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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2003
[ ] Transition Report under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from ____________ to ____________
Commission file number: 0-18868
PREMIER COMMUNITY BANKSHARES, INC.
(Exact Name of Registrant as Specified in its Charter)
Virginia 54-1560968
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
4095 Valley Pike 22602
Winchester, Virginia (Zip Code)
(Address of Principal Executive Offices)
Registrant's telephone number, including area code (540) 869-6600
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 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 whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
4,562,584 shares of Common Stock, $1.00 par value, as of May 8, 2003
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
The following financial statements are provided at the page numbers indicated.
Consolidated Balance Sheets
As of March 31, 2003 and December 31, 2002...........................3
Consolidated Statements of Income for
The Three Months Ended March 31, 2003 and 2002.......................4
Consolidated Statements of Changes in
Shareholders' Equity for the Three Months Ended
March 31, 2003 and 2002..............................................5
Consolidated Statements of Cash Flow for the
Three Months Ended March 31, 2003 and 2002...........................6
Notes to Consolidated Financial Statements........................7-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..............................11-14
Item 3. Quantitative and Qualitative Disclosures About Market Risk.......15-16
Item 4. Controls and Procedures.............................................16
Part II. OTHER INFORMATION...................................................17
Item 1. Legal Proceedings...................................................17
Item 2. Changes in Securities and Use of Proceeds...........................17
Item 3. Defaults Upon Senior Securities.....................................17
Item 4. Submission of Matters to a Vote of Security Holders.................17
Item 5. Other Information...................................................17
Item 6. Exhibits and Reports on Form 8-K....................................17
Signature.....................................................................18
Certifications.............................................................19-20
2
ITEM 1. FINANCIAL STATEMENTS
PREMIER COMMUNITY BANKSHARES, INCORPORATED
Consolidated Balance Sheets
(In Thousands, Except for Share Data)
(Unaudited)
March 31, December 31,
2003 2002
------------ ------------
Assets:
Cash and due from banks $ 23,284 $ 22,719
Interest-bearing deposits in other banks 596 2,049
Federal funds sold 24,452 19,017
Securities available for sale, at fair value 14,198 15,276
Securities held to maturity (fair value: March 31, 2003,
$10,288 December 31, 2002 $10,033) 10,165 10,020
Loans, net of allowance for loan losses of $3,525
March 31, 2003, $3,340 December 31, 2002) 332,972 312,554
Bank premises and equipment, net 8,587 7,660
Accrued interest receivable 1,643 1,645
Other real estate -- 67
Other assets 2,541 2,748
------------ ------------
$ 418,438 $ 393,755
============ ============
Liabilities and Shareholders' Equity:
Liabilities:
Deposits:
Non-interest bearing demand deposits $ 49,355 $ 48,536
Savings and interest-bearing demand deposits 111,820 100,969
Time deposits 206,155 195,557
------------ ------------
Total deposits 367,330 345,062
Federal Home Loan Bank advances 11,000 9,000
Short-term borrowings 295 535
Accounts payable and accrued expenses 1,584 2,138
Capital lease payable 194 196
Trust Preferred Capital Notes 7,000 7,000
------------ ------------
$ 387,403 $ 363,931
------------ ------------
Shareholders' Equity:
Preferred stock, Series A, 5% noncumulative, no par
value; 1,000,000 shares authorized and unissued $ -- $ --
Common stock, $1 par value, 20,000,000 shares authorized
March 31, 2003, 4,562,584 shares issued and outstanding;
December 31, 2002, 4,555,484 shares issued and outstanding 4,562 4,555
Capital surplus 15,020 14,977
Retained earnings 11,127 10,023
Accumulated other comprehensive income 326 269
------------ ------------
Total shareholders' equity 31,035 29,824
$ 418,438 $ 393,755
============ ============
See Accompanying Notes to Consolidated Financial Statements
3
PREMIER COMMUNITY BANKSHARES, INCORPORATED
Consolidated Statements of Income
(In Thousands, Except for Share Data)
(Unaudited)
For the Three Months Ended
March 31,
2003 2002
------------ ------------
Interest and dividend income:
Interest and fees on loans $ 5,905 $ 4,795
Interest on investment securities
Nontaxable 56 35
Taxable 87 106
Interest and dividends on securities available for sale:
Nontaxable 41 17
Taxable 86 118
Dividends 10 23
Interest on deposits in banks 6 1
Interest on federal funds sold 59 95
------------ ------------
Total interest and dividend income $ 6,250 $ 5,190
------------ ------------
Interest expense:
Interest on deposits $ 1,985 $ 1,891
Interest on capital lease obligations 4 4
Interest on borrowings 161 165
------------ ------------
Total interest expense $ 2,150 $ 2,060
------------ ------------
Net interest income $ 4,100 $ 3,130
Provision for loan losses 240 210
------------ ------------
Net interest income after provision for loan losses $ 3,860 $ 2,920
------------ ------------
Noninterest income
Service charges on deposit accounts $ 362 $ 327
Commissions and fees 194 159
Other 46 55
------------ ------------
Total noninterest income $ 602 $ 541
------------ ------------
Noninterest expense
Salaries and employees $ 1,497 $ 1,152
Net occupancy expense of premises 158 127
Furniture and equipment 218 124
Other 938 673
------------ ------------
Total noninterest expenses $ 2,811 $ 2,076
------------ ------------
Income before income taxes $ 1,651 $ 1,385
Provision for income taxes 547 456
------------ ------------
Net income $ 1,104 $ 929
============ ============
Average shares:
Basic 4,560,791 4,529,262
Assuming dilution 4,680,790 4,585,660
Earnings per common per share:
Basic 0.24 0.21
Assuming dilution 0.24 0.20
See Accompanying Notes to Consolidated Financial Statements
4
PREMIER COMMUNITY BANKSHARES, INCORPORATED
Consolidated Statement of Changes in Shareholders' Equity
For the Three Months Ended March 31, 2003 and 2002
(In Thousands)
(Unaudited)
Accumulated
Other Total
Common Capital Retained Comprehensive Comprehensive Shareholders'
Stock Surplus Earnings Income Income Equity
---------- --------- -------- ------------- ------------- -------------
Balance December 31, 2001 $ 4,527 $ 14,808 $ 6,342 $ 68 $ 25,745
Comprehensive Income
Net income 929 $ 929 929
Other comprehensive income, net of tax - - -
Unrealized gain on available for sale
securities (net of tax $11) $ (22) (22) (22)
-------------
Total comprehensive income $ 907
=============
Issuance of common stock-exercise of
stock options (9,000 shares) 9 36 45
---------- --------- -------- ------------- ------------- -------------
Balances - March 31, 2002 $ 4,536 $ 14,844 $ 7,271 $ 46 $ 26,697
========== ========= ======== ============= ============= =============
Accumulated
Other Total
Common Capital Retained Comprehensive Comprehensive Shareholders'
Stock Surplus Earnings Income Income Equity
---------- --------- -------- ------------- ------------- -------------
Balance December 31, 2002 $ 4,555 $ 14,977 $ 10,023 $ 269 $ 29,824
Comprehensive Income
Net income 1,104 $ 1,104 1,104
Other comprehensive income,
net of tax -- -- --
Unrealized loss on available for
sale securities (net of tax $29) 57 57 57
-------------
Total comprehensive income $ 1,161
=============
Issuance of common stock-exercise of
stock options (7,100 shares) 7 43 50
---------- --------- -------- ------------- -------------
Balances - March 31, 2003 $ 4,562 $ 15,020 $ 11,127 $ 326 $ 31,035
========== ========= ======== ============= =============
See Accompanying Notes to Consolidated Financial Statements
5
PREMIER COMMUNITY BANKSHARES
Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 2003 and 2002
(In Thousands; Unaudited)
2003 2002
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,104 $ 929
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and Amortization 199 105
Net amortization on securities 3 4
Provision for loan loss 240 210
Origination of loans available for sale -- (1,662)
Proceeds from sale of loans available for sale -- 1,904
Changes in assets and liabilities:
(Increase) in other assets (68) (161)
Decrease in accrued interest receivable 4 283
Increase (Decrease)in accounts payable and accrued expenses 439 (160)
Increase in interest expense payable 3 260
------------ ------------
Net cash provided by operating activities $ 1,924 $ 1,712
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities, calls and principal payments on
securities held to maturity $ 558 $ 479
Proceeds from maturities, calls and principal payments on
securities available for sale 3,511 1,538
Purchase of securities available for sale (1,256) (4,517)
Purchase of securities held to maturity (1,806) (1,000)
Net (increase) in loans (20,658) (18,226)
Purchase of bank premises and equipment (1,118) (232)
------------ ------------
Net cash used in investing activities $ (20,769) $ (21,958)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand deposits and interest bearing deposits $ 11,670 $ 13,663
Net increase in certificates of deposits 10,598 7,727
Net decrease in borrowings 1,760 (48)
Principal payments on capital lease obligation (2) (2)
Cash dividends paid (683) (528)
Proceeds from issuance of common stock 50 45
------------ ------------
Net cash provided by financing activities $ 23,393 $ 20,857
------------ ------------
Increase in cash and cash equivalents $ 4,548 $ 611
Beginning 43,784 39,865
------------ ------------
Ending $ 48,332 $ 40,476
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest $ 2,148 $ 2,077
============ ============
Income taxes -- --
============ ============
Change in unrealized gain on securities available for sale $ 86 $ (33)
============ ============
See Accompanying Notes to Consolidated Financial Statements
6
PREMIER COMMUNITY BANKSHARES, INC
Notes to Consolidated Financial Statements
(Unaudited)
For the Three Months Ended March 31, 2003 and 2002
Note 1.
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of only normal
recurring accruals) necessary to present fairly the financial position of
Premier Community Bankshares, Incorporated ("Premier" or the "Corporation") for
the periods ending March 31, 2003 and December 31, 2002, and the result of
operations and cash flows for the three months ended March 31, 2003 and 2002.
The statements should be read in conjunction with the Notes to Financial
Statements included in Premier's Annual Report on Form 10-KSB for the year ended
December 31, 2002.
Stock Compensation Plan
The Corporation accounts for the plan under the recognition and
measurement principles of APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related Interpretations. No stock-based compensation cost is
reflected in net income, as all options granted under the plan have an exercise
price equal to the market value of the underlying common stock on the date of
grant. The following table illustrates the effect on net income and earnings per
share if the Corporation had applied the fair value recognition provisions of
FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based
compensation (dollars in thousands except per share amounts):
2003 2002
--------------------------
In Thousands
------------ -----------
Net Income, as reported $ 1,104 $ 929
Total stock-based compensation expense
determined under fair value based method
for all rewards (29) (32)
------------ -----------
Pro forma net income $ 1,075 $ 897
============ ===========
Basic earnings per share
As reported $ 0.24 $ 0.21
============ ===========
Pro forma $ 0.24 $ 0.20
============ ===========
Diluted earnings per share
As reported $ 0.24 $ 0.20
============ ===========
Pro forma $ 0.23 $ 0.20
============ ===========
7
Note 2.
The results of operations for the three month period ended March 31,
2003 and 2002 are not necessarily indicative of the results to be expected for
the full year.
Note 3. Securities
Securities held to maturity as of March 31, 2003 are summarized as follows
(in thousands):
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
------------------------------------------------------
March 31, 2003
------------------------------------------------------
U.S. Government and federal agencies $ 1,995 $ 40 $ -- $ 2,035
Obligations of state and
political subdivisions 5,380 178 (70) 5,488
Mortgage-backed securities 40 1 -- 41
Other 2,750 -- (26) 2,724
------------ ------------ ---------- -----------
$ 10,165 $ 219 $ (96) $ 10,288
------------ ------------ ---------- -----------
Securities available for sale as of March 31, 2003 are summarized as
follows (in thousands):
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
------------------------------------------------------
March 31, 2003
------------------------------------------------------
U.S. Government and federal agencies $ 5,556 $ 191 $ -- $ 5,747
Obligations of state and --
political subdivisions 5,136 203 -- 5,339
Corporate bonds 250 55 -- 305
Mortgage-backed securities 1,213 44 -- 1,257
Other 1,550 -- -- 1,550
------------ ------------ ---------- -----------
$ 13,705 $ 493 $ -- $ 14,198
============ ============ ========== ===========
8
Note 4. Loans.
March 31, December 31,
2003 2002
(in thousands)
Loans secured by real estate:
Construction and land development $ 50,390 $ 38,063
Secured by farmland 3,986 2,774
Secured by 1-4 family residential 79,974 70,773
Multi-family residential 7,816 6,258
Nonfarm, nonresidential 114,122 123,478
Loans to farmers (except those secured by real estate) 271 42
Commercial loans (except those secured by real estate) 58,952 52,970
Loans to individuals (except those secured by real estate) 19,417 19,699
All other loans 1,900 1,838
---------- ------------
Total loans $ 336,828 $ 315,895
Less: Unearned income 331 1
Allowance for loan losses 3,525 3,340
---------- ------------
Loans, net $ 332,972 $ 312,554
========== ============
Impaired loans totaled $1.1 million at March 31, 2003 and December 31, 2002. No
non-accrual loans were excluded from impaired loans at March 31, 2003.
Non-accrual loans excluded from impaired loans disclosure under FASB 114
amounted to $114 thousand at December 31, 2002.
9
Note 5. Reserve for Loan Losses.
The Corporation maintains the allowance for loan losses at a sufficient level to
provide for potential losses in the loan portfolio. Loan losses are charged
directly to the allowance when they occur, while recoveries are credited to the
allowance. The adequacy of the provision for loan losses is reviewed
periodically by management through consideration of several factors including
changes in the character and size of the loan portfolio and related loan loss
experience, a review and examination of overall loan quality, which includes the
assessment of problem loans and an analysis of anticipated economic condition in
the market area. An analysis of the allowance for loan losses, including
charge-off activity, is presented below for the quarters ended March 31, 2003
and 2002.
March 31,
2003 2002
-------------------
(in thousands)
-------------------
Balance, beginning of period $ 3,340 $ 2,459
Less Charge-off's:
Commercial 24 --
Real estate-mortgage -- --
Real estate-construction -- --
Consumer installment loans 52 139
-------- --------
Total $ 76 $ 139
Plus Recoveries:
Commercial $ -- $ 2
Real estate-mortgage -- --
Real estate-construction -- --
Consumer installment loans $ 21 10
-------- --------
Total $ 21 $ 12
Additions charged to operating expense $ 240 $ 210
Balance, end of period $ 3,525 $ 2,542
-------- --------
The following is a summary of information pertaining to risk elements and
impaired loans for the periods ended March 31, 2003 and December 31, 2002.
March 31, December 31,
2003 2002
--------- ------------
Non-accrual loans $ 537 $ 517
Loans past due 90 days or more and still accruing
interest 404 223
Restructured loans -- --
--------- ------------
$ 941 $ 740
--------- ------------
The accrual of interest on mortgage and commercial loans is discontinued at the
time the loan is 90 days delinquent unless the credit is well-secured and in
process of collection. Loans are placed on
10
non-accrual at an earlier date or charged off if collection of principal or
interest is considered doubtful.
All interest accrued but not collected for loans that are placed on non-accrual
or charged off is reversed against interest income. The interest on these loans
is accounted for on the cash-basis or cost-recovery method, until qualifying for
return to accrual. Loans are returned to accrual status when all the principal
and interest amounts contractually due are brought current and future payments
are reasonably assured.
Note 6. Earnings Per Share
Basic earnings per share 4,560,791 $ 0.24 4,529,262 $ 0.21
Effect of dilutive securities:
Stock options 119,999 56,398
---------- ----------
Diluted earnings per share 4,680,790 $ 0.24 4,585,660 $ 0.20
========== ==========
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Financial Summary
General
Premier Community Bankshares, Inc. ("Premier" or the "Corporation") is a
Virginia multi-bank holding company headquartered in Winchester, Virginia. The
Corporation owns The Marathon Bank as well as Rockingham Heritage Bank and its
subsidiary, RHB Services, Inc. Rockingham Heritage Bank and its subsidiary were
merged into Premier in a pooling of interests transaction consummated on
November 20, 2000. Concurrent with the merger, Marathon Financial Corporation
changed its name to Premier Community Bankshares, Inc. The consolidated
statements include the accounts of Premier and its wholly-owned subsidiaries.
All significant inter-company accounts have been eliminated.
The Corporation and its subsidiaries, The Marathon Bank and Rockingham
Heritage Bank, are engaged in the business of offering banking services to the
general public. Premier offers checking accounts, savings and time deposits, and
commercial, real estate, personal, home improvement, automobile and other
installment and term loans. The Corporation also offers financial services,
travelers' checks, safe deposit boxes, collection, notary public and other
customary bank services (with the exception of trust services) to its customers.
The three principal types of loans made by Premier are: (1) commercial and
industrial loans; (2) real estate loans; and (3) loans to individuals for
household, family and other consumer expenditures.
11
Critical Accounting Policies
The allowance for loan losses is an estimate of the losses that may be
sustained in our loan portfolio. The allowance is based on two basic principles
of accounting: (i) SFAS 5, Accounting for Contingencies, which requires that
losses be accrued when they are probable of occurring and estimable and (ii)
SFAS 114, Accounting by Creditors for Impairment of a Loan, which requires that
losses be accrued based on the differences between the value of collateral,
present value of future cash flows or values that are observable in the
secondary market and the loan balance.
Premier's allowance for loan losses is determined by evaluating its loan
portfolio on a quarterly basis. Particular attention is paid to individual loan
performance, collateral values, borrower financial condition and overall
economic conditions. The evaluation includes a close review of the internal
watch list and other non-performing loans. Management uses three steps in
calculating the balance of the reserve. The first step is the specific
classification, which examines problem loans and applies a weight factor to each
category. The weight factor is based upon historical data and the loans within
each category are reviewed on a monthly basis to determine changes in their
status. The second step applies a predetermined rate against total loans with
unspecified reserves. Again, this rate is based upon experience and can change
over time. The third step is an unallocated allowance which is determined by
economic events and conditions that may have a real, but as yet undetermined,
impact upon the portfolio. Each of these steps is based on data that can be
subjective and the actual losses may be greater or less than the amount of the
allowance. However, management feels that the allowance represents a reasonable
assessment of the risk imbedded in the portfolio.
Net Income
Net income for the quarter ending March 31, 2003 was $1.1 million
compared to $929 thousand for the same period in 2002. This is an increase of
$175 thousand or 18.8% over the same period 2002. The provision for income tax
expense increased $91 thousand or 20.0% from $456 thousand in 2002 to $547
thousand in 2003. The return on assets was 1.12% for the first quarter of 2003
as compared to 1.21% for the same period 2002. Return on equity was 14.71% and
14.32% for the first quarter of 2003 and 2002, respectively.
Total Assets
Total assets of Premier increased to $418.4 million at March 31, 2003
compared to $393.8 million at December 31, 2002 representing an increase of
$24.7 million or 6.3%. Total loans at March 31, 2003, were $336.8 million of
which $256.3 million were loans secured by real estate. The remaining loans
consisted of $59.0 million in commercial loans, $19.4 million in consumer
installment loans and $2.1 million in all other loans. Net loans at March 31,
2003 increased $20.4 million or 6.5% from the December 31, 2002 balance of
$312.6 million. The loan to deposit ratio was 90.6% as of March 31, 2003 and
89.5% as of March 31, 2002. The loan growth has been generated by a strong local
market that is diverse in several areas of the economy. Premier has also been
able to increase its customer base due to recent mergers and consolidations of
competitor offices in its market area.
The investment portfolio decreased 3.7% to $24.4 million at March 31,
2003 compared to $25.3 million at December 31, 2002. The decrease in investments
was chiefly the result of calls and maturities in the portfolio. Federal funds
sold remained steady, increasing slightly to $24.5 million
12
at March 31, 2003 from $19.0 million at December 31, 2002. Total earning assets
increased by $23.7 million or 6.5% to $385.9 million from December 31, 2002.
Allowance for Loan Losses
The allowance for loan losses, as of March 31, 2003, was $3.5 million.
This is an increase of $185 thousand or 5.5% from December 31, 2002. This gives
the Corporation a 1.05% allowance for loan losses to total loans. Management has
completed an analysis on the reserve and feels the reserve is adequate.
Liabilities
Total deposits increased to $367.3 million at March 31, 2003, from a
balance of $345.1 million at December 31, 2002, which is an increase of $22.3
million or 6.5%. Non-interest bearing deposits have increased to $49.4 million
as of March 31, 2003, an increase of $819 thousand or 1.7% from December 31,
2002. During this period interest bearing checking and savings accounts
increased $10.9 million or 10.7% to $111.8 million. The balance in time deposits
was $206.2 million at the end of the first quarter reflecting an increase of
$10.6 million or 5.4% over the end of the year. As of March 31, 2003
non-interest bearing deposits represented 13.4% of total deposits as compared to
14.1% at year-end 2002. Low cost interest bearing deposits including savings and
interest bearing checking were 30.4% which represents an increase of 1.1% from
the year-end December 31, 2002 balance. Time deposits represented 56.1% of total
deposits at March 31, 2003, a decrease of 0.6% from 56.7% at year-end.
Shareholders' Equity
Total equity has increased by $1.2 million or 4.1% since December 31,
2002. The increase was due to a net profit of $1.1 million for the first three
months of 2003. Stock options totaling $50 thousand were exercised. Accumulated
other comprehensive income increased $57 thousand, net of tax. The primary
capital to assets ratio is 7.4%.
Interest Income
Interest income totaled $6.3 million for the three months ending March
31, 2003, $1.1 million or 20.4% higher than the three months ending March 31,
2002. Interest and fees on loans comprise the vast majority of interest income
with $5.9 million for the first three months of 2003. Interest income from
investment securities dropped by $6 thousand from the first quarter of 2002 due
to the decline in interest rates in 2002. Interest income on federal funds, the
third major component of the bank's investments, decreased $36 thousand or
37.7%. Again, this decrease is a direct result of the decline in interest rates.
Interest Expense
Total interest expense for the three months ending March 31, 2003 was
$2.2 million, $90 thousand or 4.4% higher than the three months ending March 31,
2002. Interest on deposits for the three month period increased by $94 thousand
or 5.0% over the same period in 2002. Interest on borrowings decreased by $4
thousand or 2.2% over the same period last year. Borrowings are generated
through an agreement with the Federal Home Loan Bank. Additional funds were
acquired through the issuance of Trust Preferred Securities in December 2002.
13
Net Interest Income
Net interest income for the three months ending March 31, 2003 was $4.1
million, $971 thousand or 31% higher than the three months ending March 31,
2002. This increase is the result of the combination of the growth in earning
assets of $23.7 million and a decline of 3.75% in the prime rate from 8.00% on
March 31, 2002 to 4.25% as of March 31, 2003. The net interest margin increased
by 7 basis points to 4.53% for the three months ending March 31, 2003 from 4.46%
for the same period of 2002. The impact on the margin was mitigated to a certain
extent because of Premier's liability sensitive status for interest bearing
balances maturing or repricing within one year.
Other Income
Total other income for the three months ending March 31, 2003 was $602
thousand, an increase of $61 thousand or 11.3% over the 2002 balance of $541
thousand. This was the result of fees charged for services such as overdraft
charges, check fees and ATM fees due to an increasing number of customer
accounts derived from a growing customer base.
Other Expenses
Total other expenses for the three months ending March 31, 2003 were
$2.8 million, $735 thousand or 35.4% higher than the three months ending March
31, 2002. Salary expense increased $345 thousand or 29.9%, and furniture and
equipment expenses increased by $94 thousand over the same period in 2002. The
net increase in other expenses is in part a result of additional staffing to
handle the growth of the bank, the expenses associated with opening additional
branches, and the costs involved in processing an increasing number of accounts
and transactions. The Corporation's efficiency ratio was 57.5% through March 31,
2003 compared to 53.3% for the same period 2002.
Liquidity
Premier's liquidity requirements are measured by the need to meet
deposit withdrawals, fund loans, meet reserve requirements and maintain cash
levels necessary for daily operations. To meet liquidity requirements, Premier
maintains cash reserves and has an adequate flow of funds from maturing loans,
securities, and short-term investments. In addition, Premier's affiliate banks
have the ability to borrow additional funds from various sources. Short-term
borrowings are available from federal funds facilities at correspondent banks
and from the discount window of the Federal Reserve Bank. Long-term borrowings
are available from the Federal Home Loan Bank. The Corporation considers its
sources of liquidity to be ample to meet its estimated needs.
Capital Resources
The Corporation's risk-based capital position at March 31, 2003 was
$37.7 million, or 11.3% of risk-weighted assets, for Tier I capital and $41.2
million, or 12.3% for total risk based capital. Tier I capital consists
primarily of common shareholders' equity. Total risk-based capital includes the
allowance for loan losses in addition to total shareholders equity.
Risk-weighted assets are determined by assigning various levels of risk to
different categories of assets and off-balance sheet items. Under current
risk-based capital standards, all banks are required to have Tier I capital of
at least 4% and a total capital ratio of 8%.
14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss arising from adverse changes in the fair value
of financial instruments due to changes in interest rates, exchange rates and
equity prices. The Corporation's market risk is composed primarily of interest
rate risk. The Corporation's Asset and Liability Management Committee (ALCO) is
responsible for reviewing the interest rate sensitivity position and
establishing policies to monitor and limit exposure to this risk. The Board of
Directors reviews the guidelines established by ALCO.
Interest rate risk is monitored through the use of three complimentary modeling
tools: static gap analysis, earnings simulation modeling and economic value
simulation (net present value estimation). Each of these models measure changes
in a variety of interest rate scenarios. While each of the interest rate risk
measures has limitations, taken together they represent a reasonably
comprehensive view of the magnitude of interest rate risk in the Corporation,
the distribution of risk along the yield curve, the level of risk through time,
and the amount of exposure to changes in certain interest rate relationships.
Static gap which measures aggregate repricing values is less utilized since it
does not effectively measure the earnings impact on the Corporation and is not
addressed here. But earnings simulation and economic value models which more
effectively the earnings impact are utilized by management on a regular basis
and are explained below.
Earnings Simulation Analysis
Management uses simulation analysis to measure the sensitivity of net income to
changes in interest rates. The model calculates an earnings estimate based on
current and projected balances and rates. This method is subject to the accuracy
of the assumptions that underlie the process, but it provides a better analysis
of the sensitivity of earnings to changes in interest rates than other analysis
such as the static gap analysis.
Assumptions used in the model, including loan and deposit growth rates, are
derived from seasonal trends and management's outlook as are the assumptions
used to project the yields and rates for new loans and deposits. All maturities,
calls and prepayments in the securities portfolio are assumed to be reinvested
in like instruments. Mortgage loans and mortgage backed securities prepayment
assumptions are based on industry estimates of prepayment speeds for portfolios
with similar coupon ranges and seasoning. Different interest rate scenarios and
yield curves are used to measure the sensitivity of earnings to changing
interest rates. Interest rates on different asset and liability accounts move
differently when the prime rate changes and are accounted for in the different
rate scenarios.
The following table represents the interest rate sensitivity on net income for
the Corporation using different rate scenarios as of December 31, 2002. There
have been no material changes in qualitative and qualitative disclosures about
market risk since this information was developed using December 31, 2002 data.
15
% Change in
Change in Prime Rate Net Income
- -------------------- -----------
+300 basis points +5.8%
+200 basis points +8.0%
+100 basis points +7.5%
Most Likely 0
- -100 basis points +2.9%
- -200 basis points +0.8%
- -300 basis points -11.2%
Economic Value Simulation
Economic Value simulation is used to calculate the estimated fair value of
assets and liabilities over different interest rate environments. Economic
values are calculated based on discounted cash flow analysis. The economic value
of equity is the economic value of all assets minus the economic value of all
liabilities. The change in economic value of equity over different rate
environments is an indication of the longer term repricing risk in the balance
sheet. The same assumptions are used in the economic value simulation as in the
earnings simulation.
The following chart reflects the change in net market value by using December
31, 2002 data, over different rate environments with a one year horizon.
Change in Economic Value of Equity
Change in Prime Rate (dollars in thousands)
- -------------------- ----------------------------------
+300 basis points 380
+200 basis points 876
+100 basis points 1,159
Most Likely 946
- -100 basis points 1,306
- -200 basis points 394
- -300 basis points -2,603
ITEM 4. CONTROLS AND PROCEDURES
The Corporation maintains disclosure controls and procedures that are designed
to provide assurance that information required to be disclosed by the
Corporation in the reports that it files or submits under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within the
time periods required by the Securities and Exchange Commission. Within the 90
day period prior to the filing of this report, an evaluation of the
effectiveness of the design and operation of the Corporation's disclosure
controls and procedures was carried out under the supervision and with the
participation of management, including the Corporation's Chief Executive Officer
and Chief Financial Officer. Based on and as of the date of such evaluation, the
aforementioned officers concluded that the Corporation's disclosure controls and
procedures were effective. There have been no significant changes in the
Company's internal controls or in other factors that could significantly affect
internal controls subsequent to the date of this evaluation.
16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Change in Securities and Use of Proceeds.
None
Item 3. Defaults upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
99.1 Certification Statement of Chief Executive Officer and Chief
Financial Officer Pursuant to 18 U.S.C. Section 1350
(b) Reports on Form 8-K - None
17
SIGNATURES:
Pursuant to the requirements 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.
PREMIER COMMUNITY BANKSHARES, INC.
DATE: 5/15/2003 /s/ John K. Stephens
- --------------- -------------------------------------
JOHN K. STEPHENS
CHAIRMAN
DATE: 5/15/2003 /s/ Donald L. Unger
- --------------- -------------------------------------
DONALD L. UNGER
PRESIDENT & CEO
DATE: 5/15/2003 /s/ Frederick A. Board
- --------------- -------------------------------------
FREDERICK A. BOARD
CHIEF FINANCIAL OFFICER
18
CERTIFICATIONS
I, Donald L. Unger, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Premier
Community Bankshares;
2. Based on my knowledge, this quarterly 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 quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly 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 quarterly report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and we 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 quarterly
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 quarterly
report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation
Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's
auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent function):
(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. The registrant's other certifying officers and I have indicated
in this quarterly report whether or not 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.
Date: 5/15/2003 /s/ Donald L. Unger
---------------- -----------------------------------
Donald L. Unger,
President & Chief Executive Officer
19
CERTIFICATIONS
I, Frederick A. Board, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Premier
Community Bankshares;
2. Based on my knowledge, this quarterly 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 quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly 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 quarterly report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and we 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 quarterly
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 quarterly
report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation
Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's
auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent function):
(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. The registrant's other certifying officers and I have indicated
in this quarterly report whether or not 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.
Date: 5/15/2003 /s/ Frederick A. Board
---------------- -----------------------------------
Frederick A. Board
Senior Vice President & Chief
Financial Officer
20
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
99.1 Certification Statement of Chief Executive Officer and Chief
Financial Officer Pursuant to 18 U.S.C. Section 1350
21