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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 No. 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, IN 46106
(Address of principal executive offices)
(Zip Code)
(317) 422-5171
(Registrant's telephone number, including area code)
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, and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Outstanding Shares of Common Stock on August 1, 2002 1,044,926
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
Page No.
-------
Forward Looking Statement.................................................. 3
Part I. Financial Information:
Item 1. Financial Statements:
Consolidated Condensed Balance Sheets.................... 4
Consolidated Condensed Statements of Income.............. 5
Consolidated Condensed Statements of Comprehensive Income 6
Consolidated Condensed Statements of Stockholders' Equity 7
Consolidated Condensed Statements of Cash Flows.......... 8
Notes to Unaudited Consolidated Condensed Financial
Statements............................................... 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................... 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk.... 15
Part II. Other Information:
Item 1. Legal Proceedings............................................. 15
Item 2. Changes In Securities......................................... 15
Item 3. Defaults Upon Senior Securities............................... 15
Item 4. Submission of Matters to a Vote of Security Holders........... 16
Item 5. Other Information............................................. 16
Item 6. Exhibits and Reports on Form 8-K.............................. 16
Signatures................................................................. 16
Certification of the Sarbanes-Oxley Act of 2002............................ 16
2
FORWARD LOOKING STATEMENT
This Quarterly Report on Form 10-Q ("Form 10-Q") 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-Q and include statements regarding the intent, belief,
outlook, estimate or expectations of the Company (as defined below), its
directors or its officers primarily with respect to future events and the future
financial performance of the Company. Readers of this Form 10-Q 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-Q
identifies important factors that could cause such differences. These factors
include changes in interest rates; loss of deposits and loan demand to other
financial institutions; substantial changes in financial markets; changes in
real estate values and the real estate market or regulatory changes.
3
Item 1. Financial Statements
- ------- --------------------
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Condensed Balance Sheet
June 30, December 31,
2002 2001
-------------------------------
(Unaudited)
Assets
Cash and due from banks $ 1,762,957 $ 1,683,913
Short-term interest-bearing deposits 4,211,995 5,003,537
-------------------------------
Cash and cash equivalents 5,974,952 6,687,450
Investment securities available for sale 6,699,770 3,968,964
Mortgage loans held for sale 304,805 554,261
Loans 129,239,068 127,241,655
Allowance for loan losses (1,232,789) (1,114,466)
-------------------------------
Net loans 128,006,279 126,127,189
Premises and equipment 4,397,170 4,564,691
Federal Home Loan Bank of Indianapolis stock, at cost 1,025,000 1,025,000
Interest receivable 863,122 849,933
Cash value of life insurance 2,477,772 2,432,547
Other assets 1,120,441 1,167,454
-------------------------------
Total assets $ 150,869,311 $ 147,377,489
===============================
Liabilities
Deposits
Noninterest-bearing $ 11,488,004 $ 11,037,797
Interest-bearing 112,000,880 106,685,724
-------------------------------
Total deposits 123,488,884 117,723,521
Federal Home Loan Bank of Indianapolis advances 13,500,000 15,500,000
Other borrowings 2,540,359 2,555,914
Interest payable 239,785 298,583
Other liabilities 971,321 1,108,065
-------------------------------
Total liabilities 140,740,349 137,186,083
-------------------------------
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 3,019,651 3,145,348
Accumulated other comprehensive income 50,446 2,068
-------------------------------
Total stockholders' equity 10,128,962 10,191,406
-------------------------------
Total liabilities and stockholders' equity $ 150,869,311 $ 147,377,489
===============================
See notes to consolidated condensed financial statements.
4
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Income
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------------------------------------
2002 2001 2002 2001
----------------------------------------------------------
Interest Income
Loans, including fees $ 2,351,882 $ 2,781,903 $ 4,752,421 $ 5,538,938
Investment securities
Taxable 29,881 13,314 39,143 37,762
Tax exempt 33,166 90,518 66,258 188,110
Interest-bearing time deposits 18,406 44,503 44,373 66,245
Dividends 15,761 17,920 32,359 37,633
----------------------------------------------------------
Total interest income 2,449,096 2,948,158 4,934,554 5,868,688
----------------------------------------------------------
Interest Expense
Deposits 765,779 1,352,425 1,592,771 2,797,581
FHLB advances 192,974 223,171 388,843 444,822
Other borrowings 46,589 46,672 92,851 93,196
----------------------------------------------------------
Total interest expense 1,005,342 1,622,268 2,074,465 3,335,599
----------------------------------------------------------
Net Interest Income 1,443,754 1,325,890 2,860,089 2,533,089
Provision for loan losses 790,000 69,250 861,500 103,500
----------------------------------------------------------
Net Interest Income After Provision for Loan Losses 653,754 1,256,640 1,998,589 2,429,589
----------------------------------------------------------
Other Income
Trust fees 1,035 3,510 20,800 22,150
Gain on sale of loans 15,166 1,980 53,972 4,648
Service charges on deposit accounts 200,222 188,008 371,092 340,288
Gain on sale of securities 0 12,522 0 12,522
Non-customer ATM fee income 41,779 41,883 76,542 71,150
Other operating income 82,058 33,359 151,007 72,010
----------------------------------------------------------
Total other income 340,260 281,262 673,413 522,768
----------------------------------------------------------
Other Expenses
Salaries and employee benefits 656,682 589,166 1,309,458 1,167,387
Premises and equipment 177,929 177,412 351,014 350,568
Advertising 35,217 34,353 60,121 63,075
Data processing fees 185,271 160,568 366,627 312,084
Deposit insurance expense 5,067 14,736 10,342 30,334
Printing and office supplies 46,270 43,402 88,893 78,195
Legal and professional fees 66,367 60,248 137,868 110,155
Telephone expense 27,966 30,389 57,026 59,628
Other operating expense 170,991 150,907 332,341 285,768
----------------------------------------------------------
Total other expenses 1,371,760 1,261,181 2,713,690 2,457,194
----------------------------------------------------------
Income (Loss) Before Income Tax (377,746) 276,721 (41,688) 495,163
Income tax expense (benefit) (178,313) 63,930 (72,533) 103,822
----------------------------------------------------------
Net Income (loss) $ (199,433) $ 212,791 $ 30,845 $ 391,341
==========================================================
Basic earnings (loss) per share $ (.19) $ .20 $ .03 $ .38
Diluted earnings (loss) per share $ (.19) $ .20 $ .03 $ .36
Dividends per share $ .05 $ .04 $ .10 $ .08
See notes to consolidated condensed financial statements.
5
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Comprehensive Income
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------------------------
2002 2001 2002 2001
-------------------------------------------------
Net income (loss) $(199,433) $ 212,791 $ 30,845 $ 391,341
Other comprehensive income, net of tax
Unrealized holding gains arising during
the period, net of tax expense of
$30,693, $7,214, $32,232 and $67,591 46,444 11,002 48,378 103,091
Less: Reclassification adjustment for
gains included in net income, net of tax
expense of $0, $4,959, $0 and $4,959 0 7,563 0 7,563
-------------------------------------------------
46,444 3,439 48,378 95,528
-------------------------------------------------
Comprehensive income (loss) $(152,989) $ 216,230 $ 79,223 $ 486,869
=================================================
See notes to consolidated condensed financial statements
6
FIRST COMMUNITY BANCSHARES, INC AND SUBSIDIARIES
Consolidated Condensed Statement of Stockholders' Equity
For the Six Months Ended June 30, 2002
(Unaudited)
Retained
Common Stock Earnings Accumulated
---------------------------- And Other
Shares Contributed Comprehensive
Outstanding Amount Capital Income Total
-----------------------------------------------------------------------------
Balances, January 1, 2002 1,042,926 $ 7,043,990 $ 3,145,348 $ 2,068 $10,191,406
Net income for the period 30,845 30,845
Unrealized gains on securities 48,378 48,378
Cash dividends (156,542) (156,542)
Options exercised, net of cost 2,000 14,875 14,875
-----------------------------------------------------------------------------
Balances, June 30, 2002 1,044,926 $ 7,058,865 $ 3,019,651 $ 50,446 $10,128,962
=============================================================================
See notes to consolidated condensed financial statements.
7
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Cash Flows
(Unaudited)
Six Months Ended
June 30,
-----------------------------
2002 2001
-----------------------------
Operating Activities
Net income $ 30,845 $ 391,341
Adjustments to reconcile net income to net cash provided by
operating activities
Provision for loan losses 861,500 103,500
Depreciation and amortization 180,497 184,655
Investment securities amortization (accretion) 17,391 35,509
Gain on sale of securities 0 (12,522)
Net change in:
Cash value of life insurance (45,225) (42,709)
Interest receivable (13,189) 171,073
Interest payable (58,798) (98,395)
Mortgage loans held for sale 249,456 0
Other adjustments (425,479) 91,160
-----------------------------
Net cash provided by operating activities 796,998 823,612
-----------------------------
Investing Activities
Proceeds from paydowns, and maturities, of securities available for sale 395,715 2,517,113
Purchases of securities available for sale (3,063,302) 0
Proceeds from paydowns, maturities, and sales of securities held to maturity 0 150,769
Purchases of FHLB stock 0 (147,200)
Net change in loans (2,711,959) (3,221,349)
Purchases of property and equipment (12,976) (67,103)
Proceeds received from sale of other real estate 222,639 0
-----------------------------
Net cash provided used in investing activities (5,169,883) (767,770)
-----------------------------
Financing Activities
Net change in
Noninterest-bearing, NOW and savings deposits 3,720,968 9,273,607
Certificates of Deposit 2,044,395 (6,451,245)
Proceeds from borrowings 0 3,500,000
Repayment of borrowings (2,015,555) (1,015,062)
Purchase of stock 0 0
Cash dividends (104,296) (83,234)
Rights and options exercised, net of costs 14,875 12,625
-----------------------------
Net cash provided used in financing activities 3,660,387 5,236,691
-----------------------------
Net Change in Cash and Cash Equivalents (712,498) 5,292,533
Cash and Cash Equivalents, Beginning of Period 6,687,450 4,886,382
-----------------------------
Cash and Cash Equivalents, End of Period $ 5,974,952 $ 10,178,915
=============================
Supplemental cash flow disclosures
Interest paid $ 2,133,263 $ 3,433,994
Held to maturity securities transferred to available for sale
securities 0 1,196,445
Income tax paid 325,600 0
Loans to finance the sale of real estate owned 87,300 98,790
Dividend payable 52,246 41,677
See notes to consolidated condensed financial statements.
8
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Condensed Financial Statements
June 30, 2002
Note 1: Basis of Presentation
- -----------------------------
The consolidated financial statements include the accounts of First Community
Bancshares, Inc. (the "Company") and its wholly owned subsidiaries, First
Community Bank & Trust, a state chartered bank (the "Bank") and First Community
Real Estate Management, Inc. ("FCREMI"). FCREMI holds and manages real estate
used by the Company and the Bank. A summary of significant accounting policies
is set forth in Note 1 of Notes to Financial Statements included in the December
31, 2001, Annual Report to Stockholders'. All significant intercompany accounts
and transactions have been eliminated in consolidation.
The interim consolidated financial statements have been prepared in accordance
with instructions to Form 10-Q, and therefore do not include all information and
footnotes necessary for a fair presentation of financial position, results of
operations and cash flows in conformity with generally accepted accounting
principles.
The interim consolidated financial statements at June 30, 2002, and for the
three and six months ended June 30, 2002 and 2001, have not been audited by
independent accountants, but reflect, in the opinion of management, all
adjustments (which include only normal recurring adjustments) necessary to
present fairly the financial position, results of operations and cash flows for
such periods. The results of operations for the three and six months ended June
30, 2002 are not necessarily indicative of the results to be expected for the
full year. The consolidated condensed balance sheet of the company as December
31, 2001 has been derived from the audited consolidated balance sheet of the
Company as of that date.
Note 2: Earnings (Loss) Per Share
- ---------------------------------
Three Months Ended Three Months Ended
June 30, 2002 June 30, 2001
------------- -------------
Weighted Weighted
Average Per Share Average Per Share
(Loss) Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
Basic earnings (loss) per share
Income (loss) available to
common stockholders $ (199,433) 1,043,651 $ (.19) $ 212,791 1,041,223 $ .20
========= =========
Effect of dilutive stock options 0 78
Effect of convertible debt 0 0 10,568 90,910
--------------------------- -------------------------
Diluted earnings (loss) per share
Income (loss) available to
common stockholders and
assumed conversions $ (199,433) 1,043,651 $ (.19) $ 223,358 1,132,211 $ .20
===================================== ===================================
9
Six Months Ended Six Months Ended
June 30, 2002 June 30, 2001
------------- -------------
Weighted Weighted
Average Per Share Average Per Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
Basic earnings per share
Income available to common
stockholders $ 30,845 1,043,291 $ .03 $ 391,341 1,040,611 $ .38
========= =========
Effect of dilutive stock options 1,717 128
Effect of convertible debt 0 0 21,136 90,910
--------------------------- -------------------------
Diluted earnings per share
Income available to common
stockholders and assumed
conversions $ 30,845 1,045,008 $ .03 $ 412,477 1,131,649 $ .36
===================================== ===================================
Item 2. Management's Discussion and Analysis of Financial Condition
- ------- and Results of Operations
-----------------------------------------------------------
General
- -------
The Bank is a subsidiary of the Company and operates as an Indiana commercial
bank. In 1998, the Company formed a new subsidiary, First Community Real Estate
Management, Inc. whose purpose is to purchase and lease back to the Bank
properties originally owned by the Bank thereby allowing the Bank to redeploy
its capital to other uses. The Bank makes monthly lease payments to FCREMI as
lessee of these locations. These lease payments are sufficient to service the
debt incurred by FCREMI to purchase these properties. 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.
The Bank's profitability depends primarily upon the difference between the
income on its loans and investments and the cost of its deposits and borrowings.
This difference is referred to as the spread or net interest margin. The
difference between the amount of interest earned on loans and investments and
the interest incurred on deposits and borrowings is referred to as net interest
income. Interest income from loans and investments is a function of the amount
of loans and investments outstanding during the period and the interest rates
earned. Interest expense related to deposits and borrowings is a function of the
amount of deposits and borrowings outstanding during the period and the interest
rates paid.
Critical Accounting Policies
- ----------------------------
The notes to the consolidated financial statements contain a summary of the
Company's significant accounting policies presented on pages F-7 through F-9 of
the Annual Report to Stockholders for the year ended December 31, 2001. Certain
of these policies are important to the portrayal of the Company's financial
condition, since they require management to make difficult, complex or
subjective judgements, some of which may relate to matters that are inherently
uncertain. At this time management believes that its critical accounting
policies include determining the allowance for loan losses.
The allowance for loan losses is a significant estimate that can and does change
based on management's assumptions about specific borrowers and current general
economic and business conditions, among other
10
factors. Management reviews the adequacy of the allowance for loan losses on at
least a quarterly basis. The evaluation by management includes consideration of
past loss experience, changes in the composition of the loan portfolio, the
current condition and amount of loans outstanding, identified problem loans and
the probability of collecting all amounts due.
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. A worsening or protracted economic
decline would increase the likelihood of additional losses due to credit and
market risk and could create the need for additional loss reserves.
Financial Condition
- -------------------
Total assets increased $3.5 million, or 2.4%, to $150.9 million at June 30,
2002, from $147.4 million at December 31, 2001. Net loans increased from $126.1
million on December 31, 2001 to $128.0 million on June 30, 2002. Deposits
increased from $117.7 million on December 31, 2001 to $123.5 million on June 30,
2002, an increase of 4.9%. FHLB advances decreased $2.0 million or 12.9% during
the same time frame. Stockholders' equity was $10.1 million at June 30, 2002 as
compared to $10.2 million at December 31, 2001.
The Bank has experienced demand in both its commercial and installment sections
of the loan portfolio during the six months ended June 30, 2002. The increase in
net loans of $1.9 million was primarily funded by deposit growth. Management may
seek out alternative funding sources, such as FHLB advances, from time to time
when the terms of these funding sources outperform traditional deposit terms in
the Bank's primary markets or for asset-liability matching purposes.
Results of Operations Comparison of Three Months Ended June 30, 2002 and
June 30, 2001
- ------------------------------------------------------------------------
The Company had a net loss of $199,000 for the three months ended June 30, 2002
compared to $213,000 for the three months ended June 30, 2001, a decrease of
$412,000. Net interest income increased to $1.4 million for the three months
ended June 30, 2002 from $1.3 million for the three months ended June 30, 2001,
an increase of $118,000 or 8.9%.
The Company made a $790,000 provision for loan losses for the three months ended
June 30, 2002 compared to a $69,000 provision in the same period last year. The
increased provision 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 loan
loss reserve calculations are reviewed monthly by both the Bank's senior lending
officer and the board of directors. The calculations consider all loans in the
portfolio, with special consideration given to classified loans and
non-performing loans. The Company believes the current loan loss reserve levels
are adequate at this time.
The Company continued to feel effects of interest rate drops of 2001 during
2002. The Bank's deposits were able to reprice in proportion to the
interest-earning assets, which repriced during this same time frame. As a
result, net interest income was increased by approximately $100,000 when
comparing the quarter ended June 30, 2002 to the quarter ended June 30, 2001.
Management continued to focus on increasing non-interest income and holding
steady or reducing non-interest expenses during the quarter ended June 30, 2002.
As a result of these efforts, non-interest income increased $59,000 or 21% from
$281,000 for the three months ended June 30, 2001 to $340,000 for the three
months ended June 30, 2002. This increase was primarily due to:
11
o Increased service charges on deposit accounts of $12,000
o Increased realized gain on sale of loans of $13,000
o And increases other operating income of $49,000 for the three months ended
June 30, 2002.
The increase in service charges on deposit accounts can be attributed to more
demand deposit accounts being serviced by the Bank coupled with fee change
differences between periods. The increases in other operating income is
primarily due to credit card merchant and interchange fees, and cash surrender
value increases on Company owned life insurance.
Non-interest expenses increased $111,000 during the quarter ended June 30, 2002,
when compared to the quarter ended June 30, 2001. The primary increase of
$68,000 between periods was in salaries and employee benefits expenses. Data
processing fees also increased to $185,000 for the three months ended June 30,
2002 from $161,000 for the three months ended June 30, 2001. These increases are
primarily related to servicing more demand deposit, savings accounts, and loan
accounts. Management has made a commitment to continue to monitor all
non-interest expenses to further reduce expenses when practicable.
Income taxes decreased $242,000 for the three months ended June 30, 2002, when
compared to the same period in 2001 primarily due to a decrease in pretax income
caused by an increased provision for loan losses.
Results of Operations Comparison of Six Months Ended June 30, 2002 and
June 30, 2001
- ----------------------------------------------------------------------
The Company reported net income of $31,000 for the six months ended June 30,
2002, a decrease of $360,000 or 92.1% over the $391,000 reported for the six
months ended June 30, 2001. Net interest income increased, $327,000, to $2.9
million for the six months ended June 30, 2002, compared to $2.5 million for the
six months ended June 30, 2001. This represents a 12.9% increase between the two
periods.
The Company made a $862,000 provision for loan losses for the six months ended
June 30, 2002 compared to a $104,000 provision for the six months ended June 30,
2001. As previously discussed, loan loss reserves are reviewed monthly by both
the Bank's senior lending officer and the board of directors.
Non-interest income increased by $151,000 or 28.8% for the six months ended June
30, 2002, compared to the year earlier period. Increases in number of demand
deposit and savings accounts being serviced along with operational procedural
changes have led to this improvement. The Company was servicing more demand
deposits during the six months ended June 30, 2002 compared to the year ago
period, which coupled with fee changes have increased service charges collected
on deposit accounts by $31,000. The Company also recognized gains on the sale of
loans of $54,000 during the six months ended June 30, 2002, compared to a gain
on the sale of loans of $5,000 during the six months ended June 30, 2001. The
increase in other operating income is primarily attributable to increases in
credit card merchant and interchange fees, and cash surrender value of Company
owned life insurance polices.
Non-interest expenses were $2.7 million for the six months ended June 30, 2002,
compared to $2.5 million during the six months ended June 30, 2001. The Company
has seen increases in salaries, premises, data processing, printing and office
supplies, legal, and other expenses while experiencing decreases in advertising,
FDIC insurance, and printing expenses during the comparable periods. The
increased data processing fees can be attributed to servicing more demand,
savings, and loan accounts. The primary decrease in non-interest expense is in
deposit insurance, which decreased $20,000 to $10,000 during the six months
ended June 30, 2002, compared to $30,000 during the six months ended June 30,
2001. Management is continuing to monitor all expense areas' and implementing
systems or procedural changes when deemed beneficial to the Company.
12
Income taxes decreased $176,000 for the six months ended June 30, 2002, when
compared to the same period in 2001, primarily due to a decrease in pretax
income caused by an increased loan loss provision recorded in the second quarter
of 2002.
Asset Quality
- -------------
The Bank currently classifies loans as substandard, doubtful and loss to assist
management in addressing collection risks and pursuant to regulatory
requirements, which are not necessarily consistent with generally accepted
accounting principles. Substandard loans represent credits characterized by the
distinct possibility that some loss will be sustained if deficiencies are not
corrected. Doubtful loans possess the characteristics of substandard loans, but
collection or liquidation in full is doubtful based upon existing facts,
conditions and values. A loan classified as a loss is considered uncollectible.
As of June 30, 2002, the Bank had $4.4 million of loans classified as
substandard, none as doubtful and none as loss. The allowance for loan losses
was $1.2 million, or .95% of loans receivable at June 30, 2002 compared to $1.1
million or .88% of net loans receivable at December 31, 2001. A portion of
classified loans are non-accrual loans. First Community had non-accrual loans
totaling $2.3 million at June 30, 2002 compared to $1.6 million at December 31,
2001.
Asset/Liability Management
- --------------------------
One of the actions undertaken by the Company's management has been to adopt
asset/liability management policies in an attempt to reduce the susceptibility
of the Company's net interest spread to the adverse impact of volatile interest
rates. This goal can be achieved 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
difference between maturity of assets and maturity of liabilities is measured by
the interest-rate gap.
At June 30, 2002, the Company's one-year cumulative interest-rate gap as a
percent of total assets was a negative 9.4%. This negative interest-rate gap
represents substantial risk for the Company in an environment of rising interest
rates. A negative interest-rate gap means the Company's earnings are vulnerable
in 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 interest 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. However, 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. The Company's ratio of
non-performing assets to total assets was 1.65% at June 30, 2002 and 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 schedule illustrates the interest-rate sensitivity of
interest-earning assets and interest-bearing liabilities at June 30, 2002.
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 or enforcement of due-on-sale clauses.
13
At June 30, 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 $ 12,634 $ 7,453 $ 6,608 $ 318 $ 27,013
Fixed rate mortgages 4,842 2,903 3,442 17,771 28,958
Commercial loans 22,735 4,193 3,560 1,382 31,870
Consumer loans 14,653 14,572 5,829 1,614 36,668
Tax-exempt loans and leases 47 457 100 1,744 2,348
Investments 788 3,639 1,111 1,162 6,700
FHLB stock 1,025 1,025
Interest-bearing deposits 4,207 4,207
---------------------------------------------------------------
Total interest-earning assets 60,931 33,217 20,650 23,991 138,789
---------------------------------------------------------------
Interest-bearing liabilities:
Fixed maturity deposits 42,663 10,831 6,579 1,324 61,397
Other deposits 30,959 12,925 5,172 1,410 50,466
FHLB advances 1,500 1,500 5,500 5,000 13,500
---------------------------------------------------------------
Total interest-bearing liabilities 75,122 25,256 17,251 7,734 125,363
---------------------------------------------------------------
Excess (deficiency) of interest-earning (14,191) 7,961 3,399 16,257 13,426
assets over interest-bearing liabilities
Cumulative excess (deficiency) of
interest-earning assets over
interest-bearing liabilities (14,191) (6,230) (2,831) 13,426
Cumulative ratio at June 30, 2002 as a
percent of total assets (9.41)% (4.13)% (1.88)% 8.90%
Liquidity and Capital Resources
- -------------------------------
Liquidity refers to the ability of a financial institution to generate
sufficient cash to fund current loan demand, meet savings deposit withdrawals
and pay operating expenses. The primary sources of liquidity are cash,
interest-bearing deposits in other financial institutions, marketable
securities, loan repayments, increased deposits and total institutional
borrowing capacity.
Cash and interest-bearing deposits, when combined with investments, have
remained a relatively constant percent of total assets, while increasing in
dollar volume. Management's goal is to maintain approximately twenty percent
(20%) to twenty-five percent (25%) of total assets in cash, interest-bearing
deposits and investments in order to satisfy the Company's need for liquidity
and other short-term obligations.
Management believes that it has adequate liquidity for the Company's short- and
long-term needs. Short-term liquidity needs resulting from normal
deposit/withdrawal functions are provided by the Company retaining a portion of
cash generated from operations in a Federal Home Loan Bank ("FHLB") daily
investment account. This account acts as a short-term liquidity source while
providing interest income to the Company. Long-term
14
liquidity and other liquidity needs are provided by the ability of the Company
to borrow from the FHLB. The balance of its FHLB advances was $13.5 million at
June 30, 2002 and $15.5 million at December 31, 2001.
At June 30, 2002, the Bank had a tier 1 leverage ratio of approximately 7.12%
and a total risk-based capital ratio of approximately 9.95%. The regulatory tier
1 leverage and total risk-based capital requirements are 4.0% and 8.0%
respectively.
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.
Other
- -----
The Securities and Exchange Commission maintains a Web site that contains
reports, proxy and information statements, and other information regarding
registrants that file electronically with the Commission, including the Company.
The address is (http://www.sec.gov).
Item 3. Quantitative and Qualitative Disclosures About Market Risk
- ------- ----------------------------------------------------------
Although the Company files a Form 10-K in lieu of 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.
Part II - Other Information
Item 1. Legal Proceedings.
- ------- ------------------
None.
Item 2. Changes in Securities.
- ------- ----------------------
On May 29, 2002 the Company issued options for the purchase of
1,000 shares of common stock to each of four outside directors
with an exercise price of $9.70 per share in reliance on the
exemption provided by Section 4(2) of the Securities Act of
1933, as amended (the "Act").
On May 29, 2002 the Company issued 2,000 shares of common
stock to an outside retired director upon exercise of
outstanding options in reliance upon the exemption provided by
Section 4(2) of the Act.
Item 3. Defaults upon Senior Securities.
- ------- --------------------------------
Not applicable.
15
Item 4. Submission of Matters to a Vote by Security Holders.
- ------- ----------------------------------------------------
On May 29, 2002, the Company held its annual meeting of
shareholders. A total of 991,868 shares were represented in
person or by proxy at the meeting out of a total of
1,042,926 voting shares eligible. Mr. Frank D. Neese and Mr.
Roy Martin Umbarger, were re-elected to the Board of
Directors for a three-year terms expiring in 2005. Mr. Neese
received 989,212 shares voted in favor of his re-election,
180 votes against and 2,576 votes abstained. Mr. Umbarger
received a total of 989,147 shares voted in favor of his
re-election, 145 votes against, and 2,576 votes abstained.
Continuing Directors include, Dr. Merrill Wesemann, M.D.,
Mr. Albert R. Jackson, III and Mr. Albert R. Jackson, Jr.
Dr. Wesemann and Mr. Albert R. Jackson, III terms will
expire in 2003. The term for Mr. Albert R. Jackson, Jr. will
expire in 2004.
Item 5. Other Information.
- ------- ------------------
None.
Item 6. Exhibits and Reports on Form 8-K.
- ------- --------------------------------
(a) No reports were filed on Form 8-K during the quarter
ended June 30, 2002.
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.
FIRST COMMUNITY BANCSHARES, INC.
Date: August 13, 2002 By: /s/ Albert R. Jackson III
--------------- --------------------------------
Albert R. Jackson III
Chief Executive Officer and Director
Date: August 13, 2002 By: /s/ Brian D. Heilers
--------------- --------------------------------
Brian D. Heilers
Vice President of Finance
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 Quarterly Report of First Community Bancshares, Inc. (the
"Company") on Form 10Q for the period ending June 30, 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
August 13, 2002
16