Community
had a leverage ratio and tangible equity ratio of 6.7% based on leverage and
tangible capital of $9,947,000 and a total capital to risk-based assets ratio of
9.5%.
At this time, the Registrant is not required to comply with the Federal Reserve
capital adequacy guidelines applicable to large bank holding companies because
it has consolidated assets of less than $150,000,000. The Registrant is,
however, currently subject to the Federal Reserve's Small Bank Holding Company
Policy Statement, which sets guidelines for the operation of small bank holding
companies related to the reduction of holding company debt, capital adequacy and
dividend restrictions. In the event that the Registrant's consolidated assets
exceed $150,000,000, the Registrant will be required to maintain a minimum ratio
of Tier 1 capital to total assets of between 3-4%, and to maintain a minimum
ratio of qualifying capital to risk weighted assets of 8%.
12
Item 2. Properties
First Community leases its home office at 136 East Harriman, Bargersville,
Indiana, and its branch offices in Greenwood, Indiana, North Vernon, Indiana,
and one of its branches in Franklin, Indiana from FCREMI. First Community also
leases branches in Indianapolis, Franklin, and its operations center in Franklin
from third parties. First Community owns its branch offices in Whiteland,
Indiana, Trafalgar, Indiana and Edinburgh, Indiana. The leases on branch offices
with third parties expire between 2001 and 2015 and the lease on its operations
center expires in 2015. The Registrant plans for FCREMI to eventually own
substantially all of the branch properties and lease them to First Community. At
December 31, 2000, the net carrying values of First Community's and FCREMI's
properties, including land, building, improvements, furniture, fixtures and
equipment were $2.9 million and $1.9 million, respectively.
Item 3. Legal Proceedings
The Registrant and First Community are from time to time, 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, 2000.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The following table sets forth the high and low 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 NASDAQ web site and on other
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, the 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.
Price Per Share
-----------------------------------
2000 1999
---------------- ----------------
High Low High Low
-------- ----- -------- -----
Quarter
First Quarter $8.75 $6.38 $10.25 $8.00
Second Quarter 8.25 5.25 10.00 7.50
Third Quarter 8.75 6.00 9.00 6.50
Fourth Quarter 8.50 6.00 8.50 7.25
Dividends of $.03 per share were declared during both the first and second
quarters of 1999 each payable during the following quarter. Dividends of $.04
per share were declared during both the third and fourth quarters of 1999 each
payable during the following quarter. The Registrant declared dividends of $.04
per share for each quarter in 2000 payable during the following quarter. Any
future dividend payments by the Registrant will be dependent upon dividends paid
by First Community and subject to regulatory limitations.
13
The dividends which the Registrant may pay are restricted by Federal Reserve
Bank capital requirements. The ability of the Registrant to pay dividends to
shareholders is dependent on dividends received from First Community. First
Community is restricted by regulations of the Indiana Department of Financial
Institutions and the Federal Deposit Insurance Corporation as to the maximum
amount of dividends it may pay to the net profits for the current year plus
those for the previous two years 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, 2000, the stockholder's equity of First Community was
$10.0 million, of which a minimum of $887,000 was available for dividends.
The number of record holders of the Registrant's common stock as of March 6,
2001 was 271.
Item 6. Selected Financial Data (dollars in thousands, except per share data)
At December 31
------------------------------------------------------------
2000 1999 1998 1997 1996
------------------------------------------------------------
Summary of Financial Condition Data:
Total assets $149,195 $145,237 $121,272 $98,740 $80,079
Loans, net 123,551 110,843 93,364 79,152 64,464
Cash and interest-bearing deposits 4,886 4,603 14,292 11,231 7,035
Securities including FHLB stock 11,325 21,810 8,857 5,258 5,705
Deposits 123,008 128,315 106,193 87,695 70,552
FHLB advances 13,000 4,597 4,753 2,930 2,379
Other borrowings 2,586 2,614 1,382 0 0
Stockholders' equity 9,316 8,805 8,486 7,550 6,886
Year Ended December 31
------------------------------------------------------------
2000 1999 1998 1997 1996
------------------------------------------------------------
Summary of Selected Operating Data:
Total interest income $11,442 $10,134 $8,420 $7,361 $6,158
Total interest expense 6,559 5,639 4,509 3,807 3,166
------------------------------------------------------------
Net interest income 4,883 4,495 3,911 3,554 2,992
Provision for loan losses 219 201 239 255 219
------------------------------------------------------------
Net interest income after provision for
loan losses 4,664 4,294 3,672 3,299 2,773
Total non-interest income 749 461 418 305 249
Total non-interest expense 4,958 3,949 2,937 2,490 2,565
------------------------------------------------------------
Income before income taxes 455 806 1,153 1,114 457
Income taxes 34 164 350 376 116
------------------------------------------------------------
Net income $ 421 $ 642 $ 803 $ 738 $341
============================================================
Basic earnings per share* $ 0.41 $ 0.63 $0.81 $ 0.75 $ 0.35
Diluted earnings per share* $ 0.41 $ 0.62 $0.80 $ 0.74 $ 0.34
Year Ended December 31
------------------------------------------------------------
2000 1999 1998 1997 1996
------------------------------------------------------------
Other Selected Data:
Return on average assets .28% .48% .77% .85% .46%
Return on average equity 4.61 7.26 9.93 10.02 5.04
Average equity to average assets 6.18 6.53 7.75 8.45 9.14
Dividend payout ratio 39.02 22.22 13.33
* Net income per share has been restated to reflect the stock dividend declared
in 1997.
14
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
First Community is a subsidiary of the Registrant and operates as an Indiana
commercial bank. In May 1998, the Registrant formed a new subsidiary, First
Community Real Estate Management, Inc. to own and lease branch facilities to
First Community. In July 1998, FCREMI borrowed $800,000 at a rate of 1.125%
under prime, adjustable every 5 years for a term of 30 years, from another
financial institution in order to purchase the land and building of First
Community's Bargersville branch office at 136 E. Harriman Ave. in Bargersville,
Indiana and the land and building of its Banta Street office at 597 Banta Street
in Franklin, Indiana. In December 1998, FCREMI borrowed $416,000 at a rate of
7.25% with payments due in monthly installments through November 2003 with a
final balloon payment due in December 2003, from another financial institution
in order to purchase the land and building of First Community's Greenwood branch
office at 298 State Road 135 North in Greenwood, Indiana. In August 1999, FCREMI
borrowed $422,800 from another financial institution at a rate of 7.50% with
payments of principal and interest due monthly for 5 years based on a 20 year
amortization schedule. The balance is due at the end of 5 years or may be
renewed at a variable interest rate. These loan proceeds were used to purchase
the land and buildings of First Community's North Vernon branch offices at 21
Madison Avenue and 521 N. State Street, North Vernon, Indiana. First Community
is making monthly lease payments to FCREMI as lessee of these locations. These
lease payments are sufficient to service the debt. As a bank holding company,
the Registrant depends upon the operations of its subsidiaries for all revenue
and reports its results of operations on a consolidated basis with its
subsidiaries.
First Community's profitability depends primarily upon the difference between
the income on its loans and investments and the cost of its deposits and
borrowings. This difference is referred to as the spread or net interest margin.
The difference between the amount of interest earned on loans and investments
and the interest incurred on deposits and borrowings is referred to as net
interest income. Interest income from loans and investments is a function of the
amount of loans and investments outstanding during the period and the interest
rates earned. Interest expense related to deposits and borrowings is a function
of the amount of deposits and borrowings outstanding during the period and the
interest rates paid.
Results of Operations
The following discussion of Results of Operations is for the years ended
December 31, 2000, 1999 and 1998.
Net income for the year ended December 31, 2000 was $421,000, compared to
$642,000 and $803,000 for the years ended December 31, 1999 and 1998,
respectively. Basic earnings per share was $.41 for the year ended December 31,
2000 compared to $.63 and $.81 for the years ended December 31, 1999 and 1998,
respectively. Diluted earnings per share was $0.41 for the year ended December
31, 2000 compared to $0.62 and $.80 for the years ended December 31, 1999 and
1998, respectively. Earnings decreased from 1999 to 2000 primarily due to
expenses incurred in relation to new key man life insurance of $143,000 and
after tax expenses in relation to the now-terminated definitive agreement to
acquire Blue River Federal Savings Bank of approximately $57,000. Earnings
decreased from 1998 to 1999 primarily as a result of an increase in non-interest
expense. Earnings increased from 1997 to 1998 primarily as a result of growth in
First Community's loans and certain other items more fully discussed below.
The increase in net interest income of $388,000 in 2000, as compared to 1999,
resulted primarily from an increase in lending and the associated income from
this activity. Net loans outstanding increased $12.7 million in 2000 with
commercial and commercial real estate seeing the primary growth, but all other
lending areas seeing increases as well. The provision for loan losses of
$219,000 was recorded in 2000 as a result of an increase in the loan portfolio.
The increase in non-interest income of $288,000 in 2000 resulted from management
focusing heavily on service fee income. The results included $101,000 of
additional interchange and surcharge income from ATM operations and $86,000 of
additional NSF fees being collected due to an increase in per item charges and
an increase in number of demand accounts being serviced. The Registrant also had
$66,000 in increases to cash surrender values on key man life insurance policies
owned, and an increase of $22,000 in fees from an off-line debit card program.
The increases in non-interest income were partially offset by losses on sales of
available for sale securities. The Registrant sold several available for sale
securities prior to maturity at an aggregate loss of $25,000 during the year
ended December 31, 2000. The Registrant's growth has been facilitated by and
resulted in the increase of additional personnel, facilities as well as other
general expenses. Data processing expense increased $160,000 in 2000 both as a
result of First Community switching its statement rendering process from manual
rendering in-house to laser printed imaged statements being outsourced through
its primary service bureau and the number of accounts being serviced increasing
dramatically over the past several years. Income taxes decreased $130,000
because of a decrease in overall
15
taxable income. The Registrant's consolidated effective tax rate was 7.4% in
2000 as compared to 20.4% in 1999. For both 2000 and 1999, the primary
difference between the effective tax rate and the statutory tax rate relates to
tax-exempt interest.
The increase in net interest income of $584,000 in 1999, as compared to 1998,
resulted primarily from an increase in lending and the income derived therefrom.
Net loans outstanding increased $17.5 million in 1999, with growth in nearly
each lending area. A provision for loan losses of $201,000 was recorded as a
result of an increase in the loan portfolio and not a deterioration of the same.
The increase in income from service fees of $56,000 resulted from a significant
increase in the number of deposit accounts and fees associated with the same.
The increases in other expenses are a direct result of the overall growth of the
Registrant. Income taxes decreased $186,000 because of a decrease in overall
taxable income. The Registrant's consolidated effective tax rate for 1999 was
20.4% as compared to 30.4% for 1998. The decline in the effective tax rate was
primarily a result of an increase in tax-exempt securities.
The increase in net interest income of $357,000 in 1998, as compared to 1997,
resulted primarily from an increase in lending and the income derived therefrom.
Net loans outstanding increased $14.2 million in 1998 with growth in each
lending area. A provision for loan losses of $239,000 was recorded as a result
of an increase in the loan portfolio and not a deterioration of the same. The
increase in income from service fees of $57,000 resulted from a significant
increase in the number of deposit accounts and fees associated with the same.
The increases in other expenses are a direct result of the overall growth of
First Community. The Registrant's consolidated effective tax rate for 1998 was
30.4% as compared to 33.7% for 1997.
Quarterly Results of Operations
The following table sets forth certain quarterly results for the years ended
December 31, 2000 and 1999. (Dollars in thousands except for per share data)
- ----------------------- --------- ----------- --------- ----------- ---------- ----------- ------------ -------------
Net Provision Basic Diluted
Quarter Interest Interest Interest For Loan Net Earnings Earnings Dividends
Ended Income Expense Income Losses Income Per Share Per Share Per Share
- ----------------------- --------- ----------- --------- ----------- ---------- ----------- ------------ -------------
2000:
March $2,785 $1,582 $1,203 $64 $103 $.10 $ .10 $ .04
June 2,792 1,576 1,216 55 226 .22 .21 .04
September 2,852 1,613 1,239 40 157 .15 .15 .04
December 3,013 1,789 1,224 60 (66) (.06) (.06) .04
1999:
March 2,326 1,228 1,098 75 205 .20 .20 .03
June 2,417 1,347 1,070 75 180 .18 .17 .03
September 2,663 1,492 1,171 75 207 .20 .20 .04
December 2,728 1,572 1,156 (24) 49 .05 .05 .04
The Registrant had a net loss during the quarter ending December 31, 2000, as
compared to net income in the three other quarter ends during 2000. The quarter
ending December 31, 2000 had two non-recurring expenses included in non-interest
expense. The first was a $143,000 up-front charge in relation to a new key man
life insurance policy that the Registrant acquired during the fourth quarter.
The Registrant believes that this initial expense will be recovered over the
term of the key man life insurance. There was also an aggregate pre-tax expense
of $94,000 in relation to the termination of the definitive agreement to acquire
Blue River Federal Savings Bank, as was discussed earlier.
Net income was $103,000 during the quarter ending March 31, 2000, as compared to
$226,000 and $157,000 in the quarters ending June 30, 2000 and September 30,
2000, respectively. The quarter ending March 31, 2000 was the first full quarter
that the Registrant had 10 full-service branches and an operations center open.
First Community opened full-service branches in Whiteland, Indiana and
Edinburgh, Indiana in September 1999 and January 2000, respectively. In
addition, First Community moved it's primary operations into a new leased
facility in Franklin, Indiana in October 1999. As a result of these three fixed
asset investments in a short period of time, the following expense categories
rose sharply: premises and
16
equipment, salaries, printing and office supplies, telephone, and other
operating expense. These expenses were offset in the third and fourth quarters
of 2000 by the increases in non-interest income.
The Registrant had lower net income during the quarter ending December 31, 1999,
as compared to the three other quarter ends during 1999. Other operating
expenses were up primarily due to the cash items determined to be uncollectible
and therefore expensed in the fourth quarter of 1999. Salaries, premises,
printing, and office supplies expense were also up significantly during this
time frame in relation to new fixed asset investments made by the Registrant
during the quarter, as discussed above. There was an adjustment of $24,000 to
the provision for loan losses in the fourth quarter based on management's
calculation of reserves necessary in relation to the loan portfolio.
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, 2000 and 1999.
17
2000 1999
-------------------------------------- ---------------------------------------
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 $6,325 $ 245 3.9% $12,132 $ 494 4.1%
Investment securities:(1)
Taxable 3,380 252 7.5 4,755 380 8.0
Tax-exempt 11,505 619 5.4 10,117 522 5.2
------------- ----------- -------------- ------------
Total investment securities 14,885 871 5.9 14,872 902 6.1
------------- ----------- -------------- ------------
Loans:(2)
Commercial 39,290 3,791 9.6 33,576 3,125 9.3
Real estate mortgage 37,192 2,885 7.8 33,223 2,508 7.5
Installment 38,426 3,645 9.5 32,385 3,069 9.5
Tax-exempt loans and leases 3,117 198 6.4 3,034 215 7.1
------------- ----------- -------------- ------------
Total loans 118,025 10,519 8.9 102,218 8,917 8.7
------------- ----------- -------------- ------------
Total earning assets 139,235 11,635 8.4 129,222 10,313 8.0
----------- ------------
Allowance for loan losses ( 938) (1,029)
Cash and due from banks 1,914 1,477
Premises and equipment 4,517 3,701
Other assets 3,578 1,922
------------- --------------
Total assets $148,306 $135,293
============= ==============
Liabilities:
Interest-bearing deposits:
NOW accounts $ 19,807 564 2.8 $ 15,937 426 2.7
Savings 24,988 1,008 4.0 25,117 967 3.9
Certificates of deposit and
other time 74,795 4,449 5.9 68,550 3,769 5.5
------------- ----------- -------------- ------------
Total interest-bearing deposits 119,590 6,021 5.0 109,604 5,162 4.7
FHLB advances 5,900 348 5.9 5,612 318 5.7
Other borrowings 2,597 190 7.3 2,215 159 7.2
------------- ----------- -------------- ------------
Total interest-bearing liabilities 128,087 6,559 5.1 117,431 5,639 4.8
----------- ------------
Noninterest-bearing demand
deposits 9,865 8,146
Other liabilities 1,214 877
------------- --------------
Total liabilities 139,166 126,454
Stockholders' equity 9,140 8,839
------------- --------------
Total liabilities and
stockholders' equity $148,306 $135,293
============= ==============
Net interest income 5,076 3.6%3 4,674 3.6%(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.
$ 193 $ 179
=========== ============
- --------
(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.
18
Changes in Interest Income and Expense Comparing December 31, 2000 and 1999 and
December 31, 1999 and 1998. The following tables analyze the changes in interest
income and interest expense comparing the years ended December 31, 2000 and 1999
and December 31, 1999 and 1998. 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, 2000 compared to year ended Due to Due to
December 31, 1999 Change Rate Volume
-----------------------------------------------------
Interest-earning assets: (Dollars in 000's)
Loans $ 1,602 $ 211 $ 1,391
Investment securities (31) (32) 1
Interest-bearing deposits (249) (17) (232)
-----------------------------------------------------
Total 1,322 162 1,160
-----------------------------------------------------
Interest-bearing liabilities:
Savings 41 46 (5)
Interest-bearing checking 138 32 106
Certificates of deposit 680 324 356
FHLB advances 30 13 17
Other borrowings 31 3 28
-----------------------------------------------------
Total 920 418 502
-----------------------------------------------------
Net change in net interest income $ 402 $ (256) $ 658
=====================================================
-----------------------------------------------------
Increase (Decrease) in Net Interest Income
-----------------------------------------------------
Year ended December 31, 1999 compared to year ended Change Due to Due to
December 31, 1998 Rate Volume
-----------------------------------------------------
Interest-earning assets: (Dollars in 000's)
Loans $ 1,201 $ (202) $ 1,403
Investment securities 416 (125) 541
Interest-bearing deposits 166 (9) 175
-----------------------------------------------------
Total 1,783 (336) 2,119
-----------------------------------------------------
Interest-bearing liabilities:
Savings 97 (109) 206
Interest-bearing checking 150 4 146
Certificates of deposit 610 (170) 780
FHLB advances 143 (4) 147
-----------------------------------------------------
Other borrowings 130 130
-----------------------------------------------------
Total 1,130 (279) 1,409
-----------------------------------------------------
Net change in net interest income $ 653 $ (57) $ 710
=====================================================
Asset/Liability Management
One of the actions undertaken by First Community's management has been to adopt
asset/liability management policies in an attempt to reduce the susceptibility
of First Community's net interest spread to the adverse impact of volatile
interest rates by attempting to match maturities (or time-to-repricing) of
assets with maturities or repricing of liabilities and then actively managing
any mismatch. Accomplishing this objective requires attention to both the asset
and liability sides of the balance sheet. The balance between maturity of assets
and maturity of liabilities is measured by the interest-rate gap.
First Community's one-year cumulative interest-rate gap as a percent of total
assets was a negative 11.07% and a negative 20.53% at December 31, 2000 and
1999, respectively. This interest-rate gap represents substantial risk for First
Community in an environment of rising interest rates. A negative interest-rate
gap means First Community's earnings are vulnerable
19
during periods of rising interest rates because during such periods the interest
expense paid on liabilities will generally increase more rapidly than the
interest income earned on assets. Conversely, in a falling interest-rate
environment, the total expense paid on liabilities will generally decrease more
rapidly than the interest income earned on assets. A positive interest-rate gap
would have the opposite effect.
Asset management goals have been directed toward obtaining a suitable balance of
asset quality, liquidity and diversification in order to stabilize and improve
earnings. The asset management strategy has concentrated on shortening the
maturity of its loan portfolio by increasing adjustable-rate loans and
short-term installment and commercial loans. To this end, at December 31, 2000,
First Community had $72.4 million or 58.2% of its total loan portfolio invested
in installment and commercial loans as compared to $62.5 million or 56.0% of
total loans invested in installment and commercial loans at December 31, 1999.
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,
2000, First Community's ratio of non-performing assets to total assets was .46%
compared to .24% at December 31, 1999.
The primary goal in the management of liabilities has been to extend the
maturities and improve the stability of deposit accounts. Management has
attempted to combine a policy for controlled growth with a strong, loyal
customer base to control interest expense.
The following tables illustrate the interest-rate sensitivity of
interest-earning assets and interest-bearing liabilities at December 31, 2000
and 1999. 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, 2000 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 $11,733 $ 9,395 $ 3,442 $ 29 $24,599
Fixed rate mortgages 4,523 2,831 3,199 19,407 29,960
Commercial loans 22,665 3,425 1,370 898 28,358
Consumer loans 15,209 15,642 6,479 1,487 38,817
Tax-exempt loans and leases 209 1,048 1,387 2,644
Investments 1,130 3,008 3,349 3,160 10,647
FHLB stock 778 778
Interest-bearing deposits 4,886 4,886
------------- ------------- ------------- ------------ -------------
Total interest-earning assets 60,924 34,510 18,887 26,368 140,689
------------- ------------- ------------- ------------ -------------
Interest-bearing liabilities:
Fixed maturity deposits 48,211 16,380 1,155 3,346 69,092
Other deposits 24,227 10,575 4,488 1,412 40,702
FHLB advances 5,000 8,000 13,000
------------- ------------- ------------- ------------ -------------
Total interest-bearing liabilities 77,438 34,955 5,643 4,758 122,794
------------- ------------- ------------- ------------ -------------
Excess (deficiency) of interest-earning
assets over interest-bearing liabilities (16,514) (445) 13,244 21,610 17,895
Cumulative excess (deficiency) of
interest-earning assets over
interest-bearing liabilities (16,514) (16,959) (3,715) 17,895
Cumulative ratio at December 31, 2000 as a
percent of total assets (11.07)% (11.4)% (2.5)% 12.0%
20
At December 31, 1999 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 $12,054 $ 6,545 $6,474 $25,073
Fixed rate mortgages 5,216 2,592 2,767 $16,602 27,177
Commercial loans 13,434 3,780 1,499 1,291 20,004
Consumer loans 13,010 14,410 7,244 1,664 36,328
Tax-exempt loans and leases 60 328 459 2,157 3,004
Investments 8,347 3,347 3,689 6,016 21,399
FHLB stock 778 778
Interest-bearing deposits 4,603 4,603
------------- ------------- ------------- ------------ -------------
Total interest-earning assets 57,502 31,002 22,132 27,730 138,366
------------- ------------- ------------- ------------ -------------
Interest-bearing liabilities:
Fixed maturity deposits 59,557 11,058 2,219 3,128 75,962
Other deposits 27,127 9,758 4,914 1,142 42,941
FHLB advances 638 2,725 1,234 4,597
------------- ------------- ------------- ------------ -------------
Total interest-bearing liabilities 87,322 23,541 8,367 4,270 123,500
------------- ------------- ------------- ------------ -------------
Excess (deficiency) of interest-earning
assets over interest-bearing liabilities (29,820) 7,461 13,765 23,460 14,866
Cumulative excess (deficiency) of
interest-earning assets over
interest-bearing liabilities (29,820) (22,359) (8,594) 14,866
Cumulative ratio at December 31, 1999 as a
percent of total assets (20.53)% (15.39)% (5.92)% 10.39%
Deposit/Asset Base. First Community has experienced significant growth in
deposits and assets in four out of 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 the Registrant's consolidated assets from $80.1
million at December 31, 1996 to $149.2 million at December 31, 2000 and deposits
from $70.6 million at December 31, 1996 to $123.0 million at December 31, 2000.
These factors include: (i) increased population in the geographic area serviced;
(ii) increased per-household disposable income in the geographic area serviced;
(iii) an increase in the number of branch offices; and (iv) the preference of
certain individuals in the service area for dealing with a locally owned
institution. Due to management's efforts to control asset growth and restructure
the deposit mix in 2000, assets only grew $4.0 million or 2.8% and deposits
decreased $5.3 million or 4.1% during the same time frame. These efforts were
being made to increase net interest margin and to strengthen First Community's
capital ratio's.
Liquidity and Capital Resources
Liquidity refers to the ability of a financial institution to generate
sufficient cash to fund current loan demand, meet savings deposit withdrawals
and pay operating expenses. The primary sources of liquidity are cash,
interest-bearing deposits in other financial institutions, marketable
securities, loan repayments, increased deposits and total institutional
borrowing capacity.
Cash and interest-bearing deposits, when combined with investments, declined
during 2000. As investments matured, the dollars were used to both fund new
loans and to fund deposit outflows. 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.
21
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, 2000 and December 31, 1999.
During 2000 and 1999, cash and cash equivalents which are defined as cash and
due from banks and interest-bearing time deposits increased $283,000 and
decreased $9.7 million, respectively. During 2000 and 1999, investment
securities decreased $10.5 million and increased $13.0 million, respectively.
Cash was used in 2000 to fund net increases in loans of $12.7 million. Cash was
provided primarily in 1999 from a net increase in deposits of $22.1 million and
was primarily used to fund net increases in loans of $17.8 million.
At December 31, 2000 and 1999, commitments to fund loan originations were
approximately $11.4 million and $9.0 million, respectively. In the opinion of
management, First Community has sufficient cash flow and borrowing capacity to
meet funding commitments and to maintain proper liquidity levels based upon
First Community's favorable liquidity ratio and the ability to borrow from the
FHLB.
First Community is a member of the FHLB of Indianapolis. Through that
affiliation, First Community has the ability to borrow up to $25.0 million at
December 31, 2000 from the FHLB and the balance of its borrowings at December
31, 2000 was $13.0 million, an increase of $8.4 million from outstanding
borrowings at December 31, 1999. The new fundings were primarily used to fund
net deposit outflows of $5.3 million.
On October 30, 1998, the Registrant issued rights and warrants to shareholders
to purchase one share of common stock of the Registrant for every ten shares
owned as of October 29, 1998, subject to a minimum offer and purchase of 100
shares. The rights were exercisable until March 30, 1999 and the warrants were
exercisable from September 15, 1999 to December 13, 1999. The net proceeds to
the Registrant from the sale of the stock, after deducting the expenses, were
$149,000 of which $121,000 was received during 1999 and $28,000 was received
during 1998. The purpose of the rights offering was to raise additional capital
for First Community to support additional growth and for general corporate
purposes.
In addition, on October 30, 1998, the Registrant commenced the offer and sale of
up to $1.0 million in unsecured convertible notes, of which $1.0 million were
sold. The notes are due December 31, 2008, bear interest at the rate of 7% per
annum and, at the option of the holder, are convertible to common stock of the
Registrant at the conversion price of $11.00 per share. The net proceeds of this
offering were used to provide capital to FCREMI to acquire and lease branch
facilities to First Community and to provide additional capital to First
Community to support asset growth.
Accounting Matters
The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative
Instruments and Hedging Activities. This Statement requires companies to record
derivatives on the balance sheet at their fair value. SFAS No. 133 also
acknowledges that the method of recording a gain or loss depends on the use of
the derivative. If certain conditions are met, a derivative may be specifically
designated as (a) a hedge of the exposure to changes in the fair value of a
recognized asset or liability or an unrecognized firm commitment, (b) a hedge of
the exposure to variable cash flows of a forecasted transaction, or (c) a hedge
of the foreign currency exposure of a net investment in a foreign operation, an
unrecognized firm commitment, an available-for-sale security, or a
foreign-currency-denominated forecasted transaction.
o For a derivative designated as hedging the exposure to changes in the fair
value of a recognized asset or liability or a firm commitment (referred to
as a fair value hedge), the gain or loss is recognized in earnings in the
period of change together with the offsetting loss or gain on the hedged
item attributable to the risk being hedged. The effect of that accounting
is to reflect in earnings the extent to which the hedge is not effective in
achieving offsetting changes in fair value.
o For a derivative designated as hedging the exposure to variable cash flows
of a forecasted transaction (referred to as a cash flow hedge), the
effective portion of the derivative's gain or loss is initially reported as
a component of other comprehensive income (outside earnings) and
subsequently reclassified into earnings when the forecasted transaction
affects earnings. The ineffective portion of the gain or loss is reported
in earnings immediately.
o For a derivative designated as hedging the foreign currency exposure of a
net investment in a foreign operation, the gain or loss is reported in
other comprehensive income (outside earnings) as part of the cumulative
translation adjustment.
22
The accounting for a fair value hedge described above applies to a
derivative designated as a hedge of the foreign currency exposure of an
unrecognized firm commitment or an available-for-sale security. Similarly,
the accounting for a cash flow hedge described above applies to a
derivative designated as a hedge of the foreign currency exposure of a
foreign-currency-denominated forecasted transaction.
o For a derivative not designated as a hedging instrument, the gain or loss
is recognized in earnings in the period of change.
The new Statement applies to all entities. If hedge accounting is elected by the
entity, the method of assessing the effectiveness of the hedging derivative and
the measurement approach of determining the hedge's ineffectiveness must be
established at the inception of the hedge.
SFAS No. 133 amends SFAS No. 52 and supersedes SFAS Nos. 80, 105, and 119. SFAS
No. 107 is amended to include the disclosure provisions about the concentrations
of credit risk from SFAS No. 105. Several Emerging Issues Task Force consensuses
are also changed or nullified by the provisions of SFAS No. 133.
SFAS No. 133 was effective for all fiscal quarters beginning after June 15,
2000. SFAS No. 133 did not have a material impact on the Registrant's
consolidated financial statements.
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.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Although the Registrant files a Form 10-K in lieu of a Form 10-KSB, the
Registrant qualifies as a small business issuer. Therefore, Item 7A is not
required under Section 229.305 of Regulation S-K.
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, 2000.
23
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, 2000 and 1999 F-2
Consolidated Statement of Income for the years ended December 31,
2000, 1999 and 1998. F-3
Consolidated Statement of Comprehensive Income for the years ended
December 31, 2000, 1999 and 1998. F-4
Consolidated Statement of Stockholders' Equity for the years ended
December 31, 2000, 1999 and 1998. F-5
Consolidated Statement of Cash Flows for the years ended December
31, 2000, 1999 and 1998. F-6
Notes to consolidated financial statements. F-7
2. Exhibit Index. The following exhibits are included as part of this
Annual Report:
2.1 Agreement and Plan of Reorganization by and between Blue River
Federal Savings Bank, a federally chartered stock saving bank,
and First Community Bancshares, Inc., an Indiana corporation and
bank holding company, dated November 10, 1999 (Incorporated
herein by reference to the Report on Form 8-K filed with the SEC
on November 17, 1999, File No. 000-19618).
3.1 Articles of Incorporation of First Community Bancshares, Inc.
(Incorporated herein by reference to the Registration Statement
on Form S-4 of First Community Bancshares, Inc. with Registration
No. 33-47691 declared effective July 30, 1992).
3.2 Amended Bylaws of First Community Bancshares, Inc. (Incorporated
herein by reference to the Form 10-K of First Community
Bancshares, Inc. for the fiscal year ended December 31, 1992 and
filed with the Securities and Exchange Commission on March 31,
1993)(Commission File No. 0-19618).
10.6 First Community Bancshares, Inc. 1992 Stock Option Plan, as
amended and approved by Shareholders on May 19, 1993
(Incorporated herein by reference to the Form 10-K of First
Community Bancshares, Inc. for the fiscal year ended December 31,
1993 and filed with the Securities and Exchange Commission on
March 30, 1994)(Commission File No. 0-19618).
10.7 Agreement To Purchase Real Estate by and between First Community
Bank & Trust and Mutual Building and Loan Association
(Incorporated herein by reference to the Form 10-K of First
Community Bancshares, Inc. for the fiscal year ended December 31,
1993 and filed with the Securities and Exchange Commission on
March 30, 1994).
10.8* Deferred Director Fee Agreement by and between First Community
Bank & Trust Company and Merrill M. Wesemann Dated November 23,
1994 (Incorporated herein by reference to the Form 10-K of First
Community Bancshares, Inc. for the fiscal year ended December 31,
1994 and filed with the Securities and Exchange Commission on
March 13, 1995).
24
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).
10.11* Deferred Director Fee Agreement by and between First Community
Bank & Trust and Frank D. Neese dated October 29, 1999
(Incorporated herein by reference to the Form 10-Q of First
Community Bancshares, Inc. for the quarter ended September 30,
1999 and filed with the Securities and Exchange Commission on
November 15, 1999).
10.12* Deferred Director Fee Agreement by and between First Community
Bank & Trust and Roy Martin Umbarger dated October 29, 1999
(Incorporated herein by reference to the Form 10-Q of First
Community Bancshares, Inc. for the quarter ended September 30,
1999 and filed with the Securities and Exchange Commission on
November 15, 1999).
10.13* First Amendment to the Deferred Fee Agreement by and between
First Community Bank & Trust and Merrill M. Wesemann, M. D. dated
October 29, 1999 (Incorporated herein by reference to the Form
10-Q of First Community Bancshares, Inc. for the quarter ended
September 30, 1999 and filed with the Securities and Exchange
Commission on November 15, 1999).
10.14 First Amendment to 1996 Stock Option Plan, as approved by the
Board of Directors November 17, 1999 (Incorporated herein by
reference to the Form 10-K of First Community Bancshares, Inc.
for the fiscal year ended December 31, 1999 and filed with the
Securities and Exchange Commission on March 30, 2000).
10.15* First Community Bank & Trust Supplemental Executive Retirement
Plan, as approved by the Board of Directors July 12, 2000.
21 Subsidiaries of First Community Bancshares, Inc. (Incorporated
herein by reference to the Registration Statement on Form SB-2 of
First Community Bancshares, Inc., Registration No. 333-63239,
declared effective October 30, 1998).
* Compensatory plan or arrangement
25
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, 2001.
FIRST COMMUNITY BANCSHARES, INC.
By: /s/ Albert R. Jackson , III
----------------------------------
Albert R. Jackson, III, Chief Executive
Officer and Director
By: /s/ Randy J. Sizemore
----------------------------------
Randy J. Sizemore, Vice President of Finance
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
- ----------------------------------------------
Albert R. Jackson, III, Chief Executive March 30, 2001
Officer and Director
/s/ Merrill M. Wesemann March 30, 2001
- ----------------------------------------------
Merrill M. Wesemann, MD, Director and Chairman
/s/ Eugene W. Morris March 30, 2001
- ----------------------------------------------
Eugene W. Morris, Director and President
/s/ Roy Martin Umbarger March 30, 2001
- ----------------------------------------------
Roy Martin Umbarger, Director and Vice President
/s/ Frank D. Neese March 30, 2001
- ----------------------------------------------
Frank D. Neese, Director and Secretary
/s/ Albert R. Jackson, Jr. March 30, 2001
- ----------------------------------------------
Albert R. Jackson, Jr., Director
[LETTERHEAD OF OLIVE LLP]
Independent Auditor's Report
To the Stockholders and
Board of Directors
First Community Bancshares, Inc.
Bargersville, Indiana
We have audited the accompanying consolidated balance sheet of
First Community Bancshares, Inc. and subsidiaries as of
December 31, 2000 and 1999, and the related consolidated
statements of income, comprehensive income, stockholders'
equity and cash flows for each of the three years in the
period ended December 31, 2000. These consolidated financial
statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used
and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements described above
present fairly, in all material respects, the consolidated
financial position of First Community Bancshares, Inc. and
subsidiaries as of December 31, 2000 and 1999, and the results
of their operations and their cash flows for each of the three
years in the period ended December 31, 2000, in conformity
with generally accepted accounting principles.
Olive LLP
Indianapolis, Indiana
February 16, 2001
F-1
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Balance Sheet
December 31 2000 1999
- ----------------------------------------------------------------------------------------------------------
Assets
Cash and due from banks $ 1,871,880 $ 2,357,531
Short-term interest-bearing deposits 3,014,502 2,245,670
----------------------------------------
Cash and cash equivalents 4,886,382 4,603,201
Investment securities
Available for sale 9,198,559 14,065,377
Held to maturity (fair value of $1,344,528 and $6,922,146) 1,348,778 6,966,605
----------------------------------------
Total investment securities 10,547,337 21,031,982
Loans, net of allowance for loan losses of $1,007,174 and $873,203 123,550,724 110,842,671
Premises and equipment 4,825,460 4,448,634
Federal Home Loan Bank of Indianapolis stock, at cost 777,800 777,800
Interest receivable 1,172,511 1,084,609
Cash value of life insurance 2,353,161 1,593,788
Other assets 1,081,502 854,001
----------------------------------------
Total assets $ 149,194,877 $ 145,236,686
========================================
Liabilities
Deposits
Noninterest-bearing $ 13,214,606 $ 9,411,994
Interest-bearing 109,793,721 118,903,006
----------------------------------------
Total deposits 123,008,327 128,315,000
Federal Home Loan Bank of Indianapolis advances 13,000,000 4,597,389
Other borrowings 2,586,424 2,613,827
Interest payable 472,442 334,234
Other liabilities 811,666 570,756
----------------------------------------
Total liabilities 139,878,859 136,431,206
----------------------------------------
Commitments and Contingent Liabilities
Stockholders' Equity
Preferred stock, no par value
Authorized and unissued--1,000,000 shares
Common stock, no par value
Authorized--4,000,000 shares
Issued and outstanding--1,039,926 and 1,019,694 shares 7,023,225 6,930,024
Retained earnings and contributed capital 2,352,588 2,096,894
Accumulated other comprehensive loss (59,795) (221,438)
----------------------------------------
Total stockholders' equity 9,316,018 8,805,480
----------------------------------------
Total liabilities and stockholders' equity $ 149,194,877 $ 145,236,686
========================================
See notes to consolidated financial statements.
F-2
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statement of Income
Year Ended December 31 2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------
Interest Income
Loans, including fees $ 10,472,180 $ 8,863,764 $7,651,263
Securities
Taxable 187,383 317,845 244,300
Tax exempt 472,420 394,888 133,572
Deposits with financial institutions 244,562 494,024 327,693
Dividends 65,684 63,684 63,609
-----------------------------------------------------
Total interest income 11,442,229 10,134,205 8,420,437
-----------------------------------------------------
Interest Expense
Deposits 6,021,889 5,161,530 4,305,064
Federal Home Loan Bank advances 347,660 318,087 175,303
Other borrowings 190,005 159,252 28,606
-----------------------------------------------------
Total interest expense 6,559,554 5,638,869 4,508,973
-----------------------------------------------------
Net Interest Income 4,882,675 4,495,336 3,911,464
Provision for loan losses 219,100 201,040 239,000
-----------------------------------------------------
Net Interest Income After Provision for Loan Losses 4,663,575 4,294,296 3,672,464
-----------------------------------------------------
Other Income
Fiduciary activities 21,284 31,683 38,498
Service charges on deposit accounts 497,415 366,068 309,965
Net realized losses on sales of available-for-sale securities (25,014)
Other operating income 255,464 63,587 69,869
-----------------------------------------------------
Total other income 749,149 461,338 418,332
-----------------------------------------------------
Other Expenses
Salaries and employee benefits 2,234,483 1,814,961 1,434,507
Premises and equipment 689,325 452,748 322,422
Advertising 156,477 157,688 119,030
Data processing fees 518,541 358,271 285,763
Deposit insurance expense 45,244 79,099 52,487
Printing and office supplies 249,652 116,151 89,303
Legal and professional fees 181,264 252,608 129,990
Telephone expense 117,633 106,026 72,725
Life insurance expenses 157,179 2,889
Other operating expenses 608,473 609,051 431,284
-----------------------------------------------------
Total other expenses 4,958,271 3,949,492 2,937,511
-----------------------------------------------------
Income Before Income Tax 454,453 806,142 1,153,285
Income tax expense 33,606 164,267 350,251
-----------------------------------------------------
Net Income $ 420,847 $ 641,875 $ 803,034
=====================================================
Basic Earnings Per Share $ .41 $ .63 $ .81
Diluted Earnings Per Share .41 .62 .80
See notes to consolidated financial statements.
F-3
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statement of Comprehensive Income
Year Ended December 31 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------
Net Income $ 420,847 $ 641,875 $ 803,034
Other comprehensive income, net of tax
Unrealized gains (losses) on securities available for sale Unrealized holding
gains (losses) arising during the period, net of
tax expense (benefit) of $96,114, $(157,605) and $(9,255) 146,537 (240,287) (14,110)
Less: Reclassification adjustment for losses included in net income,
net of tax benefit of $9,908 (15,106)
------------------------------------------------
161,643 (240,287) (14,110)
------------------------------------------------
Comprehensive income $ 582,490 $ 401,588 $ 788,924
================================================
See notes to consolidated financial statements.
F-4
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
Retained Accumulated
Common Stock Earnings Other
------------------------------- and Comprehensive
Shares Contributed Income
Outstanding Amount Capital (Loss) Total
- ------------------------------------------------------------------------------------------------------------------------------
Balances, January 1, 1998 989,848 $6,722,251 $ 794,796 $32,959 $7,550,006
Net income 803,034 803,034
Unrealized losses on securities (14,110) (14,110)
Exercise of stock options 15,420 85,427 85,427
Tax benefit on stock options exercised 33,349 33,349
Rights exercised, net of cost 6,144 28,399 28,399
-------------------------------------------------------------------------------
Balances, December 31, 1998 1,011,412 6,869,426 1,597,830 18,849 8,486,105
Net income 641,875 641,875
Unrealized losses on securities (240,287) (240,287)
Cash dividends ($.14 per share) (142,811) (142,811)
Purchase of stock (6,951) (60,419) (60,419)
Rights and warrants exercised, net of cost 15,233 121,017 121,017
-------------------------------------------------------------------------------
Balances, December 31, 1999 1,019,694 6,930,024 2,096,894 (221,438) 8,805,480
Net income 420,847 420,847
Unrealized gains on securities 161,643 161,643
Cash dividends ($.16 per share) (165,153) (165,153)
Purchase of stock (10,608) (89,953) (89,953)
Exercise of stock options 30,840 170,854 170,854
Tax benefit on stock options exercised 12,300 12,300
-------------------------------------------------------------------------------
Balances, December 31, 2000 1,039,926 $7,023,225 $2,352,588 $(59,795) $9,316,018
===============================================================================
See notes to consolidated financial statements.
F-5
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statement of Cash Flows
Year Ended December 31 2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------
Operating Activities
Net income $ 420,847 $ 641,875 $ 803,034
Adjustments to reconcile net income to net cash provided by operating
activities
Provision for loan losses 219,100 201,040 239,000
Depreciation and amortization 374,568 212,679 156,851
Deferred income tax (135,490) (108,603) 52,712
Investment securities amortization (accretion) 44,953 (47,848) 20,293
Investment securities losses 25,014
Loss on disposal of premises and equipment 2,318 3,179
Gain on sale of foreclosed assets (7,241)
Net change in
Interest receivable (87,902) (155,656) (228,874)
Interest payable 138,208 75,367 8,250
Other adjustments 218,904 115,923 (246,668)
---------------------------------------------------
Net cash provided by operating activities 1,218,202 929,854 807,777
---------------------------------------------------
Investing Activities
Purchases of securities available for sale (14,434,780) (4,963,542)
Proceeds from sales of securities available for sale 2,435,192
Proceeds from maturities of securities available for sale 2,598,330 7,066,591 645,000
Purchases of securities held to maturity (4,973,179) (6,956,714)
Proceeds from maturities and paydowns of securities held to maturity 10,622,000 1,022,500 675,000
Net change in loans (13,122,398) (17,754,883) (14,532,929)
Purchases of premises and equipment (751,394) (1,330,300) (1,548,582)
Proceeds from sale of foreclosed assets 96,455 82,585 160,883
Premiums on life insurance (825,118) (1,470,000)
---------------------------------------------------
Net cash used by investing activities (3,920,112) (33,775,001) (19,564,170)
---------------------------------------------------
Financing Activities
Net change in
Noninterest-bearing, NOW, and savings deposits 1,562,633 2,570,652 13,833,819
Certificates of deposit (6,869,306) 19,551,224 4,663,990
Proceeds from borrowings 10,000,000 2,252,800 3,386,000
Repayment of borrowings (1,624,792) (1,176,974) (180,399)
Cash dividends (164,345) (102,023)
Purchase of stock (89,953) (60,419)
Rights and warrants exercised, net of cost 121,017 28,399
Stock options exercised 170,854 85,427
---------------------------------------------------
Net cash provided by financing activities 2,985,091 23,156,277 21,817,236
---------------------------------------------------
Net Change in Cash and Cash Equivalents 283,181 (9,688,870) 3,060,843
Cash and Cash Equivalents, Beginning of Year 4,603,201 14,292,071 11,231,228
---------------------------------------------------
Cash and Cash Equivalents, End of Year $ 4,886,382 $ 4,603,201 $ 14,292,071
===================================================
Additional Cash Flows Information
Interest paid $ 6,421,346 $ 5,563,502 $ 4,500,723
Income tax paid 160,633 301,935 479,213
See notes to consolidated financial statements.
F-6
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 1 -- Nature of Operations and Summary of Significant Accounting Policies
The accounting and reporting policies of First Community Bancshares, Inc.
(Company) and its wholly owned subsidiaries, First Community Bank and Trust
(Bank) and First Community Real Estate Management, Inc. (FCREMI), conform to
generally accepted accounting principles and reporting practices followed by the
banking industry. The more significant of the policies are described below.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The Company is a bank holding company whose principal activity is the ownership
and management of the Bank. The Bank operates under a state bank charter and
provides full banking services, including trust services. As a state bank, the
Bank is subject to regulation by the Department of Financial Institutions, State
of Indiana and the Federal Deposit Insurance Corporation.
Description of business--The Bank generates commercial, mortgage and consumer
loans and receives deposits from customers located primarily in Johnson and
Jennings Counties, Indiana and surrounding counties. The Bank's loans are
generally secured by specific items of collateral including real property,
consumer assets and business assets. FCREMI was incorporated on May 26, 1998 to
hold and manage the real estate used by the Company and the Bank.
Consolidation--The consolidated financial statements include the accounts of the
Company, the Bank and FCREMI after elimination of all material intercompany
transactions.
Investment Securities--Debt securities are classified as held to maturity when
the Company has the positive intent and ability to hold the securities to
maturity. Securities held to maturity are carried at amortized cost. Debt
securities not classified as held to maturity are classified as available for
sale. Securities available for sale are carried at fair value with unrealized
gains and losses reported separately through accumulated other comprehensive
income (loss), net of tax.
Amortization of premiums and accretion of discounts are recorded as interest
income from securities. Realized gains and losses are recorded as net security
gains (losses). Gains and losses on sales of securities are determined on the
specific-identification method.
F-7
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Loans are carried at the principal amount outstanding. A loan is impaired when,
based on current information or events, it is probable that the Bank will be
unable to collect all amounts due (principal and interest) according to the
contractual terms of the loan agreement. Payments with insignificant delays not
exceeding 90 days outstanding are not considered impaired. Certain nonaccrual
and substantially delinquent loans may be considered to be impaired. The Bank
considers its investment in one-to-four family residential loans and consumer
loans to be homogeneous and therefore excluded from separate identification for
evaluation of impairment. Interest income is accrued on the principal balances
of loans. The accrual of interest on impaired and nonaccrual loans is
discontinued when, in management's opinion, the borrower may be unable to meet
payments as they become due. When interest accrual is discontinued, all unpaid
accrued interest is reversed when considered uncollectible. Interest income is
subsequently recognized only to the extent cash payments are received. Certain
loan fees and direct costs are being deferred and amortized as an adjustment of
yield on the loans over the contractual lives of the loans. When a loan is paid
off or sold, any unamortized loan origination fee balance is credited to income.
Allowance for loan losses is maintained to absorb potential loan losses based on
management's continuing review and evaluation of the loan portfolio and its
judgment as to the impact of economic conditions on the portfolio. The
evaluation by management includes consideration of past loan loss experience,
changes in the composition of the portfolio, and the current condition and
amount of loans outstanding, and the probability of collecting all amounts due.
Impaired loans are measured by the present value of expected future cash flows,
or the fair value of the collateral of the loan, if collateral dependent.
The determination of the adequacy of the allowance for loan losses is based on
estimates that are particularly susceptible to significant changes in the
economic environment and market conditions. Management believes that as of
December 31, 2000, the allowance for loan losses is adequate based on
information currently available. A worsening or protracted economic decline in
the area within which the Company operates would increase the likelihood of
additional losses due to credit and market risks and could create the need for
additional loss reserves.
Premises and equipment are carried at cost net of accumulated depreciation.
Depreciation is computed using the straight-line method based principally on the
estimated useful lives of the assets. Maintenance and repairs are expensed as
incurred while major additions and improvements are capitalized. Gains and
losses on dispositions are included in current operations.
Federal Home Loan Bank stock is a required investment for institutions that are
members of the Federal Home Loan Bank (FHLB) system. The required investment in
the common stock is based on a predetermined formula.
Foreclosed assets are carried at the lower of cost or fair value less estimated
selling costs. When foreclosed assets are acquired, any required adjustment is
charged to the allowance for loan losses. All subsequent activity is included in
current operations.
Stock options are granted for a fixed number of shares to employees with an
exercise price equal to the fair value of the shares at the date of grant. The
Company accounts for and will continue to account for stock option grants in
accordance with Accounting Principle Board Opinion (APB) No. 25, Accounting for
Stock Issued to Employees, and, accordingly, recognizes no compensation expense
for the stock option grants.
F-8
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Income tax in the consolidated statement of income includes deferred income tax
provisions or benefits for all significant temporary differences in recognizing
income and expenses for financial reporting and income tax purposes. The Company
files consolidated income tax returns with its subsidiaries.
Earnings per share have been computed based upon the weighted-average common
shares outstanding during each year.
Note 2 -- Restriction on Cash and Due From Banks
The Bank is required to maintain reserve funds in cash and/or on deposit with
the Federal Reserve Bank (FRB). The reserve required at December 31, 2000, was
$831,000.
Note 3 -- Investment Securities
2000
-----------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
December 31 Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------
Available for sale
State and municipal $ 8,798 $38 $137 $ 8,699
Corporate obligations 500 500
-----------------------------------------------------------------
Total available for sale 9,298 38 137 9,199
Held to maturity
State and municipal 1,349 6 10 1,345
-----------------------------------------------------------------
Total investment securities $10,647 $44 $147 $10,544
=================================================================
1999
-----------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
December 31 Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------
Available for sale
Federal agency $ 1,959 $ 3 $ 1,956
State and municipal 11,473 $16 380 11,109
Corporate obligations 1,000 1,000
-----------------------------------------------------------------
Total available for sale 14,432 16 383 14,065
-----------------------------------------------------------------
Held to maturity
U. S. treasury 5,491 1 5,490
State and municipal 1,476 1 45 1,432
-----------------------------------------------------------------
Total held to maturity 6,967 1 46 6,922
-----------------------------------------------------------------
Total investment securities $21,399 $17 $429 $20,987
=================================================================
F-9
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
The amortized cost and fair value of securities held to maturity and available
for sale at December 31, 2000, 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.
2000
---------------------------------------------------------------
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 $1,106 $1,105 $ 24 $ 24
Due after one through five years 5,176 5,121 1,181 1,179
Due after five through ten years 2,641 2,630 144 142
Due after ten years 375 343
---------------------------------------------------------------
Totals $9,298 $9,199 $1,349 $1,345
===============================================================
No securities were pledged at December 31, 2000. Securities with a carrying
value of $1,959,000 were pledged under a blanket collateral agreement at
December 31, 1999 to secure FHLB advances.
Proceeds from sales of securities available for sale during 2000 were
$2,435,000. Gross losses of $25,000 were realized on those sales. There were no
sales of securities available for sale in 1999 and 1998.
Note 4 -- Loans and Allowance
December 31 2000 1999
- ---------------------------------------------------------------------------------------------
Commercial, commercial real estate and industrial loans $ 37,977 $ 29,836
Real estate loans 46,049 40,653
Construction loans 3,111 5,445
Individuals' loans for household and other personal expenditures 34,373 32,648
Tax-exempt loans and leases 2,644 3,004
Lease financing 224
-----------------------------------
Total loans 124,378 111,586
Deferred loan origination costs 180 130
Allowance for loan losses (1,007) (873)
-----------------------------------
Total loans, net $ 123,551 $ 110,843
===================================
F-10
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
December 31 2000 1999 1998
- -----------------------------------------------------------
Allowance for loan losses
Balances, January 1 $ 873 $ 955 $ 848
Provision for losses 219 201 239
Recoveries on loans 19 48 19
Loans charged off (104) (331) (151)
---------------------------------
Balances, December 31 $ 1,007 $ 873 $ 955
=================================
Information on impaired loans is summarized below.
December 31 2000 1999
- ------------------------------------------------------------------------
Impaired loans for which the discounted cash flows
or collateral value exceeds the carrying value
of the loan $305 $85
Year Ended December 31 2000 1999 1998
- ----------------------------------------------------------------------------
Average balance of impaired loans $103 $769 $1,092
Interest income recognized on impaired loans 61 114
Cash-basis interest included above 61 87
Note 5 -- Premises and Equipment
December 31 2000 1999
- ------------------------------------------------------------------
Land $ 1,018 $ 1,018
Buildings 2,399 2,119
Leasehold improvements 301 212
Equipment 1,900 1,666
-----------------------
Total cost 5,618 5,015
Accumulated depreciation and amortization (793) (566)
-----------------------
Net $ 4,825 $ 4,449
=======================
F-11
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 6 -- Deposits
December 31 2000 1999
- -------------------------------------------------------------------------------
Demand deposits $ 30,004 $ 26,250
Savings deposits 23,912 26,103
Certificates and other time deposits of $100,000 or more 14,420 16,181
Other certificates and time deposits 54,672 59,781
----------------------
Total deposits $123,008 $128,315
======================
Certificates and other time deposits maturing in years ending December 31:
2001 $48,211
2002 14,187
2003 2,193
2004 671
2005 484
Thereafter 3,346
----------
$69,092
==========
Note 7 -- FHLB Advances
Interest
Amount Rate
- --------------------------------------------------------------------
Maturities in years ending December 31
2002 $ 2,000 5.23%
2003 1,000 5.41
2007 through 2010 10,000 5.78
------------
$ 13,000
============
The Bank has an available line of credit with the FHLB totaling $2,000,000. The
line of credit expires May 8, 2001 and bears interest at a rate equal to the
then current variable advance rate.
The FHLB advances and drawings on the available line of credit are secured by a
blanket collateral agreement on first mortgage loans eligible as collateral
totaling $34,031,000. Advances are subject to restrictions or penalties in the
event of prepayment.
F-12
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 8 -- Other Borrowings
December 31 2000 1999
- ------------------------------------------------------------------------------
Convertible notes due December 31, 2008 $1,000 $1,000
Notes payable 1,586 1,614
-----------------------
Total other borrowings $2,586 $2,614
=======================
The convertible notes are unsecured and bear an interest rate of 7%. The notes
were issued from December 31, 1998 through March 31, 1999 and are convertible at
the option of the holder into shares of common stock of the Company at the rate
of $11.00 per share.
Notes payable include a note dated July 15, 1998 with an original balance of
$800,000 with an interest rate of 1.125% under prime, adjustable every five
years for a term of 30 years, a note dated December 18, 1998 with an original
balance of $416,000 at a fixed interest rate of 7.25% with monthly installments
due through November 2003 with a final balloon payment due in December 2003, and
a note dated July 28, 1999 with an original balance of $422,800 at a fixed
interest rate of 7.50% with monthly installments due through July 2004 with a
final balloon payment due in August 2004 if not renewed. The notes are secured
by real estate of the Company.
Maturities in years ending December 31
- -----------------------------------------------------------
2001 $ 30
2002 33
2003 396
2004 387
2005 12
Thereafter 1,728
-----------
$2,586
===========
F-13
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 9 -- Income Tax
Year Ended December 31 2000 1999 1998
- -------------------------------------------------------------------------------------
Income tax expense
Currently payable
Federal $ 123 $ 178 $ 205
State 47 95 92
Deferred
Federal (134) (84) 52
State (2) (25) 1
----------------------------------
Total income tax expense $ 34 $ 164 $ 350
==================================
Reconciliation of federal statutory to actual tax expense
Federal statutory income tax at 34% $ 155 $ 274 $ 392
Tax exempt interest (168) (153) (93)
Effect of state income taxes 29 46 62
Effect of life insurance 23 1
Other (5) (4) (11)
----------------------------------
Actual tax expense $ 34 $ 164 $ 350
==================================
Effective tax rate 7.4% 20.2% 30.4%
A cumulative net deferred tax asset is included in other assets. The components
of the asset are as follows:
December 31 2000 1999
- ---------------------------------------------------------------
Assets
Allowance for loan losses $ 374 $ 305
Assumption fee 106 113
Securities available for sale 39 145
Alternative minimum tax credit carryforward 113
Other 63 37
------------------
Total assets 695 600
------------------
Liabilities
Depreciation (155) (115)
State income tax (24) (24)
Loan fees (81) (56)
------------------
Total liabilities (260) (195)
------------------
$ 435 $ 405
==================
F-14
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 10 -- Commitments and Contingent Liabilities
In the normal course of business there are outstanding commitments and
contingent liabilities, such as commitments to extend credit and standby letters
of credit, which are not included in the accompanying financial statements. The
Bank's exposure to credit loss in the event of nonperformance by the other party
to the financial instruments for commitments to extend credit and standby
letters of credit is represented by the contractual or notional amount of those
instruments. The Bank uses the same credit policies in making such commitments
as it does for instruments that are included in the consolidated balance sheet.
Financial instruments whose contract amount represents credit risk as of
December 31 were as follows:
2000 1999
- ----------------------------------------------------------------------------
Commitments to extend credit $11,372 $9,011
Standby letters of credit 74 127
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 restriction at December 31, 2000.
F-15
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 11 -- Stockholders' Equity
On November 19, 1997, the Board of Directors declared a 5% stock dividend
payable on February 1, 1998. Net income per share and weighted average shares
outstanding have been restated to reflect the 5% stock dividend.
On July 15, 1998, the Board of Directors approved the issuance of the following
securities:
Rights to stockholders to purchase one share for every ten shares owned as
of October 29, 1998, the record date, subject to a minimum offer and
purchase of 100 shares of common stock, at a purchase price of $10.00 per
share. The rights were exercisable for a ninety (90) day period that expired
on March 30, 1999.
Warrants to stockholders to purchase one share for every ten shares owned on
October 29, 1998, the record date, subject to a minimum offer and purchase
of 100 shares of common stock, with an exercise price of $10.00 per share.
On September 15, 1999, the exercise price was reduced to $8.75 per share.
The warrants were exercisable for a 90 day period commencing on September
15, 1999 and expired on December 13, 1999.
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, 2000, stockholder's equity of the
Bank was $10,004,000, of which a minimum of $887,000 was available for payment
of dividends.
Note 12 -- Regulatory Capital
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies and is assigned to a capital category. The assigned
capital category is largely determined by three ratios that are calculated
according to the regulations: total risk adjusted capital, Tier 1 capital, and
Tier 1 leverage ratios. The ratios are intended to measure capital relative to
assets and credit risk associated with those assets and off-balance sheet
exposures of the entity. The capital category assigned to an entity can also be
affected by qualitative judgments made by regulatory agencies about the risk
inherent in the entity's activities that are not part of the calculated ratios.
There are five capital categories defined in the regulations, ranging from well
capitalized to critically undercapitalized. Classification of a bank in any of
the undercapitalized categories can result in actions by regulators that could
have a material effect on a bank's operations. At December 31, 2000 and 1999,
the Bank is categorized as well capitalized for two of the ratios and met all
subject capital adequacy requirements. The Bank was categorized as adequately
capitalized for the total risk-adjusted capital ratio. There are no conditions
or events since December 31, 2000 that management believes have changed the
Bank's classification.
F-16
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
The Bank's actual and required capital amounts and ratios are as follows:
2000
--------------------------------------------------------------------------
Required for Adequate To Be Well
Actual Capital 1 Capitalized 1
--------------------------------------------------------------------------
December 31 Amount Ratio Amount Ratio Amount Ratio
- ----------------------------------------------------------------------------------------------------------------------------
Total capital 1 (to risk-weighted assets) $10,954 9.5% $9,239 8.0% $11,549 10.0%
Tier 1 capital 1 (to risk-weighted assets) 9,947 8.6 4,619 4.0 6,929 6.0
Tier 1 capital 1 (to average assets) 9,947 6.7 5,965 4.0 7,456 5.0
1 As defined by regulatory agencies
1999
--------------------------------------------------------------------------
Required for Adequate To Be Well
Actual Capital 1 Capitalized 1
--------------------------------------------------------------------------
December 31 Amount Ratio Amount Ratio Amount Ratio
- ----------------------------------------------------------------------------------------------------------------------------
Total capital 1 (to risk-weighted assets) $10,365 9.7% $8,518 8.0% $10,648 10.0%
Tier 1 capital 1 (to risk-weighted assets) 9,492 8.9 4,259 4.0 6,389 6.0
Tier 1 capital 1 (to average assets) 9,492 6.5 5,797 4.0 7,246 5.0
1 As defined by regulatory agencies
Note 13 -- Employee Benefits
The Bank has 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 $30,000, $24,000 and $16,000 for 2000, 1999 and 1998.
The Bank has a supplemental retirement plan implemented in 2000 which provides
retirement benefits to directors and executive officers. The Bank's obligations
under the plan have been funded via the purchase of key man life insurance
policies, for which the Bank is the beneficiary. Expense recognized under the
supplemental retirement plan totaled approximately $12,000 for the year ended
December 31, 2000.
The Company adopted a stock option plan in 1992 whereby 46,921 shares of common
stock, after restatement for stock dividends, were reserved for the granting of
options to certain officers, directors and key employees. The options were
exercisable within five years from the date of grant, and the right to purchase
shares under such options vested at a rate of 40% after the first year and 20%
each year thereafter with the options being fully vested after four years.
Additional options to purchase common shares may be granted not to exceed 10% of
the Company's outstanding shares of common stock, less previously granted
options.
F-17
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
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 unless
the Committee provides otherwise in the Option Agreement. The options granted
during 1998 and 1999 vested at the date of grant. 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:
2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------
Risk-free interest rates 6.60% 5.18% and 6.19% 5.55% and 5.67%
Dividend yields 2.19% 1.29%
Volatility factors of expected market price of common stock
29.00% 24.00% 9.00%
Weighted-average expected life of the options 9 years 9 years 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:
2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------------
Net income As reported $421 $642 $803
Pro forma 413 617 749
Basic Earnings per share As reported .41 .63 .81
Pro forma .40 .61 .75
Diluted earnings per share As reported .41 .62 .80
Pro forma .40 .59 .74
F-18
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands, Except Per Share Data)
The following is a summary of the status of the Company's stock option plans and
changes in the plans as of and for the years ended December 31, 2000, 1999 and
1998.
Year Ended December 31 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Options Shares Exercise Price Shares Exercise Price Shares Exercise Price
- ---------------------------------------------------------------------------------------------------------------------------
Outstanding, beginning of year 59,591 $7.89 50,091 $7.77 51,511 $6.14
Granted 5,000 6.88 10,500 8.59 16,000 11.56
Exercised (30,841) 5.54 (15,420) 5.54
Expired (1,000) 9.13 (2,000) 11.50
------------- ------------- -------------
Outstanding, end of year 33,750 $9.90 59,591 $7.89 50,091 $7.77
============= ============= =============
Options exercisable at year end 33,750 59,591 50,091
Weighted-average fair value of options
granted during the year $2.66 $3.28 $4.50
As of December 31, 2000, options outstanding and exercisable of 5,000 have an
exercise price of $6.88 and weighted-average remaining contractual lives of 9.4
years; options outstanding of 28,750 have exercise prices ranging from $8.00 to
$11.50 and weighted-average remaining contractual lives of 7.4 years.
Note 14 -- Related Party Transactions
The Bank has entered into transactions with certain directors, executive
officers, significant stockholders and their affiliates or associates (related
parties). Such transactions were made in the ordinary course of business on
substantially the same terms and conditions, including interest rates and
collateral, as those prevailing at the same time for comparable transactions
with other customers, and did not, in the opinion of management, involve more
than normal credit risk or present other unfavorable features.
The aggregate amount of loans, as defined, to such related parties were as
follows:
- -----------------------------------------------------------------------
Balances, January 1, 2000 $ 521
Changes in composition of related parties 1
New loans, including renewals 1,486
Payments, etc., including renewals (348)
---------
Balances, December 31, 2000 $1,660
=========
Deposits from related parties held by the Bank at December 31, 2000 and 1999
totaled $1,261,625 and $973,388.
F-19
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands, Except Per Share Data)
Note 15 -- Earnings Per Share
Earnings per share (EPS) were computed as follows:
Year Ended December 31, 2000
----------------------------------------
Weighted-Average Per Share
Income Shares Amount
----------------------------------------
Basic Earnings Per Share
Income available to common stockholders $421 1,026,615 $.41
=============
Effect of Dilutive Stock Options 2,081
----------------------------
Diluted Earnings Per Share
Income available to common stockholders and assumed conversions $421 1,028,696 $.41
========================================
Options to purchase 23,750 shares of common stock at prices ranging from $9.125
to $11.50 per share were outstanding at December 31, 2000, 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. In addition, the
Company had convertible debt outstanding at December 31, 2000 that was not
included in the computation of diluted EPS because the convertible debt was not
dilutive.
Year Ended December 31, 1999
----------------------------------------
Weighted-
Average Per Share
Income Shares Amount
----------------------------------------
Basic Earnings Per Share
Income available to common stockholders $642 1,019,086 $.63
=============
Effect of Dilutive Stock Options 6,709
Effect of Convertible Debt 35 74,271
----------------------------
Diluted Earnings Per Share
Income available to common stockholders and assumed conversions $677 1,100,066 $.62
========================================
Options to purchase 25,750 shares of common stock at prices ranging from $9.125
to $11.50 per share were outstanding at December 31, 1999, 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.
F-20
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Year Ended December 31, 1998
-----------------------------------------
Weighted-
Average Per Share
Income Shares Amount
-----------------------------------------
Basic Earnings Per Share
Income available to common stockholders $803 994,432 $.81
=============
Effect of Dilutive Stock Options 12,383
Effect of Convertible Debt 168
-----------------------------
Diluted Earnings Per Share
Income available to common stockholders and assumed conversions $803 1,006,983 $.80
=========================================
Options to purchase 19,250 shares of common stock at prices ranging from $11.00
to $11.50 per share were outstanding at December 31, 1998, but were not included
in the computation of diluted EPS because the options' exercise price was
greater than the average market price of the common shares.
Note 16 -- Fair Values of Financial Instruments
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument:
Cash and Cash Equivalents--The fair value of cash and cash equivalents
approximates carrying value.
Investment Securities--Fair values are based on quoted market prices.
Loans--The fair value for loans are estimated using discounted cash flow
analyses, using interest rates currently being offered for loans with similar
terms to borrowers of similar credit quality.
FHLB Stock--Fair value of FHLB stock is based on the price at which it may be
resold to the FHLB.
Interest Receivable/Payable--The fair values of interest receivable/payable
approximate carrying values.
Cash Surrender Value of Life Insurance--The fair values of cash surrender value
of life insurance 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.
F-21
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
FHLB Advances--The fair value of advances is estimated using a discounted cash
flow calculation, based on current rates for similar debt.
Other Borrowing--The fair value of the borrowing is estimated using a discounted
cash flow calculation based on the prime interest rate.
The estimated fair values of the Company's financial instruments are as follows:
2000 1999
--------------------------------------------------------------
Carrying Fair Carrying Fair
December 31 Value Value Value Value
- ------------------------------------------------------------------------------------------------------------------------
Assets
Cash and cash equivalents $4,886 $4,886 $4,603 $4,603
Investment securities available for sale 9,199 9,199 14,065 14,065
Investment securities held to maturity 1,349 1,345 6,967 6,922
Loans, net 123,551 123,456 110,843 110,774
Stock in FHLB 778 778 778 778
Interest receivable 1,173 1,173 1,085 1,085
Cash surrender value of life insurance 2,353 2,353 1,594 1,594
Liabilities
Deposits 123,008 123,178 128,315 128,393
FHLB advances 13,000 12,824 4,597 4,518
Other borrowings 2,586 2,457 2,614 2,525
Interest payable 472 472 334 334
Note 17 -- Business Combinations
On November 10, 1999, the Company signed a definitive agreement to acquire Blue
River Federal Savings Bank, Edinburgh, Indiana. Under provisions of the
agreement, the transaction was terminated in 2000. Expenses related to the
proposed business combination are included in other expenses for the year ended
December 31, 2000.
F-22
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 18 -- Condensed Financial Information (Parent Company Only)
Presented below is condensed financial information as to financial position,
results of operations and cash flows of the Company:
Condensed Balance Sheet
December 31 2000 1999
- -----------------------------------------------------------------------
Assets
Cash on deposit with subsidiary $ 36 $ 248
Investment in common stock of subsidiaries 10,292 9,561
Other assets 281 384
---------------------
Total assets $10,609 $10,193
=====================
Liabilities
Convertible notes $ 1,000 $ 1,000
Other liabilities 293 388
---------------------
Total liabilities 1,293 1,388
Stockholders' Equity 9,316 8,805
---------------------
Total liabilities and stockholders' equity $10,609 $10,193
=====================
Condensed Statement of Income
Year Ended December 31 2000 1999 1998
- --------------------------------------------------------------------------------------
Income
Dividends from subsidiaries $ 285 $ 148 $ 100
Other interest income and dividends 1 1 1
---------------------------
Total income 286 149 101
---------------------------
Expenses
Interest expense 70 58
Salaries and employee benefits 64 54 41
Professional fees 50 93 59
Other expenses 97 8 15
---------------------------
Total expenses 281 213 115
---------------------------
Income (loss) before income tax benefit and equity
in undistributed income of subsidiaries 5 (64) (14)
Income tax benefit (111) (84) (45)
---------------------------
Income before equity in undistributed income of subsidiaries 116 20 31
Equity in undistributed income of subsidiaries 305 622 772
---------------------------
Net Income $ 421 $ 642 $ 803
===========================
F-23
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Condensed Statement of Cash Flows
Year Ended December 31 2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------
Operating Activities
Net income $421 $642 $803
Adjustments to reconcile net income to net cash provided
(used) by operating activities (285) (389) (829)
------------------------------
Net cash provided (used) by operating activities 136 253 (26)
------------------------------
Investing Activity--capital contributions to subsidiary (265) (968) (130)
------------------------------
Financing Activities
Cash dividends (164) (143)
Stock options exercised 171 85
Purchase of stock (90) (60)
Rights and warrants exercised, net of costs 121 28
Proceeds from borrowings 830 170
------------------------------
Net cash provided (used) by financing activities (83) 748 283
------------------------------
Net Change in Cash on Deposit (212) 33 127
Cash on Deposit at Beginning of Year 248 215 88
------------------------------
Cash on Deposit at End of Year $ 36 $248 $215
==============================
F-24