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, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the transition period from _____________ to _____________
Commission File Number: 0-19618
FIRST COMMUNITY BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
Indiana 35-1833586
(State or other jurisdiction of incorporation (IRS Employer Identification No.)
or organization)
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 [ ].
Indicate by check mark whether the Registrant is an accelerated filer
Yes No X
--- ---
Aggregate market value of common stock held by
non-affiliates computed by reference to the
sale price of such stock as of June 28, 2002 $10,344,767
Shares of common stock outstanding as of March 3, 2003: 1,044,926
DOCUMENT INCORPORATED BY REFERENCE.
The Registrant's definitive proxy statement for the 2002 annual meeting of
shareholders to be filed within 120 days of the close of the Registrant's fiscal
year 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............................................................14
Item 6. Selected Financial Data............................................15
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations..............................................15
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.........25
Item 8. Financial Statements and Supplementary Data........................25
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure...............................................25
PART III
Item 10. Directors and Executive Officers of the Registrant.................26
Item 11. Executive Compensation.............................................26
Item 12. Security Ownership of Certain Beneficial Owners and Management.....26
Item 13. Certain Relationships and Related Transactions.....................26
Item 14. Controls and Procedures............................................26
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K....27
Signatures...................................................................29
Certification pursuant to the Sarbanes-Oxley Act of 2002.....................30
Certification of Controls and Procedures.....................................31
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; unemployment rates in areas
serviced by First Community; and changes in monetary policy or regulatory
changes.
PART I
Item 1. Business
General
First Community Bancshares, Inc. (the "Company") is primarily a one-bank holding
company and was incorporated in 1991. The Company'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 Company 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, 2002, the Company had approximately $145.6 million of assets,
net loans of approximately $121.0 million, deposits of approximately $119.6
million and stockholders' equity of approximately $10.5 million. First Community
has offices located in Bargersville, Greenwood, Franklin, Indianapolis,
Trafalgar, Whiteland, Edinburgh, and North Vernon, Indiana. As of December 31,
2002, First Community had 80 full time equivalent employees. Neither the Company
nor FCREMI has any employees.
On November 20, 2002, the Company announced it had executed a non-binding
agreement principle, which is expected to lead to the merger of the Company with
and into a wholly-owned subsidiary of MainSource Financial Group, Inc. The
agreement in principle provides that the Company's stockholders will receive $21
in cash for each share of common stock of the Company, and each holder of
options to purchase common stock in the Company will receive $21.00 per share
less the exercise price of such option. On March 27, 2003, the Company and
MainSource Financial Group, Inc. executed a definitive merger agreement, upon
the same terms as set forth in the agreement in principle. The consummation of
the merger transaction is subject to various regulatory approvals and the
approval of the stockholders of the Company.
First Community's deposits are insured to the maximum extent permitted by law by
the Savings Association Insurance Fund ("SAIF") of the Federal Deposit Insurance
Corporation ("FDIC"). First Community is a member of the Federal Home Loan Bank
("FHLB") of Indianapolis. First Community is subject to comprehensive
regulation, examination and supervision by the Indiana Department of Financial
Institutions ("DFI") and the FDIC. The Company is subject to regulation by the
Federal Reserve Board. The Federal Reserve Board has required the Company 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, 2002, the Company's debt-to-equity
ratio on an unconsolidated basis was 9.6%.
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
federal agency, state, municipal and other investment
3
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, sales of residential
mortgages to the Federal National Mortgage Association ("FNMA"), maturity and
sale of investment securities and FHLB advances.
First Community's primary sources of income are interest on loans, investment
securities, interest-bearing deposits in other financial institutions, service
charges on deposit accounts and income earned on the sale of mortgage loans on
the secondary market. 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 $122.4 million at December 31, 2002. Of
this amount, approximately $69.6 million or 56.9% represented fixed rate loans
and adjustable rate loans comprised $52.7 million or 43.1%.
The following table sets forth information concerning the composition of First
Community's loan portfolio in dollar amounts and percentages.
At December 31
--------------------------------------------------------
2002 2001
--------------------------------------------------------
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) $37,536 31.02% $46,585 37.08%
Construction and land development 3,578 2.96 3,630 2.89
Commercial loans 45,900 37.93 41,126 32.73
Installment loans 31,441 25.98 32,094 25.55
Tax-exempt loans and leases 2,818 2.33 2,370 1.89
Lease financing 1,113 .92 762 .61
--------------------------------------------------------
Loans, gross 122,386 101.14 126,567 100.75
Allowance for loan losses (1,495) (1.24) (1,114) (.89)
Deferred loan origination costs 116 .10 174 .14
--------------------------------------------------------
Loans, net $121,007 100.00% $125,627 100.00%
========================================================
The following table sets forth certain information at December 31, 2002,
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
2002 or Less To Five Years Years
----------------------------------------------------------------
(Dollars in 000's)
Real estate loans $ 51,876 $18,409 $17,273 $16,194
Commercial loans 28,332 15,429 8,081 4,822
Installment loans 38,247 16,765 19,371 2,111
Tax-exempt loans and leases 2,818 0 1,897 921
Lease financing 1,113 0 747 366
----------------------------------------------------------------
Total $ 122,386 $50,603 $47,369 $24,414
================================================================
The following table sets forth, as of December 31, 2002, the dollar amount of
all loans maturing after December 31, 2002 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 $25,395 $26,481
Commercial loans 7,883 20,449
Installment loans 32,431 5,816
Tax-exempt loans and leases 2,818 0
Lease financing 1,113 0
--------------------------------------------
69,640 52,746
Less amount due within one year 29,454 21,149
--------------------------------------------
Loans due after one year $40,186 $31,597
============================================
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.
First Community has sold commercial real estate loans, from time to time, to
other participating financial institutions. This type of activity is intended to
reduce credit risk, enable additional credit extensions to large borrowers and
for general liquidity needs of First Community. First Community retains
servicing rights on these participations and receives servicing fees ranging
from .125% to .375%. There were ten commercial real estate loan participations
with an aggregate principal balance of $2.7 million as of December 31, 2002, as
compared to eleven participations with an aggregate principal balance of
approximately $3.2 million as of December 31, 2001. The largest outstanding loan
participation of this type was $500,000 at December 31, 2002.
5
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 fixed-rate mortgages for the loan portfolio. In addition, First
Community began selling residential fixed-rate mortgages to FNMA with servicing
retained during the year ended December 31, 2001.
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 includes 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.
As was previously mentioned, First Community began selling residential
fixed-rate mortgages to FNMA during the year ended December 31, 2001. This
decision was made in order to offer competitive fixed rate mortgages without
exposing First Community to the attendant interest rate risk, provide mortgage
banking income and to enhance liquidity. First Community retains servicing
rights on these mortgage sales and receives servicing fees ranging from .250% to
..375% on the outstanding principal balances of these loans. As of December 31,
2002, First Community was servicing 180 residential mortgage loans for FNMA with
outstanding principal balances of approximately $14.4 million.
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. Generally, 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
2002 and are reviewed annually. The limits vary from officer to officer with a
range of $1,500 to $70,000 for unsecured, and a range of $7,500 to $200,000 for
secured. The loan officers committee or the board of directors loan committee
must approve loans in excess of the above-mentioned limits.
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 includes
an application, employment income verified by pay stubs, and 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
6
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 96.0% of First
Community's total interest income for the year ended December 31, 2002.
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. First Community experienced an increase in nonaccrual
loans between December 31, 2001 and December 31, 2002 primarily due to three
different borrowers. The primary reasons causing the increase was due to a
bankruptcy and delinquency of two separate borrowers and fraud discovered on one
borrower. Reserves have been allocated towards any expected losses on these
loans. Restructured loans of which there were none at either December 31, 2002
or December 31, 2001, 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
------------------------
2002 2001
------------------------
(Dollars in 000's)
Nonaccrual loans $ 2,657 $ 1,630
Past-due loans 90 days or more (interest accruing) 540 48
------------------------
Total non-performing loans 3,197 1,678
Real estate owned 203 305
Other repossessed assets 156 33
------------------------
Total non-performing assets
$ 3,556 $ 2,016
========================
Ratio of non-performing assets to total assets 2.44% 1.37%
Interest on non-performing loans that would have been included in income
$129 $ 77
========================
Interest on non-performing loans that was included in income $16
$1
========================
At December 31, 2002, loans of $2,410,000 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. First Community has reserved $425,000
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
7
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, 2002
compared to the year ended December 31, 2001 both due to additional loan
balances outstanding in the portfolio and because of specific reserves allotted
towards loans in non-accrual status. During 2002, First Community made a $1.6
million provision for loan losses. The increased provision taken during the
second quarter and allocated to the commercial loan portfolio was necessary due
to the continued weakness in the general economy of the Indianapolis metro area
and the charge off of two loans that were partially unreserved.
Allocation of the Allowance for Loan Losses:
At December 31
2002 2001
-----------------------------------------------------
Percentage of Percentage of
Loans to Total Loans to Total
Amount Loans Amount Loans
-----------------------------------------------------
(Dollars in 000's)
Real estate mortgage loans $137 30.7% $125 36.8%
Construction and land development 7 2.9 36 2.9
Commercial loans 1,106 38.4 524 33.1
Installment loans 244 25.7 427 25.3
Tax-exempt loans and leases 1 2.3 2 1.9
----------------------------------------------------
$1,495 100.0% $1,114 100.0%
====================================================
Summary of Loan Loss Experience:
Year Ended December 31
-------------------------
2002 2001
-------------------------
(Dollars in 000's)
Balance at January 1 $ 1,114 $ 1,007
Chargeoffs:
Real estate mortgage loans (18) (6)
Commercial loans (1,027) (51)
Installment loans (169) (159)
-------------------------
Total Chargeoffs (1,214) (216)
-------------------------
Recoveries:
Real estate mortgage loans 1 8
Commercial loans 2 0
Installment loans 38 26
-------------------------
Total Recoveries 41 34
-------------------------
Net Chargeoffs (1,173) (182)
-------------------------
Provision for loan losses 1,554 289
-------------------------
Balance at December 31 $ 1,495 $ 1,114
=========================
Average loans during the year $ 126,602 $ 127,269
Ratio of net chargeoffs to total average loans outstanding during the year .93% .14%
8
Investment Activities
The following table sets forth the carrying value of First Community's
investment portfolio and FHLB stock as of the dates indicated:
December 31
-----------------------
2002 2001
-----------------------
(Dollars in 000's)
Available for sale at fair value:
State and municipal obligations $3,412 $3,969
Corporate obligations 500 500
-----------------------
3,912 4,469
-----------------------
FHLB stock 1,025 1,025
-----------------------
Total $4,937 $5,494
=======================
At December 31, 2002, the amortized cost of securities available for sale was
$3,828,000 with related gross unrealized gains of $84,000. There were no
unrealized losses in the investment portfolio at December 31, 2002. First
Community did not hold securities classified as held to maturity at December 31,
2002.
As of December 31, 2002, there were no individual investments representing more
than 10% of stockholders' equity included in securities.
The following table sets forth the maturities of investment securities at
December 31, 2002 and the weighted-average yield (on a tax equivalent basis) on
such securities.
------------------------------------------------------
Corporate Obligations State & Municipal Obligations
------------------------------------------------------
Available for Sale Amount(1) Yield Amount(1) Yield
------------------------------------------------------
Maturities (Dollars in 000's)
One year or less $ 0 0% $680 5.43%
Over 1 year to 5 years 500 10.50% 1,646 5.53%
Over 5 years to 10 years 0 0% 781 7.99%
Over 10 years 0 0% 305 6.35%
------------------------------------------------------
Total available for sale $ 500 10.50% $3,412 6.15%
======================================================
(1) The available for sale amounts that are shown in the maturity distribution
table are at fair value. Amortized cost was used in the computation of the
yields.
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. As was discussed earlier,
First Community began underwriting and selling fixed rate mortgages to FNMA
during the year ended December 2001, which represents yet another source of
funds. Borrowings are the primary source of funds for the Company 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
9
included in "Management's Discussion and Analysis of Financial Condition and
Results of Operations" for a breakdown of the average amount and average rate
paid on First Community's deposit categories. First Community does not rely on
brokered deposits as funding sources.
The following table indicates the amount of certificates of deposit of $100,000
or more by time remaining until maturity at December 31, 2002 (in 000's).
Maturity Period
Three months or less $ 1,973
Greater than three months through six months 6,071
Greater than six months through twelve months 2,543
Over twelve months 5,812
-----------
Total $ 16,399
===========
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
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 $12.5 million from the
FHLB as of December 31, 2002.
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, 2002 was $762,000. As also further
discussed in Item 7, the Company has borrowings as of December 31, 2002 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 2000 U.S. Census. First Community has branches in
Bargersville, Trafalgar, Franklin, Whiteland and Greenwood, Johnson County
Indiana, two branches in North Vernon, Jennings County Indiana, a branch at a
retirement center in Indianapolis, Indiana, and a branch in Edinburgh,
Bartholomew County, Indiana.
10
Competition
The banking business is highly competitive especially 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.
Regulation and Supervision of the Company
The Company is a bank holding company within the meaning of the Bank Holding
Company Act of 1956, as amended ("BHCA"), and is registered as such with the
Board of Governors of the Federal Reserve System ("Federal Reserve"). The
Company is examined, regulated and supervised by the Federal Reserve and is
required to file annual reports and other information regarding its business and
operations and the business and operations of its subsidiaries with the Federal
Reserve. The BHCA prohibits any person from acquiring control, directly or
indirectly, of the Company 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 Company of banks and savings associations are also subject
to regulation. Any acquisition by the Company 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
The Gramm-Leach-Bliley Act of 1999 (the "Financial Services Modernization
Act")establishes a comprehensive framework to permit affiliations among
commercial banks, insurance companies, securities firms, and other financial
service providers by revising and expanding the existing BHCA. 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 Company is able to provide securities and
insurance services. Furthermore, under this legislation, the Company is able to
acquire, or be acquired by, brokerage and securities firms and insurance
companies. In addition, the Financial Services
11
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.
Sarbanes-Oxley Act of 2002
On July 30, 2002, the Senate and the House of Representatives of the United
States enacted the Sarbanes-Oxley Act of 2002, a law that addresses, among other
issues, corporate governance, auditing and accounting, executive compensation,
and enhanced and timely disclosure of corporate information. Effective August
29, 2002, as directed by Section 302(a) of Sarbanes-Oxley, the Company's Chief
Executive Officer and Chief Financial Officer are each required to certify that
the Company's quarterly and annual reports do not contain any untrue statement
of material fact. The rules have several requirements, including having these
officers certify that: they are responsible for establishing, maintaining and
regularly evaluating the effectiveness of the Company's internal controls; they
have made certain disclosures to the Company's auditors and the audit committee
of the Board of Directors about the Company's internal controls; and they have
included information in the Company's quarterly and annual reports about their
evaluation and whether there have been significant changes in the Company's
internal controls or other factors that could significantly affect internal
controls subsequent to the evaluation.
The Company 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 Company 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 branch anywhere in the state.
The Company is a legal entity separate and distinct from First Community. There
are various legal limitations on the extent to which First Community can supply
funds to the Company. The principal source of the Company's funds consists of
dividends from First Community. State and federal laws restrict the amount of
dividends which may be paid by banks. In addition, the Company is subject to
certain restrictions imposed by the Federal Reserve on obtaining extensions of
credit to the Company 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,
12
including the Federal Reserve, no prediction can be made as to possible future
changes in interest rates, deposit levels, loan demand or the business and
earnings of the Company and First Community.
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 tier one leverage ratio of at least 4%, and a total
capital to risk-based assets ratio of at least 8%. As of December 31, 2002,
First Community had a tier one leverage ratio of 7.45%, based on tier one
capital of approximately $10,920,000. As of the same date, First Community had a
total capital to risk-based assets ratio of 10.5%, based on eligible capital of
approximately $12,396,000 for the determination of this ratio.
At this time, the Company 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 Company 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 Company's consolidated assets
exceed $150,000,000, the Company 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%.
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 2003 and 2015 and the lease on its operations
center expires in 2015. The lease that expires in 2003 is automatically
renewable from year to year and no party has given notice of intent to terminate
the lease. The Company plans for FCREMI to eventually own substantially all of
the branch properties and lease them to First Community. At December 31, 2002,
the net carrying values of First Community's and FCREMI's properties, including
land, building, improvements, furniture, fixtures and equipment were $2.4
million and $1.8 million, respectively.
Item 3. Legal Proceedings
The Company and First Community are from time to time, a party to certain
lawsuits arising in the ordinary course of their business. The Company and First
Community believe that none of their current lawsuits would, if adversely
determined, have a material adverse effect on the Company 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, 2002.
PART II
Item 5. Market for Company's Common Equity and Related Stockholder Matters
The following table sets forth the high and low prices for the Company's common
stock for the quarters during the years indicated, based upon information
obtained by management of the Company from the America Online web site and on
other information made available to management of the Company. Management of the
Company has not verified the accuracy of the following information. There is no
established public trading market for the Company's common stock. The common
stock is traded on a limited basis, quoted on the OTC Bulletin Board and many
trades have involved privately negotiated transactions. As a result, the Company
is not always aware of the price at which trades occur. The referenced prices
may not reflect an actual trading range and may reflect inter-dealer prices,
without retail mark-up, mark-down or commission and may not necessarily
represent actual transactions.
13
Price Per Share
---------------------------------------------------
2002 2001
---------------------------------------------------
High Low High Low
---------------------------------------------------
Quarter
First Quarter $11.00 $8.10 $8.00 $6.50
Second Quarter 10.80 9.60 7.25 5.85
Third Quarter 9.90 8.00 8.00 6.52
Fourth Quarter 19.83 7.95 8.15 7.10
The Company declared dividends totaling $.25 per share during 2002. A $.05 per
share dividend was declared and paid in January 2002. There were four additional
$.05 per share dividends declared in each quarter of 2002 and paid during the
following quarter. The Company declared dividends of $.04 per share for the
first three quarters of 2001, each paid during the following quarter. The
Company did not declare a dividend during the fourth quarter of 2001, but
subsequently declared and paid an additional dividend in January 2002, as
previously mentioned.
The dividends which the Company may pay are restricted by Federal Reserve Bank
capital requirements. The ability of the Company to pay dividends to
shareholders is also 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, 2002, the stockholder's equity of First Community was
$11.2 million, of which a minimum of $1,068,000 was available for dividends.
The number of record holders of the Company's common stock as of March 3, 2003
was 246.
The Company only has one equity compensation plan. The following table sets
forth information concerning securities issued and available for issue for the
compensation plan under which equity securities of the Company are authorized
for issuance.
14
Equity Compensation Plan Information
- ------------------------------------------------------------------------------------------------------------------
Number of securities to Weighted average exercise
be issued upon exercise price of outstanding Number of securities
of outstanding options, options, warrants and remaining available for
Plan Category warrants and rights rights future issuance
- ------------------------------------------------------------------------------------------------------------------
Equity compensation plans
approval by security holders 34,700 9.72 62,300
- ------------------------------------------------------------------------------------------------------------------
Item 6. Selected Financial Data (dollars in thousands, except per share data)
At December 31
----------------------------------------------------------------------
2002 2001 2000 1999 1998
----------------------------------------------------------------------
Summary of Financial Condition Data:
Total assets $145,640 $147,377 $149,195 $145,237 $121,272
Loans, net 121,007 125,627 123,551 110,843 93,364
Cash and interest-bearing deposits 9,103 6,687 4,886 4,603 14,292
Securities including FHLB stock 4,937 5,494 11,325 21,810 8,857
Deposits 119,611 117,724 123,008 128,315 106,193
FHLB advances 12,500 15,500 13,000 4,597 4,753
Other borrowings 1,762 2,556 2,586 2,614 1,382
Stockholders' equity 10,466 10,191 9,316 8,805 8,486
Year Ended December 31
-----------------------------------------------------------
2002 2001 2000 1999 1998
-----------------------------------------------------------
Summary of Selected Operating Data:
Total interest income $9,812 $11,372 $11,352 $10,071 $8,395
Total interest expense 3,858 5,960 6,559 5,639 4,509
-----------------------------------------------------------
Net interest income 5,954 5,412 4,793 4,432 3,886
Provision for loan losses 1,554 289 219 201 239
-----------------------------------------------------------
Net interest income after provision for
loan losses 4,400 5,123 4,574 4,231 3,647
Total non-interest income 1,649 1,213 839 524 443
Total non-interest expense 5,467 5,065 4,958 3,949 2,937
-----------------------------------------------------------
Income before income taxes 582 1,271 455 806 1,153
Income taxes 110 353 34 164 350
-----------------------------------------------------------
Net income $ 472 $ 918 $ 421 $ 642 $ 803
===========================================================
Basic earnings per share* $ 0.45 $ 0.88 $ 0.41 $0.63 $ 0.81
Diluted earnings per share* $ 0.45 $ 0.85 $ 0.41 $0.62 $ 0.80
Year Ended December 31
---------------------------------------------------------
2002 2001 2000 1999 1998
---------------------------------------------------------
Other Selected Data:
Return on average assets .32% .61% .28% .48% .77%
Return on average equity 4.56 9.31 4.61 7.26 9.93
Average equity to average assets 6.92 6.50 6.18 6.53 7.75
Dividend payout ratio 55.56 13.62 39.02 22.22
* Net income per share has been restated to reflect the stock dividend declared
in 1997.
15
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
First Community is a subsidiary of the Company and operates as an Indiana
commercial bank. In May 1998, the Company formed a new subsidiary, First
Community Real Estate Management, Inc. whose sole purpose is 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. The purpose of this borrowing was to purchase the land and building
associated with two of First Community's banking facilities. The branches are
located at 136 E. Harriman Ave. in Bargersville, Indiana and 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. This borrowing was issued 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 Company depends upon the operations of its subsidiaries for
all revenue and reports its results of operations on a consolidated basis with
its subsidiaries.
In November of 2002, FCREMI refinanced the $800,000 borrowing from 1998,
mentioned above. The new note was refinanced through First Community, a
subsidiary of the Company. The outstanding balance of the note payable, issued
by another financial institution, was paid off in the amount of $762,855 and
refinanced for $765,300 at a fixed rate of 4.25%, for 15 years. The refinancing
of this borrowing was a substantial savings in interest expense to FCREMI. The
related principal balances of the note payable and receivable, interest expense
and income have been eliminated in the financial statements of the Company.
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, investments and
other interest earning deposits compared to 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.
Critical Accounting Policies
The accounting and reporting policies of the Company are in accordance with
accounting principles generally accepted in the United States and conform to
general practices within the banking industry. The Company's significant
accounting policies are described in detail in the notes to the Company's
consolidated financial statements for the year ended December 31, 2002. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions. The
financial position and results of operations can be affected by these estimates
and assumptions and are integral to the understanding of reported results.
Critical accounting policies are those policies that management believes are the
most important to the portrayal of the Company's financial condition and
results, and they require management to make estimates that are difficult,
subjective, or complex. At this time management believes that its critical
accounting policies include determining the allowance for loan losses and
accounting for mortgage servicing rights.
The allowance for credit losses provides coverage for probable losses inherent
in the Company's loan portfolio. Management evaluates the adequacy of the
allowance for credit losses each quarter based on changes, if any, in
underwriting activities, the loan portfolio composition (including product mix
and geographic, industry or
16
customer-specific concentrations), trends in loan performance, regulatory
guidance and economic factors. This evaluation is inherently subjective, as it
requires the use of significant management estimates. Many factors can affect
management's estimates of specific and expected losses, including volatility of
default probabilities, rating migrations, loss severity and economic and
political conditions. The allowance is increased through provisions charged to
operating earnings and reduced by net charge-offs.
The Company determines the amount of the allowance based on relative risk
characteristics of the loan portfolio. The allowance recorded for commercial
loans is based on reviews of individual credit relationships and an analysis of
the migration of commercial loans and actual loss experience. The allowance
recorded for homogeneous consumer loans is based on an analysis of loan mix,
risk characteristics of the portfolio, fraud loss and bankruptcy experiences,
and historical losses, adjusted for current trends, for each homogeneous
category or group of loans. The allowance for credit losses relating to impaired
loans is based on the loan's observable market price, the collateral for certain
collateral-dependent loans, or the discounted cash flows using the loan's
effective interest rate.
Regardless of the extent of the Company's analysis of customer performance,
portfolio trends or risk management processes, certain inherent but undetected
losses are probable within the loan portfolio. This is due to several factors
including inherent delays in obtaining information regarding a customer's
financial condition or changes in their unique business conditions, the
judgmental nature of individual loan evaluations, collateral assessments and the
interpretation of economic trends. Volatility of economic or customer-specific
conditions affecting the identification and estimation of losses for larger
non-homogeneous credits and the sensitivity of assumptions utilized to establish
allowances for homogenous groups of loans are among other factors. The Company
estimates a range of inherent losses related to the existence of these
exposures. The estimates are based upon the Company's evaluation of imprecision
risk associated with the commercial and consumer allowance levels and the
estimated impact of the current economic environment.
Mortgage servicing rights ("MSRs") associated with loans originated and sold,
where servicing is retained, are capitalized and included in other intangible
assets in the consolidated balance sheet. The value of the capitalized servicing
rights represents the present value of the future servicing fees arising from
the right to service loans in the portfolio. Critical accounting policies for
MSRs relate to the initial valuation and subsequent impairment tests. The
methodology used to determine the valuation of MSRs requires the development and
use of a number of estimates, including anticipated principal amortization and
prepayments of that principal balance. Events that may significantly affect the
estimates used are changes in interest rates, mortgage loan prepayment speeds
and the payment performance of the underlying loans. The carrying value of the
MSRs is periodically reviewed for impairment based on a determination of fair
value. Impairment, if any, is recognized through a valuation allowance and is
recorded as amortization of intangible assets.
Results of Operations
The following discussion of Results of Operations is for the years ended
December 31, 2002, 2001 and 2000.
Net income for the year ended December 31, 2002 was $472,000 compared to
$918,000 and $421,000 for the years ended December 31, 2001 and 2000,
respectively. Basic earnings per share was $.45 for the year ended December 31,
2002 compared to $.88 and $.41 for the years ended December 31, 2001 and 2000,
respectively. Diluted earnings per share was $0.45 for the year ended December
31, 2002 compared to $0.85 and $.41 for the years ended December 31, 2001 and
2000, respectively. Net income increased from 2000 to 2001 due to management's
ability to reduce interest expenses through deposit mix and lower interest
rates, increasing other avenues of other income and managing other expenses. In
2002, earnings decreased primarily due to increased provision for loan losses.
Net interest income from 2000 to 2001 increased $619,000 from $4.8 million for
2000 to $5.4 million for 2001. This increase was primarily due to the reduction
of interest expense through lower rates on deposit accounts from 5.0% to 4.4% in
2000 and 2001, respectively. This same trend continued throughout 2002. Net
interest income increased $543,000 to $6.0 million from $5.4 million for the
year ended December 31, 2001. Net interest income has increased 24.2% from 2000
to 2002. This increase in net interest income can be attributable to
management's successful efforts to change the funding mix in addition to the
continued lower interest rates. The decline in interest income on the loan
portfolio associated with a lower interest rate environment was offset
17
by larger decreases in interest expense on deposit accounts. This environment
had a favorable affect to the net interest margin.
The provision for losses increased $1.3 million to $1.6 in 2002, from $289,000
in 2001. The increase was primarily due to the charge off of two partially
reserved loans in the second quarter, and the discovery of fraudulent accounts
receivable financing related to one borrower in the fourth quarter. The increase
in the provision for loan losses of $74,000 from 2000 to 2001 was a result of an
increase in net loan dollars outstanding and the risk profile of the loan
portfolio.
Other income significantly increased annually from 2000 to 2002. For the year
ended December 31, 2002, other income increased $435,000 to $1.6 million from
$1.2 million for year ended December 31, 2001. For the year ended December 31,
2001, other income increased $375,000 compared to the same period in 2000. These
increases were a result of management's continued focus on other income
producing revenues, primarily service charges on deposit accounts, customer and
non-customer fees and fees on the sale of mortgage loans.
Service charges on deposit accounts increased $110,000 or 16% from $697,000 for
the year ended December 31, 2001, to $807,000 for year ended December 31, 2002.
Service charges on deposit accounts are primarily composed of NSF fees, ATM
interchange fees and monthly service fees on checking and savings accounts. NSF
fee income increased $73,000 in 2002. During 2001, NSF Fees increased $167,000
or 69% compared to 2000. The large increase in NSF fees in 2001 was the result
of an increase in per item charges coupled with growth in the number of demand
deposit accounts being serviced. ATM interchange income increased $29,000, from
$80,000 for year ended December 31, 2001 to $109,000 for the year ended December
31, 2002. In 2001, ATM interchange fees increased $40,000 compared to the 2000.
The increases in ATM interchange fees is due to the increased volume of deposit
accounts creating more income producing transactions for First Community.
Other customer and non-customer fee income consists of ATM service charges on
non-bank customers and credit card merchant and interchange fees. Other customer
and non-customer income increased to $27,000 for the year ended December 31,
2002. For the year ended December 31, 2001, other customer and non-customer fee
income increased $82,000 or 45% from 2000. The increase in 2001 was primarily
due to a $60,000 increase in non-customer ATM fees resulting from increased
transactions.
Gains on the sale of loans increased $158,000 to $199,000 for the year ended
December 31, 2002 compared to $41,000 for year ended December 31, 2001. The
increase on gains on the sale of loans was due to the success of First
Community's mortgage program and the ability to sell loans on the secondary
market. First Community began its secondary mortgage sales program during 2001.
Other operating income increased $145,000, or 112%, to $274,000 for year ended
December 31, 2002, compared to $129,000 for year ended December 31, 2001. Other
operating income includes gains on the sale of assets, earnings on life
insurance, insurance commissions and loan servicing fees. In 2002, there was a
one-time gain on the sale of an other asset of $74,000 and a $23,000 gain on the
sale of other real estate owned. Loan servicing fee income increased $18,000
during 2002 as a result of increased servicing retained on mortgage loans sold.
Other expenses increased $401,000 from 2001 to 2002 and increased $108,000 from
2000 to 2001. This increase was primarily due to salaries and employee benefits,
data processing fees and legal and professional fees. Salaries and employee
benefits expense increased $192,000 from $2.4 million in 2001 to $2.6 million in
2002. In 2001 salaries and employee benefits expenses increased $174,000
compared to 2000. Data processing fees increased by $82,000 to $745,000 for year
ended December 31, 2002, compared to $663,000 for year ended December 31, 2001.
During 2001, data processing fees increased $144,000. The increases in salaries
and employee benefits and data processing fees for both years were attributable
to increased volumes in customer deposit accounts, loans and fees associated
with servicing those accounts.
Legal and professional fees increased $89,000 during 2002 compared to 2001.
During 2001, legal and professional fees increased $12,000 compared to 2000. The
increase in legal and professional fees in 2002 is mostly related to increased
litigation associated with the loan portfolio, pre-merger legal fees and
increased audit fees.
18
Life insurance expense for 2002, 2001 and 2000 was $13,000, $12,000 and
$150,000, respectively. In 2000, life insurance expense included an up-front
charge of $143,000 on the initiation of key man life insurance policies.
Other operating expenses include postage, FDIC insurance, ATM related expenses,
capitalized loan costs, director fees, credit card interchange expenses and
other miscellaneous operating expenses the Company would incur. The increase in
other operating expenses during 2002 was mostly due to a reduction of
capitalized loan cost in the amount of $55,000.
Income tax expense decreased $243,000 in 2002, from the previous year ended
December 31, 2001. Income tax expense increased $319,000 from 2000 to 2001. The
Company's effective tax rate was 18.8%, 27.8% and 7.4% for the years ended 2002,
2001 and 2000, respectively. For 2002, 2001 and 2000, the primary difference
between the effective tax rate and the statutory tax rate related to tax-exempt
interest.
Quarterly Results of Operations
The following table sets forth certain quarterly results for the years ended
December 31, 2002 and 2001. (Dollars in thousands except for per share data)
- -----------------------------------------------------------------------------------------------------
Net Provision Net Basic Diluted
Quarter Interest Interest Interest For Loan Income/ Earnings Earnings Dividends
Ended Income Expense Income Losses (Loss) Per Share Per Share Per Share
- -----------------------------------------------------------------------------------------------------
2002:
March $2,485 $1,069 $1,416 $ 72 $230 $.22 $.21 $ .10
June 2,449 1,005 1,444 790 (199) (.19) (.19) .05
September 2,506 957 1,549 60 420 .40 .38 .05
December 2,372 827 1,545 632 21 .02 .02 .05
2001:
March $2,920 $1,713 $1,207 $ 34 $178 $.17 $.17 $ .04
June 2,949 1,623 1,326 69 213 .20 .20 .04
September 2,882 1,403 1,479 119 273 .26 .25 .04
December 2,733 1,221 1,512 67 254 .24 .23 .00
During the second and fourth quarters of 2002, the Company made considerable
provisions to the loan loss reserve causing decreases in net income. The
increased provision during the second quarter of 2002 was for the commercial
loan portfolio and was primarily necessary due to continued weakness in the
general economy of the Indianapolis metro area and due to the charge off of two
loans that were partially unreserved. The Company believes that there is
potential for recovery of these charged off loans, but the recoveries may be
over several quarters. The increased provision for loan losses during the fourth
quarter of 2002 was due to the discovery of fraudulent accounts receivable
financing relating to one borrower. At this time management believes recovery on
the fraudulent lending that was discovered in fourth quarter of 2002 will be
minimal. The increases to the provision for loan losses were partially offset by
the net interest income and non-interest income levels achieved.
The Company made significant progress in reducing its cost of funds on
interest-bearing liabilities without losing proportionate yields on its
interest-earning assets during the last three quarters of 2001. The results
included the Company's net interest income increasing to $1.5 million during the
quarter ended December 31, 2001, an increase of $305,000 or 25.3%, compared to
the Company's net interest income of approximately $1.2 million during the
quarter ended March 31, 2001. These improvements coupled with continued
increases in non-interest income from service charges on accounts, mortgage
banking activity, and other income propelled the Company to a record net income
level of $918,000 for the year ended December 31, 2001.
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, 2002 and 2001.
19
2002 2001
-------------------------------------- ---------------------------------------
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 $ 7,410 $ 76 1.0% $ 5,577 $ 108 1.9%
Investment securities:(1)
Taxable 3,142 194 6.2 1,697 147 8.7
Tax-exempt 3,165 178 5.6 6,862 375 5.5
------------------------- ---------------------------
Total investment securities 6,307 372 5.9 8,559 522 6.1
------------------------- ---------------------------
Loans:(2)
Commercial 52,352 3,623 6.9 47,394 4,205 8.9
Real estate mortgage 35,908 2,632 7.3 39,139 3,028 7.7
Installment 35,985 3,037 8.4 38,065 3,571 9.4
Tax-exempt loans and leases 2,357 173 7.3 2,671 196 7.3
------------------------- ---------------------------
Total loans 126,602 9,465 7.5 127,269 11,000 8.6
------------------------- ---------------------------
Total earning assets 140,319 9,913 7.1 141,405 11,630 8.2
----------- ------------
Allowance for loan losses (1,184) (1,033)
Cash and due from banks 1,840 1,753
Premises and equipment 4,365 4,655
Other assets 4,282 4,872
------------- --------------
Total assets $149,622 $151,652
============= ==============
Liabilities:
Interest-bearing deposits:
NOW accounts 23,138 179 .8 21,545 411 1.9
Savings 27,367 287 1.1 24,058 660 2.7
Certificates of deposit and
other time 59,637 2,435 4.1 66,405 3,804 5.7
------------------------- ---------------------------
Total interest-bearing deposits 110,142 2,901 2.6 112,008 4,875 4.4
FHLB advances 13,544 777 5.7 15,647 899 5.7
Other borrowings 2,458 180 7.3 2,567 186 7.3
------------------------- ---------------------------
Total interest-bearing liabilities 126,144 3,858 3.1 130,222 5,960 4.6
----------- ------------
Noninterest-bearing demand
deposits 11,984 10,279
Other liabilities 1,139 1,291
------------- --------------
Total liabilities 139,267 141,792
Stockholders' equity 10,355 9,860
------------- --------------
Total liabilities and
stockholders' equity $149,622 $151,652
============= ==============
Net interest income 6,055 4.3%(3) 5,670 4.2%(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. $ 101 $ 146
=========== ============
(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.
21
Changes in Interest Income and Expense Comparing December 31, 2002 and 2001 and
December 31, 2001 and 2000. The following tables analyze the changes in interest
income and interest expense comparing the years ended December 31, 2002 and 2001
and December 31, 2001 and 2000. 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, 2002 compared to year ended Due to Due to
December 31, 2001 Change Rate Volume
-------------------------------------------
Interest-earning assets: (Dollars in 000's)
Loans $(1,535) $(1,452) $ (83)
Investment securities (150) (40) (110)
Interest-bearing deposits (32) (61) 29
-------------------------------------------
Total (1,717) (1,553) (164)
-------------------------------------------
Interest-bearing liabilities:
Savings (373) (454) 81
Interest-bearing checking (232) 28
Certificates of deposit and other time deposits (1,369) (1,010) (359)
FHLB advances (122) (1) (121)
Other borrowings (6) 2 (8)
-------------------------------------------
Total (2,102) (1,723) (379)
-------------------------------------------
Net change in net interest income $ 385 $ 170 $ 215
===========================================
------------------------------------------
Increase (Decrease) in Net Interest Income
------------------------------------------
Year ended December 31, 2001 compared to year ended Change Due to Due to
December 31, 2000 Rate Volume
--------------------------------
Interest-earning assets: (Dollars in 000's)
Loans $481 $(362) $ 843
Investment securities (349) 57 (406)
Interest-bearing deposits (137) (115) (22)
--------------------------------
Total (5) (420) 415
--------------------------------
Interest-bearing liabilities:
Savings (348) (317) (31)
Interest-bearing checking (153) (112) (41)
Certificates of deposit (645) (158) (487)
FHLB advances 551 (14) 565
--------------------------------
Other borrowings (4) 0 (4)
--------------------------------
Total (599) (601) 2
--------------------------------
Net change in net interest income $594 $ 181 $ 413
================================
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 6.2% and a negative 18.2% at December 31, 2002 and 2001,
respectively. This interest-rate gap represents substantial risk
22
for First Community in an environment of rising interest rates. A negative
interest-rate gap means First Community's earnings are vulnerable during periods
of rising interest rates because during such periods the interest expense paid
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, 2002,
First Community had $77.3 million or 63.9% of its net loan portfolio invested in
installment and commercial loans as compared to $73.2 million or 58.3% of net
loans invested in installment and commercial loans at December 31, 2001.
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,
2002, First Community's ratio of non-performing assets to total assets was 2.44%
compared to 1.37% at December 31, 2001.
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, 2002
and 2001. 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, 2002 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 $4,602 $ 2,924 $ 3,068 $ 15,887 $26,481
Fixed rate mortgages 13,807 5,124 6,157 307 25,395
Commercial loans 15,429 5,086 2,995 4,822 28,332
Consumer loans 16,765 13,753 5,618 2,111 38,247
Tax-exempt loans and leases 0 748 1,149 921 2,818
Lease Financing 0 256 491 366 1,113
Investments 678 927 1,153 1,070 3,828
FHLB stock 1,025 1,025
Interest-bearing deposits 6,710 6,710
--------------------------------------------------------------------
Total interest-earning assets 59,016 28,818 20,631 25,484 133,949
--------------------------------------------------------------------
Interest-bearing liabilities:
Fixed maturity deposits 32,572 7,669 7,053 3,728 51,022
Other deposits 33,989 13,772 5,490 1,644 54,895
FHLB advances 1,500 500 5,000 5,500 12,500
--------------------------------------------------------------------
Total interest-bearing liabilities 68,061 21,941 17,543 10,872 118,417
--------------------------------------------------------------------
Excess (deficiency) of interest-earning (9,045) 6,877 3,088 14,612 15,532
assets over interest-bearing liabilities
Cumulative excess (deficiency) of
interest-earning assets over
interest-bearing liabilities (9,045) (2,168) 920 15,532
Cumulative ratio at December 31, 2002 as a
percent of total assets (6.2)% (1.5)% 0.06% 10.7%
23
At December 31, 2001 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 $14,373 $ 8,027 $ 5,631 $ 152 $28,183
Fixed rate mortgages 4,453 2,953 3,399 19,345 30,150
Commercial loans 21,271 4,637 2,007 824 28,739
Consumer loans 14,054 14,394 6,414 1,501 36,363
Tax-exempt loans and leases 99 288 264 1,719 2,370
Lease Financing 10 182 545 25 762
Investments 411 1,170 1,249 1,636 4,466
FHLB stock 1,025 1,025
Interest-bearing deposits 5,004 5,004
--------------------------------------------------------------------
Total interest-earning assets 60,700 31,651 19,509 25,202 137,062
--------------------------------------------------------------------
Interest-bearing liabilities:
Fixed maturity deposits 45,914 6,743 5,322 1,372 59,351
Other deposits 28,043 13,103 4,808 1,381 47,335
FHLB advances 13,500 2,000 15,500
--------------------------------------------------------------------
Total interest-bearing liabilities 87,457 21,846 10,130 2,753 122,186
--------------------------------------------------------------------
Excess (deficiency) of interest-earning (26,757) 9,805 9,379 22,449 14,876
assets over interest-bearing liabilities
Cumulative excess (deficiency) of
interest-earning assets over
interest-bearing liabilities (26,757) (16,952) (7,573) 14,876
Cumulative ratio at December 31, 2001 as a
percent of total assets (18.2)% (11.5)% (5.1)% 10.1%
Deposit/Asset Base. First Community has experienced significant growth in assets
and deposits in the past five years. The Company's consolidated assets grew from
$121.3 million at December 31, 1998 to $145.6 million at December 31, 2002 and
deposits increasing from $106.2 million at December 31, 1998 to $119.6 million
at December 31, 2002. The growth in assets and deposits primarily occurred
during 1999. 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. 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 the tremendous growth during 1999, management has focused efforts to
control asset growth and restructure the deposit mix in 2000, 2001 and 2002. For
the year ended December 31, 2002 compared to December 31, 2001, the consolidated
assets decreased $1.7 million, while deposits increased $1.9 million. Net loans
decreased $4.6 million to $121 million at year end 2002 compared to 2001. The
decrease in loans was primarily attributable to the sale of mortgage loans on
the secondary market. These combined efforts were made to increase net interest
margin and to strengthen First Community's capital ratios. The results were
evident as the Company recorded record net interest income of $6.0 million
during the year ended December 31, 2002 as compared to $5.4 million for the year
ended December 31, 2001, an increase of 10.0%. First Community's tier one
capital and total capital to risk-weighted assets ratios reached 7.5% and 10.5%,
respectively at December 31, 2002. These comparable ratios were 7.2% and 10.3%
at December 31, 2001.
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 and sales, increased deposits and total
institutional borrowing capacity.
24
Cash and interest-bearing deposits, when combined with investments, increased
during 2002, with declines during 2001. As investments matured or were sold, the
dollars were used to both fund new loans and to fund higher costing time 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.
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, 2002 and December 31, 2001.
During 2002 and 2001, cash and cash equivalents which are defined as cash and
due from banks and interest-bearing time deposits increased $2.4 million and
increased $1.8 million, respectively. During 2002 and 2001, investment
securities decreased $557,000 and decreased $5.8 million, respectively.
At December 31, 2002 and 2001, commitments to fund loan originations were
approximately $17.8 million and $16.3 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, the ability to borrow from the
FHLB, and proceeds from the sale of residential mortgages to FNMA.
First Community is a member of the FHLB of Indianapolis. Through that
affiliation, First Community has the ability to borrow up to $20.0 million as of
December 31, 2002 from the FHLB, based on board resolution amounts. The balance
of its borrowings at December 31, 2002 was $12.5 million, a decrease of $3.0
million from outstanding borrowings at December 31, 2001. The reduction of the
outstanding borrowings is due to improved cashflows from the sale of the
mortgage loans and increases in deposit accounts.
New Accounting Standards
Acquisitions of Certain Financial Institutions:
- -----------------------------------------------
Statement of Financial Accounting Standards ("SFAS") No. 147 amends SFAS No. No.
72, Accounting for Certain Acquisitions of Banking or Thrift Institutions, and
FASB Interpretation No. 9, Applying APB Opinions No. 16 and 17 When a Savings
and Loan Association or a Similar Institution Is Acquired in a Business
Combination Accounted for by the Purchase Method. SFAS No. 72 and FASB
Interpretation No. 9 provided interpretive guidance on the application of the
purchase method to acquisitions of financial institutions. Except for
transactions between two or more mutual enterprises, SFAS No. 147 removes
acquisitions of financial institutions from the scope of both SFAS No. 72 and
Interpretation No. 9 and requires that those transactions be accounted by in
accordance with SFAS No. 141, Business Combinations, and No. 142, Goodwill and
Other Intangible Assets.147. In addition, SFAS No. 147 amends SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets, to include in
its scope long-term customer-relationship intangible assets of financial
institutions such as depositor- and borrower-relationship intangible assets and
credit cardholder intangible assets. Those intangible assets are subject to the
same undiscounted cash flow recoverability test and impairment loss recognition
and measurement provisions that SFAS No. 144 requires for other long-lived
assets that are held and used.
Accounting for Stock-Based Compensation - Transition and Disclosure:
- -------------------------------------------------------------------
SFAS No. 148 amends FASB Statement No. 123, Accounting for Stock-Based
Compensation. SFAS No. 148 provides alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, SFAS No. 148 amends the disclosure
requirements of SFAS No. 123 to require more prominent and more frequent
disclosures in financial statements about the effects of stock-based
compensation.
25
Under the provisions of SFAS No. 123, companies that adopted the fair value
based method were required to apply that method prospectively for new stock
option awards. This contributed to a "ramp-up" effect on stock-based
compensation expense in the first few years following adoption, which caused
concern for companies and investors because of the lack of consistency in
reported results. To address that concern, SFAS No. 148 provides two additional
methods of transition that reflect an entity's full complement of stock-based
compensation expense immediately upon adoption, thereby eliminating the ramp-up
effect.
SFAS No. 148 also improves the clarity and prominence of disclosures about the
proforma effects of using the fair value based method of accounting for
stock-based compensation for all companies - regardless of the accounting method
used - by requiring that the data be presented more prominently and in a more
user-friendly format in the footnotes to the financial statements. In addition,
SFAS No. 148 improves the timeliness of those disclosures by requiring that this
information be included in interim as well as annual financial statements. In
the past, companies were required to make proforma disclosures only in annual
financial statements.
The transition guidance and annual disclosure provisions of SFAS No. 148 are
effective for fiscal years ending after December 15, 2002, with earlier
application permitted in certain circumstances. The interim disclosure
provisions are effective for financial reports containing financial statements
for interim periods beginning after December 15, 2002. The Company does not
believe that adoption of this statement will have a material effect on the
Company's financial position or results of operations.
Impact of Inflation and Changing Prices
The financial statements and related data presented herein have been prepared in
accordance with generally accepted accounting principles. These principles
require the measurement of financial position and operating results in terms of
historical dollars, without considering changes in the relative purchasing power
of money over time due to inflation.
The primary assets and liabilities of the Company are monetary in nature.
Consequently, interest rates generally have a more significant impact on
performance than the effects of inflation. Interest rates, however, do not
necessarily move in the same direction or with the same magnitude as the price
of goods and services. In a period of rapidly rising interest rates, the
liquidity and the maturity structure of the Company's assets and liabilities are
critical to the maintenance of acceptable performance levels.
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 Company
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, Items 10 thru 13, 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,
2002.
Item 14. Controls and Procedures
26
(a) Evaluation of disclosure controls and procedures. The Company's chief
executive officer financial officer, after evaluating the effectiveness of the
Company's disclosure controls and procedures (as defined in Sections 13a-14(c)
and 15d-14(c) of the Securities Exchange Act of 1934, as amended), as of a date
(the "Evaluation Date") within 90 days before the filing date of this annual
report, has concluded that as of the Evaluation Date, the Company's disclosure
controls and procedures were adequate and are designed to ensure that material
information relating to the Company is timely gathered, analyzed and disclosed
to such officer within the Company, as appropriate, to allow timely decisions
regarding required disclosure in the Company's reports filed under the
Securities Exchange Act of 1934, as amended.
(b) Changes in internal controls. There have been no significant changes in the
Company's internal controls or in other factors that could significantly affect
our internal controls subsequent to the Evaluation Date.
27
PART IV
Item 15. 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 Accountants' Report on consolidated financial
statements. F-1
Consolidated Balance Sheets at December 31, 2002 and 2001 F-2
Consolidated Statements of Income for the years ended December
31, 2002, 2001 and 2000. F-3
Consolidated Statements of Comprehensive Income for the years
ended December 31, 2002, 2001 and 2000. F-4
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 2002, 2001 and 2000. F-5
Consolidated Statement of Cash Flows for the years ended December
31, 2002, 2001 and 2000. F-6
Notes to consolidated financial statements. F-7
2. Exhibit Index. The following exhibits are included as part of this
Annual Report:
3.1 Articles of Incorporation of First Community Bancshares, Inc.
(Incorporated herein by reference to the Registration
Statement on Form S-4 of First Community Bancshares, Inc. with
Registration No. 33-47691 declared effective July 30, 1992).
3.2 Amended Bylaws of First Community Bancshares, Inc.
(Incorporated herein by reference to the Form 10-K of First
Community Bancshares, Inc. for the fiscal year ended December
31, 1992 and filed with the Securities and Exchange Commission
on March 31, 1993)(Commission File No. 0-19618).
10.6 First Community Bancshares, Inc. 1992 Stock Option Plan, as
amended and approved by Shareholders on May 19, 1993
(Incorporated herein by reference to the Form 10-K of First
Community Bancshares, Inc. for the fiscal year ended December
31, 1993 and filed with the Securities and Exchange Commission
on March 30, 1994)(Commission File No. 0-19618).
10.8* Deferred Director Fee Agreement by and between First Community
Bank & Trust Company and Merrill M. Wesemann Dated November
23, 1994 (Incorporated herein by reference to the Form 10-K of
First Community Bancshares, Inc. for the fiscal year ended
December 31, 1994 and filed with the Securities and Exchange
Commission on March 13, 1995).
10.9 First Community Bancshares, Inc. 1996 Stock Option Plan
(Incorporated herein by reference to the First Community
Bancshares, Inc. proxy statement for the 1996 annual
shareholders meeting filed with the Securities and Exchange
Commission on March 13, 1996).
10.10 Amendment to the First Community Bancshares, Inc. 1992 Stock
Option Plan, as amended and approved by Shareholders on March
13, 1996 (Incorporated herein by reference to the First
Community Bancshares, Inc. proxy statement for the 1996 annual
shareholders meeting filed with the Securities and Exchange
Commission on March 13, 1996).
28
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.
(Incorporated herein by reference to the Form 10-K of First
Community Bancshares, Inc. for the fiscal year ended December
31, 2001 and filed with the Securities and Exchange Commission
on April 1, 2002)
10.16* Form of Deferred Compensation Agreement. (Incorporated herein
by reference to the Form 10-K of First Community Bancshares,
Inc. for the fiscal year ended December 31, 2001 and filed
with the Securities and Exchange Commission on April 1, 2002)
(a) Agreement between First Community Bank & Trust and
Albert R. Jackson, Jr. dated December 31, 2002, for
the deferral of Director fees.
(b) Agreement between First Community Bank & Trust and
Albert R. Jackson, III, dated December 31, 2002, for
the deferral of compensation paid to Mr. Jackson as
President of First Community.
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
29
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized, this 31st day of March, 2003.
FIRST COMMUNITY BANCSHARES, INC.
By: /s/ Albert R. Jackson , III
---------------------------------------
Albert R. Jackson, III, Chief Executive
Officer, Chief Financial Officer and
Director
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 31, 2003
Officer, Chief Financial Officer and Director
/s/ Merrill M. Wesemann March 31, 2003
- ------------------------------------------------
Merrill M. Wesemann, MD, Director and Chairman
/s/ Albert R. Jackson, Jr. March 31, 2003
- ------------------------------------------------
Albert R. Jackson, Jr., Director and President
/s/ Roy Martin Umbarger March 31, 2003
- ------------------------------------------------
Roy Martin Umbarger, Director and Vice President
/s/ Frank D. Neese March 31, 2003
- ------------------------------------------------
Frank D. Neese, Director and Secretary
30
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of First Community Bancshares, Inc. (the
"Company") on Form 10K for the year ending December 31, 2002 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Albert
R. Jackson, III, Chief Executive Officer and Chief Financial Officer of the
Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company as of and for the periods stated therein.
By: /s/ Albert R. Jackson, III
---------------------------------------------------
Chief Executive Officer and Chief Financial Officer
March 31, 2003
31
CERTIFICATION OF PRINCIPAL EXECUTIVE AND FINANCIAL OFFICER
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Albert R. Jackson III, certify that:
1. I have reviewed this annual report on Form 10-K of First Community
Bancshares, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report.
4. I am responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for
the registrant and have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. I have disclosed, based on my most recent evaluation, to the
registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. I have indicated in this annual report whether there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our
most recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
By: /s/ Albert R. Jackson, III
---------------------------------------------------
Chief Executive Officer and Chief Financial Officer
March 31, 2003
32
Independent Accountants' Report
To the Stockholders and
Board of Directors
First Community Bancshares, Inc.
Bargersville, Indiana
We have audited the accompanying consolidated balance sheets of First Community
Bancshares, Inc. as of December 31, 2002 and 2001, 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, 2002. 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 auditing standards generally accepted
in the United States of America. 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. as of December 31, 2002 and 2001, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2002, in conformity with accounting principles generally accepted
in the United States of America.
/s/ BKD, LLP
Indianapolis, Indiana
March 12, 2003
F-1
First Community Bancshares, Inc.
Consolidated Balance Sheets
December 31, 2002 and 2001
Assets
2002 2001
------------------------------------------
Cash and due from banks $ 2,392,914 $ 1,683,913
Short-term interest-bearing deposits 6,710,100 5,003,537
--------------- ---------------
Cash and cash equivalents 9,103,014 6,687,450
Investments available for sale 3,912,228 4,468,964
Mortgage loans held for sale 1,625,533 554,261
Loans, net of allowance for loan losses of $1,495,000 and $1,114,000 121,006,713 125,627,189
Premises and equipment 4,284,827 4,564,691
Federal Home Loan Bank of Indianapolis stock, at cost 1,025,000 1,025,000
Interest receivable 764,727 849,933
Cash value of life insurance 2,532,999 2,432,547
Other assets 1,385,274 1,167,454
--------------- ---------------
Total assets $ 145,640,315 $ 147,377,489
=============== ===============
Liabilities
Deposits
Noninterest-bearing $ 13,558,713 $ 11,037,797
Interest-bearing 106,051,958 106,685,724
--------------- ---------------
Total deposits 119,610,671 117,723,521
Federal Home Loan Bank of Indianapolis advances 12,500,000 15,500,000
Other borrowings 1,761,999 2,555,914
Interest payable 192,325 298,583
Other liabilities 1,109,761 1,108,065
--------------- ---------------
Total liabilities 135,174,756 137,186,083
--------------- ---------------
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 - 1,044,926 and 1,042,926 shares 7,058,865 7,043,990
Retained earnings and contributed capital 3,356,465 3,145,348
Accumulated other comprehensive income 50,229 2,068
--------------- ---------------
Total stockholders' equity 10,465,559 10,191,406
--------------- ---------------
Total liabilities and stockholders' equity $ 145,640,315 $ 147,377,489
=============== ===============
See Notes To Consolidated Financial Statements
F-2
First Community Bancshares, Inc.
Consolidated Statements of Income
Years Ended December 31, 2002, 2001 and 2000
2002 2001 2000
-------------------------------------------------------------
Interest Income
Loans, including fees $ 9,415,396 $ 10,837,658 $ 10,381,938
Securities
Taxable 130,182 73,181 187,383
Tax exempt 126,732 279,771 472,420
Deposits with financial institutions 76,353 107,601 244,562
Dividends 63,362 73,571 65,684
--------------- --------------- ---------------
Total interest income 9,812,025 11,371,782 11,351,987
--------------- --------------- ---------------
Interest Expense
Deposits 2,901,450 4,875,159 6,021,889
Federal Home Loan Bank advances 777,147 898,875 347,660
Other borrowings 179,749 186,590 190,005
--------------- --------------- ---------------
Total interest expense 3,858,346 5,960,624 6,559,554
--------------- --------------- ---------------
Net Interest Income 5,953,679 5,411,158 4,792,433
Provision for loan losses 1,553,968 288,500 219,100
--------------- --------------- ---------------
Net Interest Income After Provision for Loan
Losses 4,399,711 5,122,658 4,573,333
--------------- --------------- ---------------
Other Income
Fiduciary activities 29,844 33,917 21,284
Service charges on deposit accounts 807,043 697,075 497,415
Other customer and non-customer fee income 290,549 263,683 182,149
Gain on sale of loans 199,056 40,536 --
Net realized gains (losses) on sales of
available-for-sale securities 48,077 49,777 (25,014)
Other operating income 274,428 128,816 163,557
--------------- --------------- ---------------
Total other income 1,648,997 1,213,804 839,391
--------------- --------------- ---------------
Other Expenses
Salaries and employee benefits 2,599,623 2,408,322 2,234,483
Premises and equipment 724,014 715,608 689,325
Advertising 124,609 148,744 156,477
Data processing fees 744,929 662,717 518,541
Printing and office supplies 163,557 160,948 249,652
Legal and professional fees 281,838 193,076 181,264
Telephone expense 114,264 118,187 117,633
Life insurance expense 13,142 11,943 157,179
Other operating expenses 700,988 646,266 653,717
--------------- --------------- ---------------
Total other expenses 5,466,964 5,065,811 4,958,271
--------------- --------------- ---------------
Income Before Income Tax 581,744 1,270,651 454,453
Income tax expense 109,590 352,862 33,606
--------------- --------------- ---------------
Net Income $ 472,154 $ 917,789 $ 420,847
=============== =============== ===============
Basic Earnings Per Share $ .45 $ .88 $ .41
Diluted Earnings Per Share .45 .85 .41
See Notes To Consolidated Financial Statements
F-3
First Community Bancshares, Inc.
Consolidated Statements of Comprehensive Income
Years Ended December 31, 2002, 2001 and 2000
2002 2001 2000
---------------------------------
Net Income $ 472,154 $ 917,789 $ 420,847
--------- --------- ---------
Other comprehensive income, net of tax
Unrealized gains on securities available for sale
Unrealized holding gains arising during the
period, net of tax expense of $50,633,
$60,293 and $96,114 77,195 91,923 146,537
Less: Reclassification adjustment for gains
(losses) included in net income, net of tax
expense (benefit) of $19,043, $19,717 and
$ (9,908) 29,034 30,060 (15,106)
--------- --------- ---------
48,161 61,863 161,643
--------- --------- ---------
Comprehensive Income $ 520,315 $ 979,652 $ 582,490
========= ========= =========
See Notes To Consolidated Financial Statements
F-4
First Community Bancshares, Inc.
Consolidated Statements of Stockholders' Equity
Years Ended December 31, 2002, 2001 and 2000
Retained Accumulated
Earnings Other
Common Stock and Comprehensive
Shares Contributed Income
Outstanding Amount Capital (Loss) Total
----------------------------------------------------------------------------------
Balances, January 1, 2000 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 ($.16 per share) (165,153) (165,153)
Purchase of stock (10,608) (89,953) (89,953)
Exercise of stock options 30,840 170,854 170,854
Tax benefit on stock options
exercised 12,300 12,300
----------- ------------ ------------ ----------- ------------
Balances, December 31, 2000 1,039,926 7,023,225 2,352,588 (59,795) 9,316,018
Net income 917,789 917,789
Unrealized gains on securities 61,863 61,863
Cash dividends ($.12 per share) (125,029) (125,029)
Exercise of stock options 3,000 20,625 20,625
Tax benefit on stock options
exercised 140 140
----------- ------------ ------------ ----------- ------------
Balances, December 31, 2001 1,042,926 7,043,990 3,145,348 2,068 10,191,406
Net income 472,154 472,154
Unrealized gains on securities 48,161 48,161
Cash dividends ($.25 per share) (261,037) (261,037)
Exercise of stock options 2,000 14,875 14,875
----------- ------------ ------------ ----------- ------------
Balances, December 31, 2002 1,044,926 $ 7,058,865 $ 3,356,465 $ 50,229 $ 10,465,559
=========== ============ ============ =========== ============
See Notes To Consolidated Financial Statements
F-5
First Community Bancshares, Inc.
Consolidated Statements of Cash Flows
Years Ended December 31, 2002, 2001 and 2000
2002 2001 2000
----------------------------------------------------------
Operating Activities
Net income $ 472,154 $ 917,789 $ 420,847
Items not requiring (providing) cash
Provision for loan losses 1,553,968 288,500 219,100
Depreciation and amortization 355,725 372,017 374,568
Deferred income tax (168,690) 10,262 (135,490)
Investment securities amortization 31,622 49,212 44,953
Investment securities (gains) losses (48,077) (49,777) 25,014
Loans originated for sale in the secondary
market (16,820,922) (3,267,260) --
Proceeds from loans sold in the secondary
market 15,948,706 2,753,535 --
Gain on loans sold (199,056) (40,536) --
Net change in
Interest receivable 85,206 322,578 (87,902)
Interest payable (106,258) (173,859) 138,208
Other adjustments (457,917) 318,339 218,904
-------------- -------------- --------------
Net cash provided by operating activities 646,461 1,500,800 1,218,202
-------------- -------------- --------------
Investing Activities
Purchases of securities available for sale (3,063,302) (500,000) --
Proceeds from sales of securities available for
sale 3,097,854 5,451,805 2,435,192
Proceeds from maturities of securities available
for sale 618,887 1,079,288 2,598,330
Purchases of securities held to maturity -- -- (4,973,179)
Proceeds from sale of securities held to maturity -- 126,284 --
Proceeds from maturities of securities held to
maturity -- 24,000 10,622,000
Net change in loans 2,850,241 (2,736,366) (13,122,398)
Purchases of premises and equipment (75,486) (121,206) (751,394)
Proceeds from sale of foreclosed assets 366,274 174,980 96,455
Purchases of Federal Home Loan Bank stock -- (247,200) --
Premiums on life insurance -- -- (825,118)
Other investing activities 75,316 10,000
-------------- -------------- --------------
Net cash provided by (used in) investing
activities 3,869,784 3,261,585 (3,920,112)
-------------- -------------- --------------
Financing Activities
Net change in
Noninterest-bearing, NOW, and savings deposits 10,215,989 4,456,693 1,562,633
Certificates of deposit (8,328,839) (9,741,499) (6,869,306)
Proceeds from borrowings -- 8,000,000 10,000,000
Repayment of borrowings (3,793,915) (5,530,510) (1,624,792)
Cash dividends (208,791) (166,626) (164,345)
Purchase of stock -- -- (89,953)
Stock options exercised 14,875 20,625 170,854
-------------- -------------- --------------
Net cash provided by (used in) financing
activities (2,100,681) (2,961,317) 2,985,091
-------------- -------------- --------------
Net Change in Cash and Cash Equivalents 2,415,564 1,801,068 283,181
Cash and Cash Equivalents, Beginning of Year 6,687,450 4,886,382 4,603,201
-------------- -------------- --------------
Cash and Cash Equivalents, End of Year $ 9,103,014 $ 6,687,450 $ 4,886,382
============== ============== ==============
Additional Cash Flows Information
Interest paid $ 3,964,604 $ 6,134,483 $ 6,421,346
Income tax paid 560,567 75,440 160,633
Investment securities held to maturity
transferred to available for sale -- 1,196,095 --
See Notes To Consolidated Financial Statements
F-6
First Community Bancshares, Inc.
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
(Table Dollar Amounts in Thousands, Except Per Share Data)
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 accounting principles generally accepted in the
United States of America 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 accounting
principles generally accepted in the United States of America 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
holds and manages 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.
Cash equivalents - The Company considers all liquid investments with
original maturities of three months or less to be cash equivalents.
Investment securities - Debt securities are classified as held to
maturity when the Company has the positive intent and ability to hold
the securities to maturity. Securities held to maturity are carried at
amortized cost. Debt securities not classified as held to maturity are
classified as available for sale. Securities available for sale are
carried at fair value with unrealized gains and losses reported
separately through accumulated other comprehensive income, net of tax.
Amortization of premiums and accretion of discounts are recorded as
interest income from securities. Realized gains and losses are recorded
as net security gains (losses). Gains and losses on sales of securities
are determined on the specific-identification method.
F-7
First Community Bancshares, Inc.
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
(Table Dollar Amounts in Thousands, Except Per Share Data)
Mortgage loans held for sale - Mortgage loans held for sale are carried
at the lower of cost or fair value, determined using an aggregate basis.
Write-downs to fair value are recognized as a charge to earnings at the
time the decline in value occurs. Forward commitments to sell mortgage
loans are acquired to reduce market risk on mortgage loans in the
process of origination and mortgage loans held for sale. Gains and
losses resulting from sales of mortgage loans are recognized when the
respective loans are sold to investors. Gains and losses are determined
by the difference between the selling price and the carrying amount of
the loans sold, net of discounts collected or paid and considering a
normal servicing rate. Fees received from borrowers to guarantee the
funding of mortgage loans held for sale and fees paid to investors to
ensure the ultimate sale of such mortgage loans are recognized as income
or expense when the loans are sold or when it becomes evident that the
commitment will not be used.
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. Loan losses are charged
against the allowance when management believes the uncollectibility of a
loan balance is confirmed. Subsequent recoveries, if any, are credited
to the allowance. 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. A loan is considered impaired when, based
upon current information and events, it is probable the Company will be
unable to collect the scheduled payments of principal or interest when
due according to the contractual terms of the loan agreement.
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, 2002, 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
F-8
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 - The Company has a stock-based employee compensation
plan, which is described more fully in Note 19. The Company accounts for
this plan under the recognition and measurement principles of APB
Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations. No stock-based employee compensation cost is reflected
in net income, as all options granted under the plan had an exercise
price equal to the market value of the underlying common stock on the
grant date. The following table illustrates the effect on net income and
earnings per share as if the Company had applied the fair value
provisions of Statement of Financial Accounting Standards (SFAS) No.
123, Accounting for Stock-Based Compensation, to stock-based employee
compensation.
2002 2001 2000
------------------------------------------------------
Net income, as reported $ 472 $ 918 $ 421
Less: Total stock-based employee compensation
cost determined under the fair value based
method, net of income taxes (5) (5) (8)
------------- ------------- -------------
Pro forma net income $ 467 $ 913 $ 413
============= ============= =============
Earnings per share:
Basic - as reported $ .45 $ .88 $ .41
Basic - pro forma .45 .88 .40
Diluted - as reported .45 .85 .41
Diluted - pro forma .45 .84 .40
Income tax in the consolidated statements 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.
F-9
First Community Bancshares, Inc.
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
(Table Dollar Amounts in Thousands, Except Per Share Data)
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, 2002, was $888,000.
Note 3: Investment Securities
2002
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------------------------------------------------------------------
Available for sale
State and municipal $ 3,328 $ 84 $ -- $ 3,412
Corporate obligations 500 -- -- 500
------------- ------------- ------------ ------------
Total $ 3,828 $ 84 $ 0 $ 3,912
============= ============= ============ ============
2001
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------------------------------------------------------------------
Available for sale
State and municipal $ 3,966 $ 24 $ 21 $ 3,969
Corporate obligations 500 500
------------- ------------- ------------ ------------
Total $ 4,466 $ 24 $ 21 $ 4,469
============= ============= ============ ============
The amortized cost and fair value of securities held to maturity and
available for sale at December 31, 2002, 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.
F-10
First Community Bancshares, Inc.
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
(Table Dollar Amounts in Thousands, Except Per Share Data)
2002
Available for Sale
Amortized Fair
Maturity Distribution Cost Value
- --------------------------------------------------------------------------------------------------------------------
Due in one year or less $ 678 $ 680
Due after one through five years 2,080 2,146
Due after five through ten years 765 781
Due after ten years 305 305
------------- -------------
Totals $ 3,828 $ 3,912
============= =============
No securities were pledged at December 31, 2002 and 2001.
Proceeds from sales of securities available for sale during 2002, 2001
and 2000 were $3,098,000, $5,452,000 and $2,435,000. Gross gains of
$48,000 and $50,000 were realized on the 2002 and the 2001 sales and
gross losses of $25,000 were realized on the 2000 sales. During 2001,
the Company sold $126,000 of securities classified as held to maturity.
Subsequent to the transaction, the Company transferred the remaining
portfolio of securities held to maturity to securities available for
sale. Proceeds from the sale were $126,000 with a negligible gain.
Note 4: Loans and Allowance
2002 2001
------------------------------------------
Commercial, commercial real estate and industrial loans $ 45,900 $ 41,126
Real estate loans 37,536 46,585
Construction loans 3,578 3,630
Individuals' loans for household and other personal
expenditures 31,441 32,094
Tax-exempt loans and leases 2,818 2,370
Lease financing 1,113 762
--------------- ---------------
Total loans 122,386 126,567
Deferred loan origination costs 116 174
Allowance for loan losses (1,495) (1,114)
--------------- ---------------
Total loans, net $ 121,007 $ 125,627
=============== ===============
F-11
First Community Bancshares, Inc.
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
(Table Dollar Amounts in Thousands, Except Per Share Data)
2002 2001 2000
--------------------------------------------------------------
Allowance for loan losses
Balances, January 1 $ 1,114 $ 1,007 $ 873
Provision for losses 1,554 289 219
Recoveries on loans 41 34 19
Loans charged off (1,214) (216) (104)
--------------- --------------- ---------------
Balances, December 31 $ 1,495 $ 1,114 $ 1,007
=============== =============== ===============
Information on impaired loans is summarized below.
2002 2001
------------------------------------------
Impaired loans with an allowance $ 2,410 $ 1,227
Impaired loans for which the discounted cash flows or
collateral value exceeds the carrying value of the loan -- 131
--------------- ---------------
$ 2,410 $ 1,358
=============== ===============
Allowance for impaired loans (included in the Company's
allowance for loan losses) $ 425 $ 137
2002 2001 2000
--------------------------------------------------------------
Average balance of impaired loans $ 1,300 $ 358 $ 103
Interest income recognized on impaired
loans -- -- --
Cash-basis interest included above -- -- --
At December 31, 2002 and 2001, accruing loans delinquent 90 days or more
totaled $540,000 and $48,000, respectively. Non-accruing loans at
December 31, 2002 and 2001 were $2,657,000 and $1,630,000, respectively.
F-12
First Community Bancshares, Inc.
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
(Table Dollar Amounts in Thousands, Except Per Share Data)
Note 5: Premises and Equipment
2002 2001
-------------------------------------------
Land $ 1,018 $ 1,018
Buildings 2,439 2,432
Leasehold improvements 230 238
Equipment 1,828 2,013
--------------- ---------------
Total cost 5,515 5,701
Accumulated depreciation and amortization (1,230) (1,136)
--------------- ---------------
Net $ 4,285 $ 4,565
=============== ===============
Note 6: Loan Servicing
Mortgage loans serviced for others are not included in the accompanying
consolidated balance sheets. The unpaid principal balances of mortgage
loans serviced for others was $14,394,000 and $2,600,000 at December 31,
2002 and 2001, respectively.
The aggregate fair value of capitalized mortgage servicing rights at
December 31, 2002 and 2001 totaled $103,000 and $23,000. Comparable
market values and a valuation model that calculates the present value of
future cash flows were used to estimate fair value. For purposes of
measuring impairment, risk characteristics including product type,
investor type, and interest rates, were used to stratify the originated
mortgage servicing rights.
2002 2001
------------------------------------------
Mortgage Servicing Rights
Balances, beginning of year $ 23 $ --
Servicing rights capitalized 90 23
Amortization of servicing rights (10) --
--------------- ---------------
Balances, end of year $ 103 $ 23
=============== ===============
F-13
First Community Bancshares, Inc.
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
(Table Dollar Amounts in Thousands, Except Per Share Data)
Note 7: Deposits
2002 2001
-------------------------------------------
Demand deposits $ 37,837 $ 31,895
Savings deposits 30,752 26,478
Certificates and other time deposits of $100,000 or more 16,399 13,864
Other certificates and time deposits 34,623 45,487
--------------- ---------------
Total deposits $ 119,611 $ 117,724
=============== ===============
Certificates and other time deposits maturing in:
2003 $ 32,571
2004 6,322
2005 1,348
2006 4,979
2007 2,074
Thereafter 3,728
---------------
$ 51,022
Note 8: FHLB Advances
Interest
Amount Rate
-----------------------------------------
Maturities in
2003 $ 1,500 5.51%
2004 500 5.73
2007 5,000 5.95
Thereafter 5,500 5.50
---------------
$ 12,500
===============
The Bank has an available line of credit with the FHLB totaling
$2,000,000. The line of credit expires May 8, 2003 and bears interest at
a rate equal to the then current variable advance rate.
F-14
First Community Bancshares, Inc.
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
(Table Dollar Amounts in Thousands, Except Per Share Data)
The FHLB advances and drawings on the available line of credit are
secured by specific mortgage collateral on first mortgage loans eligible
as collateral totaling $19,500,000. Advances are subject to restrictions
or penalties in the event of prepayment.
FHLB advances totaling $10,500,000 are subject to various options for
the FHLB to convert the rates. If the FHLB exercises its option, the
advance will be prepayable at the Bank's option, at par and without a
penalty fee.
Note 9: Other Borrowings
2002 2001
-------------------------------------------
Convertible notes due December 31, 2008 $ 1,000 $ 1,000
Notes payable 762 1,556
--------------- ---------------
Total other borrowings $ 1,762 $ 2,556
=============== ===============
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 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 and 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 and a final balloon payment due in
August 2004 if not renewed. The notes are secured by real estate of the
Company.
Maturities in
2003 $ 403
2004 359
2008 1,000
---------------
$ 1,762
===============
F-15
First Community Bancshares, Inc.
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
(Table Dollar Amounts in Thousands, Except Per Share Data)
Note 10: Income Tax
2002 2001 2000
-------------------------------------------------------------
Income tax expense
Currently payable
Federal $ 195 $ 243 $ 123
State 84 99 47
Deferred
Federal (126) 8 (134)
State (43) 3 (2)
--------------- --------------- ---------------
Total income tax expense $ 110 $ 353 $ 34
=============== =============== ===============
Reconciliation of federal statutory to
actual tax expense
Federal statutory income tax at 34% $ 198 $ 432 $ 155
Tax exempt interest (99) (123) (168)
Effect of state income taxes 27 67 29
Effect of life insurance (34) (27) 23
Other 18 4 (5)
--------------- --------------- ---------------
Actual tax expense $ 110 $ 353 $ 34
=============== =============== ===============
Effective tax rate 18.8% 27.8% 7.4%
F-16
First Community Bancshares, Inc.
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
(Table Dollar Amounts in Thousands, Except Per Share Data)
A cumulative net deferred tax asset is included in other assets. The
components of the asset are as follows:
2002 2001
-------------------------------------------
Assets
Allowance for loan losses $ 578 $ 419
Assumption fee 91 98
Alternative minimum tax credit carryforward 52 77
Deferred compensation 174 113
--------------- ---------------
Total assets 895 707
--------------- ---------------
Liabilities
Depreciation (189) (186)
State income tax (42) (27)
Loan fees (49) (81)
Mortgage servicing rights (47) (14)
Securities available for sale (33) (1)
Other (14) (14)
--------------- ---------------
Total liabilities (374) (323)
--------------- ---------------
$ 521 $ 384
=============== ===============
No valuation allowance was necessary for the years ended December 31,
2002 and 2001.
Note 11: 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
sheets.
F-17
First Community Bancshares, Inc.
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
(Table Dollar Amounts in Thousands, Except Per Share Data)
Financial instruments whose contract amount represents credit risk as of
December 31 were as follows:
2002 2001
------------------------------------------
Commitments to extend credit $ 17,355 $ 16,231
Standby letters of credit 474 95
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, 2002.
Note 12: Stockholders' Equity
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, 2002, stockholder's equity of the Bank was
$11,182,000, of which a minimum of $1,068,000 was available for payment
of dividends.
F-18
First Community Bancshares, Inc.
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
(Table Dollar Amounts in Thousands, Except Per Share Data)
Note 13: Regulatory Capital
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies and is assigned to a
capital category. The assigned capital category is largely determined by
three ratios that are calculated according to the regulations: total
risk adjusted capital, Tier 1 capital, and Tier 1 leverage ratios. The
ratios are intended to measure capital relative to assets and credit
risk associated with those assets and off-balance sheet exposures of the
entity. The capital category assigned to an entity can also be affected
by qualitative judgments made by regulatory agencies about the risk
inherent in the entity's activities that are not part of the calculated
ratios.
There are five capital categories defined in the regulations, ranging
from well capitalized to critically undercapitalized. Classification of
a bank in any of the undercapitalized categories can result in actions
by regulators that could have a material effect on a bank's operations.
At December 31, 2002 and 2001 the Bank is well capitalized and meets all
subject capital adequacy requirements and the Bank was categorized as
adequately capitalized during the most recent regulatory examination.
The Bank has a policy plan which outlines the Bank's plan to maintain
the required levels of regulatory capital. There are no conditions or
events since December 31, 2002 that management believes have changed the
Bank's classification.
The Bank's actual and required capital amounts and ratios are as
follows:
2002
Required for Adequate To Be Well
Actual Capital(1) Capitalized(1)
Amount Ratio Amount Ratio Amount Ratio
-----------------------------------------------------------------------
Total capital(1)(to risk-weighted
assets) $ 12,396 10.5% $ 9,448 8.0% $ 11,810 10.0%
Tier 1 capital(1)(to
risk-weighted assets) 10,920 9.2 4,725 4.0 7,086 6.0
Tier 1 capital(1)(to average
assets) 10,920 7.5 5,863 4.0 7,329 5.0
(1) As defined by regulatory agencies
2001
Required for Adequate To Be Well
Actual Capital(1) Capitalized(1)
Amount Ratio Amount Ratio Amount Ratio
-----------------------------------------------------------------------
Total capital(1)(to risk-weighted
assets) $ 11,840 10.3% $ 9,238 8.0% $ 11,547 10.0%
Tier 1 capital(1)(to
risk-weighted assets) 10,726 9.3 4,619 4.0 6,928 6.0
Tier 1 capital(1)(to average
assets) 10,726 7.2 5,960 4.0 7,450 5.0
(1) As defined by regulatory agencies
F-19
First Community Bancshares, Inc.
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
(Table Dollar Amounts in Thousands, Except Per Share Data)
Note 14: 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 $57,000, $52,000 and $30,000 for 2002, 2001 and
2000.
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 $46,000 and $47,000 for the years ended December 31, 2002
and 2001.
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.
The 1992 stock option plan, which is accounted for in accordance with
APB No. 25, Accounting for Stock Issued to Employees, and related
interpretations, has been 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.
Additionally, the 1992 stock option plan was amended to extend the
exercise period from five years to ten years from the date of grant.
The Company's 1996 stock option plan has reserved 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,
therefore, no compensation expense is recognized. 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.
F-20
First Community Bancshares, Inc.
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
(Table Dollar Amounts in Thousands, Except Per Share Data)
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:
2002 2001 2000
----------------------------------------------------
Risk-free interest rates 3.10% 5.58% 6.60%
Dividend yields 2.23% 1.79% 2.19%
Volatility factors of expected market price of
common stock 24.00% 26.00% 29.00%
Weighted-average expected life of the options 7 years 7 years 9 years
The pro forma effect on net income is disclosed in Note 1.
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, 2002, 2001 and 2000.
2002 2001 2000
Weighted- Weighted- Weighted-
Average Average Average
Options Shares Exercise Price Shares Exercise Price Shares Exercise Price
- --------------------------------------------------------------------------------------------------------------------
Outstanding, beginning of year 34,750 $ 9.68 33,750 $ 9.90 59,590 $ 7.89
Granted 4,000 9.70 4,000 5.75 5,000 6.88
Exercised (2,000) 7.44 (3,000) 6.88 (30,840) 5.54
Expired (2,050) 11.22 -- -- --
------- ------- -------
Outstanding, end of year 34,700 $ 9.72 34,750 $ 9.68 33,750 $ 9.90
======= ======= =======
Options exercisable at year
end 34,700 34,750 33,750
Weighted-average fair value
of options granted
during the year $ 2.26 $ 1.88 $ 2.66
As of December 31, 2002, options outstanding and exercisable totaling
9,000 have exercise prices ranging from $5.75 to $8.00 and
weighted-average remaining contractual lives of 7.3 years; options
outstanding of 25,700 have exercise prices ranging from $9.13 to $11.50
and weighted-average remaining contractual lives of 5.9 years.
F-21
First Community Bancshares, Inc.
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
(Table Dollar Amounts in Thousands, Except Per Share Data)
Note 15: Related Party Transactions
The Bank has entered into transactions with certain directors, executive
officers, significant stockholders and their affiliates or associates
(related parties). Such transactions were made in the ordinary course of
business on substantially the same terms and conditions, including
interest rates and collateral, as those prevailing at the same time for
comparable transactions with other customers, and did not, in the
opinion of management, involve more than normal credit risk or present
other unfavorable features.
The aggregate amount of loans, as defined, to such related parties were
as follows:
Balances, January 1, 2002 $ 1,563
New loans, including renewals 2,327
Payments, etc., including renewals 2,105
---------------
Balances, December 31, 2002 $ 1,785
===============
Deposits from related parties held by the Bank at December 31, 2002 and
2001 totaled $1,253,000 and $854,000.
Note 16: Earnings Per Share
Earnings per share (EPS) were computed as follows:
2002
Weighted-Average Per Share
Income Shares Amount
--------------------------------------------------------
Basic Earnings Per Share
Income available to common stockholders $ 472 1,044,115 $ .45
=============
Effect of Dilutive Stock Options -- 2,302
------------- ---------------
Diluted Earnings Per Share
Income available to common stockholders and
assumed conversions $ 472 1,046,417 $ .45
============= =============== =============
The Company had convertible debt outstanding at December 31, 2002 that
was not included in the computation of diluted EPS because the
convertible debt was not dilutive.
F-22
First Community Bancshares, Inc.
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
(Table Dollar Amounts in Thousands, Except Per Share Data)
2001
Weighted-Average Per Share
Income Shares Amount
--------------------------------------------------------
Basic Earnings Per Share
Income available to common stockholders $ 918 1,041,584 $ .88
=============
Effect of Dilutive Stock Options -- 399
Effect of Convertible Debt 42 90,910
------------- ---------------
Diluted Earnings Per Share
Income available to common stockholders and
assumed conversions $ 960 1,132,893 $ .85
============= =============== =============
Options to purchase 27,750 shares of common stock at prices ranging from
$8.00 to $11.50 per share were outstanding at December 31, 2001, 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.
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.
Note 17: Fair Values of Financial Instruments
The following methods and assumptions were used to estimate the fair
value of each class of financial instrument:
Cash and Cash Equivalents - The fair value of cash and cash equivalents
approximates carrying value.
F-23
First Community Bancshares, Inc.
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
(Table Dollar Amounts in Thousands, Except Per Share Data)
Investment Securities - Fair values are based on quoted market prices.
Mortgage Loans Held for Sale - 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 Value of Life Insurance - The fair values of cash 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.
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:
2002 2001
Carrying Fair Carrying Fair
Value Value Value Value
---------------- ---------------- --------------- ----------------
Assets
Cash and cash equivalents $ 9,103 $ 9,103 $ 6,687 $ 6,687
Investment securities available
for sale 3,912 3,912 4,469 4,469
Loans, including mortgage loans
held for sale, net 122,632 124,349 126,181 127,687
Stock in FHLB 1,025 1,025 1,025 1,025
Interest receivable 765 765 849 849
Cash surrender value of life
insurance 2,533 2,533 2,433 2,433
Liabilities
Deposits 119,611 120,318 117,724 118,531
FHLB advances 12,500 13,072 15,500 15,504
Other borrowings 1,762 1,781 2,556 2,562
Interest payable 192 192 299 299
F-24
First Community Bancshares, Inc.
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
(Table Dollar Amounts in Thousands, Except Per Share Data)
Note 18: 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.
On November 20, 2002, the Company announced it had executed an agreement
which is expected to lead to the merger of the Company into MainSource
Financial Group, Inc. The agreement provides that the Company's
stockholders will receive $21 in cash for each share of common stock of
the Company. As a result of the transaction, the Company will ultimately
be merged with and into MainSource Financial Group, Inc. The transaction
is subject to the execution of a definitive merger agreement, various
regulatory approvals, and the approval of the stockholders of the
Company.
Note 19: 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 Sheets
2002 2001
-------------------------------------------
Assets
Cash on deposit with subsidiary $ 67 $ 40
Investment in common stock of subsidiaries 11,469 11,155
Other assets 197 228
--------------- ---------------
Total assets $ 11,733 $ 11,423
=============== ===============
Liabilities
Convertible notes $ 1,000 $ 1,000
Other liabilities 267 232
--------------- ---------------
Total liabilities 1,267 1,232
Stockholders' Equity 10,466 10,191
--------------- ---------------
Total liabilities and stockholders' equity $ 11,733 $ 11,423
=============== ===============
F-25
First Community Bancshares, Inc.
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
(Table Dollar Amounts in Thousands, Except Per Share Data)
Condensed Statements of Income
2002 2001 2000
-----------------------------------------------------
Income
Dividends from subsidiaries $ 257 $ 225 $ 285
Other interest income and dividends 1 1 1
Other income 74 -- --
------------ ------------ ------------
Total income 332 226 286
------------ ------------ ------------
Expenses
Interest expense 70 70 70
Salaries and employee benefits 58 54 64
Professional fees 39 49 50
Other expenses 3 6 97
------------ ------------ ------------
Total expenses 170 179 281
------------ ------------ ------------
Income before income tax benefit and equity in
undistributed income of subsidiaries 162 47 5
Income tax benefit (44) (71) (111)
------------ ------------ ------------
Income before equity in undistributed income of
subsidiaries 206 118 116
Equity in undistributed income of subsidiaries 266 800 305
------------ ------------ ------------
Net Income $ 472 $ 918 $ 421
============ ============ ============
F-26
First Community Bancshares, Inc.
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
(Table Dollar Amounts in Thousands, Except Per Share Data)
Condensed Statements of Cash Flows
2002 2001 2000
-------------------------------------------------------
Operating Activities
Net income $ 472 $ 918 $ 421
Items not requiring (providing) cash (352) (810) (285)
------------ ------------ ------------
Net cash provided by operating activities 120 108 136
------------ ------------ ------------
Investing Activities
Capital contributions to subsidiary -- -- (265)
Other investing activities 101 -- --
------------ ------------ ------------
Net cash provided by (used in) investing
activities 101 -- (265)
------------ ------------ ------------
Financing Activities
Cash dividends (209) (125) (164)
Stock options exercised 15 21 171
Purchase of stock -- -- (90)
------------ ------------ ------------
Net cash used in financing activities (194) (104) (83)
------------ ------------ ------------
Net Change in Cash on Deposit 27 4 (212)
Cash on Deposit at Beginning of Year 40 36 248
------------ ------------ ------------
Cash on Deposit at End of Year $ 67 $ 40 $ 36
============ ============ ============
F-27