Back to GetFilings.com
FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended: March 31, 2004
--------------
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: 0-19297
First Community Bancshares, Inc.
(Exact name of registrant as specified in its charter)
Nevada 55-0694814
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
One Community Place, Bluefield, Virginia 24605
(Address of principal executive offices) (Zip Code)
(276) 326-9000
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 of 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 Registrant is an accelerated filer (as defined in
Exchange Act Rule 12b-2).
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at April 30, 2004
Common Stock, $1 Par Value 11,244,894
----------------------
First Community Bancshares, Inc.
FORM 10-Q
For the quarter ended March 31, 2004
INDEX
PART I. FINANCIAL INFORMATION REFERENCE
---------
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 2004 and
December 31, 2003 3
Consolidated Statements of Income for the Three
Month Periods Ended March 31, 2004 and 2003 4
Consolidated Statements of Cash Flows for the
Three Month Periods Ended March 31, 2004 and 2003 5
Consolidated Statements of Changes in Stockholders'
Equity for the Three Months Ended March 31,
2004 and 2003 6
Notes to Consolidated Financial Statements 7-13
Independent Accountants' Review Report 14
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15-26
Item 3. Quantitative and Qualitative Disclosures about 26
Market Risk
Item 4. Controls and Procedures 26
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 27
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 27
Item 3. Defaults Upon Senior Securities 27
Item 4. Submission of Matters to a Vote of 27
Security Holders
Item 5. Other Information 28
Item 6. Exhibits and Reports on Form 8-K 28
SIGNATURES 30
2
PART I. ITEM 1. FINANCIAL STATEMENTS
FIRST COMMUNITY BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
MARCH 31 December 31
2004 2003
ASSETS (UNAUDITED) (Note 1)
----------- -----------
CASH AND DUE FROM BANKS $ 38,482 $ 39,416
INTEREST-BEARING DEPOSITS WITH BANKS 40,157 22,136
FEDERAL FUNDS SOLD - -
----------- -----------
TOTAL CASH AND CASH EQUIVALENTS 78,639 61,552
SECURITIES AVAILABLE FOR SALE (AMORTIZED COST OF $432,733 AT
MARCH 31, 2004; $436,194 AT DECEMBER 31, 2003) 443,844 444,491
SECURITIES HELD TO MATURITY (FAIR VALUE OF $39,629 AT
MARCH 31, 2004; $40,060 AT DECEMBER 31, 2003) 37,425 38,020
LOANS HELD FOR SALE 28,656 18,152
LOANS HELD FOR INVESTMENT, NET OF UNEARNED INCOME 1,019,829 1,026,191
LESS ALLOWANCE FOR LOAN LOSSES 14,536 14,624
----------- -----------
NET LOANS HELD FOR INVESTMENT 1,005,293 1,011,567
PREMISES AND EQUIPMENT 30,633 30,021
OTHER REAL ESTATE OWNED 2,571 2,091
INTEREST RECEIVABLE 8,448 8,345
OTHER ASSETS 18,792 17,762
GOODWILL 38,861 39,363
OTHER INTANGIBLE ASSETS 1,298 1,363
----------- -----------
TOTAL ASSETS $ 1,694,460 $ 1,672,727
=========== ===========
LIABILITIES
DEPOSITS:
NON-INTEREST-BEARING $ 197,330 $ 194,127
INTEREST-BEARING 1,045,374 1,031,490
----------- -----------
TOTAL DEPOSITS 1,242,704 1,225,617
INTEREST, TAXES AND OTHER LIABILITIES 12,363 12,037
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE 98,035 97,651
FHLB BORROWINGS AND OTHER INDEBTEDNESS 148,324 147,387
JUNIOR SUBORDINATED DEBT RELATED TO ISSUANCE OF TRUST PREFERRED SECURITIES 15,000 15,000
----------- -----------
TOTAL LIABILITIES 1,516,426 1,497,692
----------- -----------
STOCKHOLDERS' EQUITY
PREFERRED STOCK, PAR VALUE UNDESIGNATED; 1,000,000 SHARES AUTHORIZED;
NO SHARES ISSUED AND OUTSTANDING IN 2004 AND 2003 - -
COMMON STOCK, $1 PAR VALUE; 15,000,000 SHARES AUTHORIZED;
11,449,841 AND 11,442,348 ISSUED IN 2004 AND 2003, AND
11,244,894 AND 11,242,443 OUTSTANDING IN 2004 AND 2003, 11,450 11,442
ADDITIONAL PAID-IN CAPITAL 108,243 108,128
RETAINED EARNINGS 58,241 56,894
TREASURY STOCK, AT COST (6,566) (6,407)
ACCUMULATED OTHER COMPREHENSIVE INCOME 6,666 4,978
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 178,034 175,035
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,694,460 $ 1,672,727
=========== ===========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
3
FIRST COMMUNITY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA) (UNAUDITED)
- --------------------------------------------------------------------------------
THREE MONTHS ENDED
MARCH 31, March 31,
2004 2003
----------- -----------
INTEREST INCOME:
INTEREST AND FEES ON LOANS HELD FOR INVESTMENT $ 17,130 $ 16,892
INTEREST ON LOANS HELD FOR SALE 203 629
INTEREST ON SECURITIES-TAXABLE 3,270 3,145
INTEREST ON SECURITIES-NONTAXABLE 1,636 1,657
INTEREST ON FEDERAL FUNDS SOLD AND DEPOSITS IN BANKS 199 215
----------- -----------
TOTAL INTEREST INCOME 22,438 22,538
----------- -----------
INTEREST EXPENSE:
INTEREST ON DEPOSITS 4,315 5,317
INTEREST ON FHLB AND OTHER SHORT-TERM BORROWINGS 1,883 1,893
INTEREST ON OTHER INDEBTEDNESS 208 148
----------- -----------
TOTAL INTEREST EXPENSE 6,406 7,358
----------- -----------
NET INTEREST INCOME 16,032 15,180
PROVISION FOR LOAN LOSSES 532 589
----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 15,500 14,591
----------- -----------
NON-INTEREST INCOME:
FIDUCIARY INCOME 418 416
SERVICE CHARGES ON DEPOSIT ACCOUNTS 1,960 1,821
OTHER SERVICE CHARGES, COMMISSIONS AND FEES 559 513
MORTGAGE BANKING INCOME 507 2,964
OTHER OPERATING INCOME 295 297
GAIN ON SECURITIES 11 20
----------- -----------
TOTAL NON-INTEREST INCOME 3,750 6,031
----------- -----------
NON-INTEREST EXPENSE:
SALARIES AND EMPLOYEE BENEFITS 7,213 6,333
OCCUPANCY EXPENSE OF BANK PREMISES 951 849
FURNITURE AND EQUIPMENT EXPENSE 673 530
CORE DEPOSIT AMORTIZATION 64 63
OTHER OPERATING EXPENSE 4,455 3,356
----------- -----------
TOTAL NON-INTEREST EXPENSE 13,356 11,131
----------- -----------
INCOME BEFORE INCOME TAXES 5,894 9,491
INCOME TAX EXPENSE 1,733 2,743
----------- -----------
NET INCOME $ 4,161 $ 6,748
=========== ===========
BASIC EARNINGS PER COMMON SHARE $ 0.37 $ 0.62
=========== ===========
DILUTED EARNINGS PER COMMON SHARE $ 0.37 $ 0.62
=========== ===========
WEIGHTED AVERAGE BASIC SHARES OUTSTANDING 11,245,465 10,857,307
=========== ===========
WEIGHTED AVERAGE DILUTED SHARES OUTSTANDING 11,347,748 10,913,481
=========== ===========
See Notes to Consolidated Financial Statements.
4
FIRST COMMUNITY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS) (UNAUDITED)
- --------------------------------------------------------------------------------
THREE MONTHS ENDED
MARCH 31
2004 2003
--------- ---------
OPERATING ACTIVITIES:
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME $ 4,161 $ 6,748
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH (USED IN) PROVIDED BY
OPERATING ACTIVITIES:
PROVISION FOR LOAN LOSSES 532 589
DEPRECIATION OF PREMISES AND EQUIPMENT 669 437
CORE DEPOSIT AMORTIZATION 65 63
PURCHASE PRICE ACCOUNTING ACCRETION (61) (12)
NET INVESTMENT AMORTIZATION AND ACCRETION 618 510
NET GAIN ON THE SALE OF ASSETS (15) (60)
NET GAIN ON SALE OF LOANS (2,201) (4,753)
MORTGAGE LOANS ORIGINATED FOR SALE (124,549) (206,856)
PROCEEDS FROM SALE OF MORTGAGE LOANS 116,246 226,599
INCREASE IN INTEREST RECEIVABLE (103) (313)
INCREASE IN OTHER ASSETS (1,580) (2,109)
INCREASE (DECREASE) IN OTHER LIABILITIES 375 (505)
--------- ---------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (5,843) 20,338
--------- ---------
INVESTING ACTIVITIES:
CASH FLOWS FROM INVESTING ACTIVITIES:
PROCEEDS FROM SALES OF SECURITIES AVAILABLE FOR SALE 1 505
PROCEEDS FROM MATURITIES AND CALLS OF SECURITIES AVAILABLE FOR SALE 46,416 27,074
PROCEEDS FROM MATURITIES AND CALLS OF SECURITIES HELD TO MATURITY 455 928
PURCHASE OF SECURITIES AVAILABLE FOR SALE (43,424) (101,316)
NET DECREASE IN LOANS MADE TO CUSTOMERS 5,258 30,148
PURCHASE OF PREMISES AND EQUIPMENT (1,370) (948)
SALE OF EQUIPMENT 35 58
NET CASH PROVIDED BY ACQUISITIONS - 30
--------- ---------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 7,371 (43,521)
--------- ---------
FINANCING ACTIVITIES:
CASH FLOWS FROM FINANCING ACTIVITIES:
NET INCREASE IN DEMAND AND SAVINGS DEPOSITS 16,327 7,194
NET INCREASE IN TIME DEPOSITS 853 6,844
NET INCREASE (DECREASE) IN FHLB AND OTHER INDEBTEDNESS 1,357 (10,179)
REPAYMENT OF OTHER BORROWINGS (5) (5)
ACQUISITION OF TREASURY STOCK (159) (2,562)
DIVIDENDS PAID (2,814) (2,565)
--------- ---------
NET CASH (PROVIDED BY) USED IN FINANCING ACTIVITIES 15,559 (1,273)
--------- ---------
CASH AND CASH EQUIVALENTS
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 17,087 (24,456)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 61,552 124,585
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 78,639 $ 100,129
========= =========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
5
FIRST COMMUNITY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE INFORMATION) (UNAUDITED)
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID-IN RETAINED TREASURY COMPREHENSIVE
STOCK CAPITAL EARNINGS STOCK (LOSS) INCOME TOTAL
--------- ----------- --------- --------- ------------- ----------
BALANCE JANUARY 1, 2003 $ 9,957 $ 58,642 $ 79,084 $ (1,982) $ 6,761 $ 152,462
COMPREHENSIVE INCOME:
NET INCOME - - 6,748 - - 6,748
OTHER COMPREHENSIVE INCOME, NET OF TAX:
NET UNREALIZED GAINS ON
SECURITIES AVAILABLE FOR SALE - - - - (725) (725)
COMMON DIVIDENDS DECLARED
($.24 PER SHARE) - - (2,565) - - (2,565)
PURCHASE 85,000 TREASURY SHARES AT
$30.15 PER SHARE - - - (2,562) - (2,562)
8,409 SHARES ISSUED IN STONE CAPITAL
ACQUISITION (SEE NOTE 3) 8 236 244
OPTION EXERCISE 11,000 SHARES @ $23.91 49 321 370
ISSUANCE OF TREASURY SHARES TO ESOP 43 680 723
--------- ----------- --------- --------- ----------- ----------
BALANCE MARCH 31, 2003 $ 9,965 $ 58,970 $ 83,267 $ (3,543) $ 6,036 $ 154,695
========= =========== ========= ========= =========== ==========
BALANCE JANUARY 1, 2004 $ 11,442 $ 108,128 $ 56,894 $ (6,407) $ 4,978 $ 175,035
COMPREHENSIVE INCOME:
NET INCOME - - 4,161 - 4,161
OTHER COMPREHENSIVE INCOME, NET OF TAX:
NET UNREALIZED GAINS ON
SECURITIES AVAILABLE FOR SALE - - - - 1,688 1,688
COMMON DIVIDENDS DECLARED
($.25 PER SHARE) - - (2,814) - - (2,814)
PURCHASE 5,000 TREASURY SHARES AT
$32.05 PER SHARE - - - (159) - (159)
SECOND PAYMENT OF STOCK RELATED TO THE
ACQUISITION OF STONE CAPITAL:2,540 SHARES 3 85 88
OPTION EXERCISE 4,953 SHARES 5 30 - 35
--------- ----------- --------- --------- ----------- ----------
BALANCE MARCH 31, 2004 $ 11,450 $ 108,243 $ 58,241 $ (6,566) $ 6,666 $ 178,034
========= =========== ========= ========= =========== ==========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. UNAUDITED FINANCIAL STATEMENTS
The unaudited consolidated balance sheet as of March 31, 2004, the unaudited
consolidated statements of income for the three months ended March 31, 2004 and
2003 and the consolidated statements of cash flows and changes in stockholders'
equity for the three months ended March 31, 2004 and 2003 have been prepared by
the management of First Community Bancshares, Inc. ("FCBI" or the "Company"). In
the opinion of management, all adjustments (including normal recurring accruals)
necessary to present fairly the financial position of FCBI and subsidiaries at
March 31, 2004 and its results of operations, cash flows, and changes in
stockholders' equity for the three months ended March 31, 2004 and 2003 have
been made. These results are not necessarily indicative of the results of
consolidated operations that might be expected for the full calendar year.
The consolidated balance sheet as of December 31, 2003 has been extracted from
the audited financial statements included in the Company's 2003 Annual Report to
Stockholders on Form 10-K. Certain information and footnote disclosures normally
included in annual financial statements prepared in accordance with accounting
principles generally accepted in the United States have been omitted in
accordance with standards for the preparation of interim financial statements.
These financial statements should be read in conjunction with the financial
statements and notes thereto included in the 2003 Annual Report of FCBI on Form
10-K.
A more complete and detailed description of FCBI's significant accounting
policies is included within Footnote 1 to the Company's Annual Report on Form
10-K for December 31, 2003. In addition, the Company's required disclosure of
the application of critical accounting policies is included within the
"Application of Critical Accounting Policies" section of Part I, Item 2.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included herein.
The following is an update pursuant to the requirements of Financial Accounting
Standards Board ("FASB") Statement 148.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICY UPDATE FOR CERTAIN REQUIRED
DISCLOSURES: STOCK OPTIONS
The Company has a stock option plan for certain executives and directors
accounted for under the intrinsic value method in accordance with Accounting
Principles Board ("APB") 25. Because the exercise price of the Company's
employee/director stock options equals the market price of the underlying stock
on the date of grant, no compensation expense is recognized. The effect of
option shares on earnings per share relates to the dilutive effect of the
underlying options outstanding. To the extent the granted exercise share price
is less than the current market price ("in the money") there is an economic
incentive for the shares to be exercised and an increase in the dilutive effect
on earnings per share results.
In December 2002, the FASB issued Financial Accounting Standards ("FAS") 148,
"Accounting for Stock-Based Compensation." This new standard provides
alternative methods of transition for a voluntary change to the fair value
method of accounting for stock-based compensation. In addition, the Statement
amends the disclosure requirements of FAS 123 to require prominent disclosure in
both annual and interim financial statements about the method of accounting for
stock-based compensation and the underlying effect of the method used on
reported results until exercised.
7
Assuming use of the fair value method of accounting for stock options, pro forma
net income and earnings per share for the three month periods ended March 31,
2004 and 2003 would have been estimated as follows:
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
2004 2003
--------- ---------
(AMOUNTS IN THOUSANDS)
Net income as reported $ 4,161 $ 6,748
Less: Total stock-based employee
compensation expense determined
under fair value based method for all
awards, net of related tax effects (39) (39)
--------- ---------
$ 4,122 $ 6,709
========= =========
Earnings per share from continuing operations:
Basic as reported $ 0.37 $ 0.62
Basic pro forma $ 0.37 $ 0.62
Diluted as reported $ 0.37 $ 0.62
Diluted pro forma $ 0.36 $ 0.61
At the annual shareholder meeting in April 2004, a new Omnibus Stock Option Plan
was approved. The options and shares of this new plan will be used in
conjunction with retention, recruitment and hiring of employees. The maximum
number of grants and awards under this Plan was limited to 200,000 shares.
NOTE 2. DIVESTITURES
On April 27, 2004, the Company announced the proposed sale of the mortgage
subsidiary reflecting the Company's strategic plans for exiting the mortgage
banking business which will allow greater focus on the Company's core community
banking business. The proposed transaction involves a sale of 100% of the stock
of UFM to certain members of UFM's present management. Although completion of
the transaction remains subject to the execution of a definitive agreement and
satisfaction of the conditions which will be set forth therein, the proposed
sale did result in a charge to net income of $651,000 in the first quarter of
2004. The parties anticipate that the proposed sale of the mortgage subsidiary
will close by June 30, 2004.
NOTE 3. MERGERS AND ACQUISITIONS
After the close of business on March 31, 2004, the Company acquired PCB Bancorp,
Inc., a Tennessee-chartered bank holding company ("PCB Bancorp") headquartered
in Johnson City, Tennessee. PCB Bancorp has six full service branch offices
located in Johnson City, Kingsport and surrounding areas in Washington and
Sullivan Counties in East Tennessee. At acquisition, PCB Bancorp, had total
assets of $171 million, total loans of $128 million and total deposits of $150
million, which will be included in the Company's financial statements beginning
with the second quarter of 2004.
Under the terms of the merger agreement, shares of PCB Bancorp common stock were
purchased for $40.00 per share in cash. The total deal value, including the
cash-out of outstanding stock options, was approximately $36.0 million.
Concurrent with the PCB Bancorp merger, Peoples Community Bank, the wholly-owned
subsidiary of PCB Bancorp, was merged into First Community Bank, N.A., a
wholly-owned subsidiary of First Community Bancshares, Inc (the "Bank").
On June 6, 2003, the Company acquired The CommonWealth Bank, a
Virginia-chartered commercial bank ("CommonWealth"). CommonWealth's four branch
facilities located in the Richmond, Virginia metro area were simultaneously
merged with and into the Bank. The completion of this transaction resulted in
the addition of $136.5 million in assets, including $120.0 million in loans and
added an additional $105.0 million in deposits to the Bank. As a result of the
purchase price allocation, approximately $14.1 million excess of purchase price
over the fair market value of the net assets acquired and identified intangibles
was recorded as goodwill.
In the second and third quarters of 2003, the Company opened three de novo
branches in Winston-Salem, North Carolina. The Company does not anticipate that
these branches will be profitable until market development has proven successful
and adequate loan balances and corresponding loan revenue are established to
support the added facilities, infrastructure and other
8
operating costs of these branches. The Company also opened two additional loan
production offices during the first quarter of 2004 in Mount Airy and Charlotte,
North Carolina.
In January 2003, the Bank completed the acquisition of Stone Capital, based in
Beckley, West Virginia. This acquisition expanded the Bank's operations to
include a broader range of financial services, including wealth management,
asset allocation, financial planning and investment advice. Stone Capital at
December 31, 2003 had total assets of $59 million under management and continues
to operate under its name. Stone Capital was acquired through the issuance of
8,409 shares of Company common stock, which represented 50% of the total
consideration. In 2003, Stone Capital exceeded the annual revenue requirement
outlined in the acquisition agreement and another 2,541 shares were paid to the
original shareholders subsequent to December 31, 2003. The balance of the
remaining consideration ($175,000) is payable over the next two years in the
form of Company common stock, subject to the achievement of minimum requirements
set forth in the acquisition agreement.
NOTE 4. BORROWINGS
Federal Home Loan Bank ("FHLB") borrowings and other indebtedness are comprised
of $136.3 million in convertible and callable advances and $8.3 million of
noncallable term advances from the FHLB of Atlanta. The callable advances may be
redeemed at quarterly intervals after various lockout periods. These call
options may substantially shorten the lives of these instruments. If these
advances are called, the debt may be paid in full, converted to another FHLB
credit product, or converted to an adjustable rate advance.
The following schedule details the contractual terms of outstanding FHLB
advances, rates and corresponding final maturities at March 31, 2004. Not
included in the table are the fair value adjustments related to debt obligations
acquired in the CommonWealth Bank acquisition. The unamortized premium of
approximately $180,000 which is being amortized to interest expense over the
anticipated life of the borrowings reflecting an adjustment to the effective
rate paid.
ADVANCE RATE MATURITY NEXT CALL
DATE
-------------------------------------------------------
(AMOUNTS IN THOUSANDS)
Callable advances:
$ 5,000 1.10% 03/10/06 03/10/04
25,000 0.67% 06/30/06 06/30/04
1,250 4.14% 05/02/07 05/02/05
5,000 1.41% 09/27/07 06/29/04
25,000 5.71% 03/17/10 03/17/04
25,000 6.11% 05/05/10 05/05/04
25,000 6.02% 05/05/10 05/05/04
25,000 5.47% 10/04/10 04/05/04
------------------
$ 136,250
==================
Noncallable advances: $ 900 4.55% 11/23/05 N/A
379 5.01% 12/11/06 N/A
5,000 1.12% 01/30/07 N/A
2,000 6.27% 09/02/08 N/A
------------------
$ 8,279
==================
In addition to the FHLB borrowings listed in the foregoing table, the Company
issued $15.0 million of trust preferred securities in September 2003 at a
variable rate indexed to the 3 Month LIBOR rate + 2.95%. The securities mature
on October 8, 2033 and are callable beginning October 8, 2008.
The Company's wholly owned mortgage subsidiary, United First Mortgage ("UFM"),
also maintains a warehouse line of credit used to fund mortgage loan inventory
with a third party which was entered into in the third quarter of 2003. The
maximum line available under this credit facility is $15 million, $3.6 million
of which was outstanding at March 31, 2004. This line matures August 10, 2004
and carries an interest rate of New York Prime, adjusting as the prime rate
changes.
Other various debt obligations of the Company were approximately $30,000 at
March 31, 2004.
NOTE 5. COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company is a defendant in various legal
actions and asserted claims, most of which involve lending, collection and
employment matters. While the Company and legal counsel are unable to assess the
ultimate
9
outcome of each of these matters with certainty, they are of the belief that the
resolution of these actions, singly or in the aggregate, should not have a
material adverse effect on the financial condition, results of operations or
cash flows of the Company.
In November, 2003 the Company was sued by two former employees of The
CommonWealth Bank, alleging among other things, violation of employment law and
breach of contract, stemming from their termination. The Company and counsel
believe that the lawsuit, which seeks damages of more than $180,000 in severance
plus certain retirement and employee benefits and punitive damages for each of
the two former employees of The CommonWealth Bank is without merit, and intends
to vigorously defend this matter.
The Company conducts mortgage banking operations through UFM. The majority of
loans originated by UFM are sold to larger national investors on a service
released basis. Loans are sold under loan sales agreements which contain various
repurchase provisions. These repurchase provisions give rise to a contingent
liability for loans which could subsequently be submitted to UFM for repurchase.
The principal events which could result in a repurchase obligation are i.) the
discovery of fraud or material inaccuracies in a sold loan file and ii.) a
default on the first payment due after a loan is sold to the investor, coupled
with a ninety day delinquency in the first year of the life of the loan. Other
events and variations of these events could result in a loan repurchase
obligation under terms of other loan sales agreements. The volume of contingent
loan repurchases, if any, is largely dependent on the quality of loan
underwriting and systems employed by UFM for quality control in the production
of mortgage loans. UFM may remarket these loans to alternate investors after
repurchase and cure of the loans' defects. To date, loans submitted for
repurchase have not been material and have not had a material adverse effect on
the results of operations, financial condition or liquidity of UFM or the
Company.
UFM also originates government guaranteed FHA and VA loans that are also sold to
third party investors. The Department of Housing and Urban Development ("HUD")
periodically audits loan files of government guaranteed loans and may require
UFM to execute indemnification agreements on loans which do not meet certain
predefined underwriting guidelines or may require the repurchase of the
underlying loan. To date, the number of required indemnification agreements, or
loan repurchases have not been material and no subsequent losses have been
incurred. Loan indemnifications and repurchases under the FHA and VA and VHDA
loan programs have not had a material adverse effect on the financial condition,
results of operations or cash flows of UFM or the Company.
UFM is subject to net worth requirements issued by HUD. Failure to meet these
minimum capital requirements can result in certain mandatory and possibly
additional discretionary actions that, if undertaken, could have a direct
material effect on UFM's operations. UFM was in compliance with HUD's minimum
net worth requirement at March 31, 2004. UFM's adjusted tangible net worth was
$1.9 million at March 31, 2004, which exceeded the HUD requirement.
The Bank is a party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit, standby letters of
credit and financial guarantees. These instruments involve, to varying degrees,
elements of credit and interest rate risk beyond the amount recognized on the
balance sheet. The contractual amounts of those instruments reflect the extent
of involvement the Company has in particular classes of financial instruments.
The Company's exposure to credit loss in the event of non-performance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit and financial guarantees written is represented by the
contractual amount of those instruments. The Company uses the same credit
policies in making commitments and conditional obligations as it does for
on-balance sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long as
there is not a 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 Company evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Company, upon extension of credit is based on
management's credit evaluation of the counterparties. Collateral held varies but
may include accounts receivable, inventory, property, plant and equipment, and
income-producing commercial properties.
Standby letters of credit and written financial guarantees are conditional
commitments issued by the Company to guarantee the performance of a customer to
a third party. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers.
To the extent deemed necessary, collateral of varying types and amounts is held
to secure customer performance under certain of those letters of credit
outstanding.
Financial instruments whose contract amounts represent credit risk at March 31,
2004 are commitments to extend credit (including availability of lines of
credit) of $97.2 million and standby letters of credit and financial guarantees
written of $9.1 million. In addition, at March 31, 2004, UFM had commitments to
originate loans of $137.7 million. Of these commitments, the fallout/pullthrough
model employed by UFM identified $82.6 million that are anticipated to close.
10
In September 2003, the Company issued, through FCBI Capital Trust, $15.0 million
of trust preferred securities in a private placement. In connection with the
issuance of the preferred securities, the Company has committed to irrevocably
and unconditionally guarantee the following payments or distributions with
respect to the preferred securities to the holders thereof to the extent that
FCBI Capital Trust has not made such payments or distributions and has the funds
therefor: (i) accrued and unpaid distributions, (ii) the redemption price, and
(iii) upon a dissolution or termination of the trust, the lesser of the
liquidation amount and all accrued and unpaid distributions and the amount of
assets of the trust remaining available for distribution.
NOTE 6. OTHER COMPREHENSIVE INCOME
The Company currently has one component of other comprehensive income, which is
comprised of unrealized gains and losses on securities available for sale,
detailed as follows:
THREE MONTHS ENDED
MARCH 31, MARCH 31,
2004 2003
--------- ---------
(AMOUNTS IN THOUSANDS)
OTHER COMPREHENSIVE INCOME:
Unrealized gain (losses) arising during the period $ 2,825 $(1,198)
Related income (expense) benefit (1,130) 479
------- -------
Unrealized gains (losses) arising during the period, net of tax 1,695 (719)
Reclassification adjustment for gains realized in net
income (11) (10)
Tax expense of reclassification 4 4
------- -------
Other comprehensive gain (loss) 1,688 (725)
Beginning accumulated other comprehensive gain 4,978 6,761
------- -------
Ending accumulated other comprehensive income $ 6,666 $ 6,036
======= =======
NOTE 7. SEGMENT INFORMATION
The Company operates two business segments: community banking and mortgage
banking. These segments are primarily identified by their products and services
and the channels through which they are offered. The community banking segment
consists of the Company's full-service bank that offers customers traditional
banking products and services through various delivery channels. The mortgage
banking segment consists of mortgage brokerage offices that originate, acquire,
and sell residential mortgage products into the secondary market through
national investors.
Information for each of the segments is presented below.
THREE MONTHS ENDED MARCH 31, 2004
-------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS)
COMMUNITY MORTGAGE
BANKING BANKING PARENT ELIMINATIONS TOTAL
---------- ---------- ---------- ------------ ----------
NET INTEREST INCOME (LOSS) $ 16,199 $ 48 $ (119) $ (96) $ 16,032
PROVISION FOR LOAN LOSSES 532 - - - 532
---------- ---------- ---------- ---------- ----------
NET INTEREST INCOME (LOSS) AFTER PROVISION
FOR LOAN LOSSES 15,667 48 (119) (96) 15,500
OTHER INCOME 3,434 507 - (191) 3,750
OTHER EXPENSES 11,055 2,446 142 (287) 13,356
---------- ---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES 8,046 (1,891) (261) - 5,894
INCOME TAX EXPENSE (BENEFIT) 2,334 (450) (151) - 1,733
---------- ---------- ---------- ---------- ----------
NET INCOME (LOSS) $ 5,712 $ (1,441) $ (110) $ - $ 4,161
========== ========== ========== ========== ==========
AVERAGE ASSETS $1,666,330 $ 19,466 $ 193,354 $ (205,565) $1,673,585
========== ========== ========== ========== ==========
TOTAL ASSETS $1,686,955 $ 32,275 $ 194,016 $ (218,786) $1,694,460
========== ========== ========== ========== ==========
11
THREE MONTHS ENDED MARCH 31, 2003
------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS)
COMMUNITY MORTGAGE
BANKING BANKING PARENT ELIMINATIONS TOTAL
---------- ---------- ---------- ------------ ----------
NET INTEREST INCOME $ 15,011 $ 124 $ 55 $ (10) $ 15,180
PROVISION FOR LOAN LOSSES 589 - - - 589
---------- ---------- ---------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 14,422 124 55 (10) 14,591
OTHER INCOME 3,237 2,964 (4) (166) 6,031
OTHER EXPENSES 8,645 2,387 275 (176) 11,131
---------- ---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES 9,014 701 (224) - 9,491
INCOME TAX EXPENSE (BENEFIT) 2,600 273 (130) - 2,743
---------- ---------- ---------- ---------- ----------
NET INCOME (LOSS) $ 6,414 $ 428 $ (94) $ - $ 6,748
========== ========== ========== ========== ==========
AVERAGE ASSETS $1,510,362 $ 55,642 $ 154,576 $ (205,680) $1,514,900
========== ========== ========== ========== ==========
TOTAL ASSETS $1,523,133 $ 57,392 $ 155,093 $ (206,508) $1,529,110
========== ========== ========== ========== ==========
NOTE 8. RECENT ACCOUNTING DEVELOPMENTS
On March 9, 2004, the SEC issued SAB 105, "Application of Accounting Principles
to Loan Commitments" to inform registrants of the Staff's view that the fair
value of the recorded loan commitments, that are required to follow derivative
accounting under Statement 133, Accounting for Derivative Instruments and
Hedging Activities, should not consider the expected future cash flows related
to the associated servicing of the future loan. The provisions of SAB 105 must
be applied to loan commitments accounted for as derivatives that are entered
into after March 31, 2004. Though the Company sells its loans on a servicing
released basis, the Company adopted the provisions of SAB 105 on January 1, 2004
and this had the impact of reducing the fair value of such instruments by
$252,000.
In December 2003, the AICPA issued Statement of Position ("SOP") 03-3
"Accounting for Certain Loans or Debt Securities Acquired in a Transfer". This
statement, which is effective for loans acquired in fiscal years beginning after
December 15, 2004, addresses accounting for differences between contractual cash
flows and cash flows expected to be collected from an investor's initial
investment in loans or debt securities (loans) acquired in a transfer if those
differences are attributable, at least in part, to credit quality. This standard
will require a fair value measure of loans acquired and as such no corresponding
loss reserve will be permitted on all loans acquired in a transfer that are
within the scope of SOP 03-3. The impact of the Standard is prospective and will
require new recognition and measurement techniques upon adoption.
In May 2003 the FASB issued Statement 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity", which
established standards for classification and measurement of certain financial
instruments with characteristics of both liabilities and equity. It requires
that an issuer classify a financial instrument that is within its scope as a
liability (or an asset in some circumstances). Many of those instruments were
previously classified as equity. This Statement is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003 subject to certain deferrals and modifications announced in February 2004.
The adoption of this standard did not materially impact the financial statements
of the Company.
In January 2003, the FASB issued Interpretation No. 46 (FIN 46), Consolidation
of Variable Interest Entities which provides guidance on how to identify a
variable interest entity (VIE) and determine when the assets, liabilities,
non-controlling interests, and results of operations of a VIE need to be
included in a company's consolidated financial statements. A company that holds
variable interests in an entity is required to consolidate the entity if the
company's interest in the VIE is such that the company will absorb a majority of
the VIE's expected losses and/or receive a majority of the entity's expected
residual returns, if they occur. FIN 46 also requires additional disclosures by
primary beneficiaries and other significant variable interest holders. The
provisions of this interpretation became effective upon issuance. In December
2003, the FASB reissued FIN 46. This guidance was effective for interests in
certain VIE's as of December 31, 2003. The adoption of this Statement did not
have a material adverse affect on the financial condition, results of operation
or cash flows of the Company.
In July 2003, the Board of Governors of the Federal Reserve System issued a
supervisory letter instructing bank holding companies to continue to include the
trust preferred securities in their Tier 1 capital for regulatory capital
purposes until notice
12
is given to the contrary. The Federal Reserve intends to review the regulatory
implications of any accounting treatment changes and, if necessary or warranted,
provide further appropriate guidance. There can be no assurance that the Federal
Reserve will continue to allow institutions to include trust preferred
securities in Tier 1 capital for regulatory capital purposes. At March 31, 2004,
$15 million in trust preferred securities issued by FCBI Capital Trust were
outstanding that are treated as Tier 1 capital for bank regulatory purposes. If
FCBI's outstanding trust preferred securities at March 31, 2004 were not treated
as Tier 1 capital at that date, FCBI's Tier 1 leverage capital ratio would have
declined from 8.98% to 8.071%, its Tier 1 risk-based capital ratio would have
declined from 13.41% to 12.06%, and its total risk-based capital ratio would
have declined from 14.71% to 13.35% as of March 31, 2004. These reduced capital
ratios would continue to meet the applicable "well capitalized" Federal Reserve
capital requirements. On May 6, 2004, the Federal Reserve released for comment
its position stating that trust preferred securities will continue to be
included in Tier 1 Capital up to 25% of capital less goodwill.
NOTE 9. EARNINGS PER SHARE
The following schedule details earnings and shares used in computing basic and
diluted earnings per share for the three months ended March 31, 2004 and 2003.
FOR THE THREE MONTHS ENDED
MARCH 31, MARCH 31,
2004 2003
----------- -----------
Basic:
Net income (in thousands) $ 4,161 $ 6,748
Weighted average shares outstanding 11,245,465 10,857,307
Earnings per share $ 0.37 $ 0.62
Diluted:
Net income (in thousands) $ 4,161 $ 6,748
Weighted average shares outstanding 11,245,465 10,857,307
Dilutive shares for stock options 97,786 51,676
Contingently issuable shares for acquisition 4,497 4,498
Weighted average dilutive shares outstanding 11,347,748 10,913,481
Earnings per share-dilutive $ 0.37 $ 0.62
NOTE 10. PROVISION AND ALLOWANCE FOR LOAN LOSSES
The Company's lending strategy stresses quality growth diversified by product,
geography, and industry. All loans made by the Company are subject to common
credit standards and a uniform underwriting system. Loans are also subject to an
annual review process which varies based on the loan size and type. The Company
utilizes this ongoing review process to evaluate loans for changes in credit
risk. This process serves as the primary means by which the Company evaluates
the adequacy of the loan loss allowance. The total loan loss allowance is
divided into the following categories: i) specifically identified losses on loan
relationships which are on non-accrual status, ninety days past due or more and
loans with elements of credit weakness, and ii) formula allowances and special
allocations addressing other qualitative factors including industry
concentrations, economic conditions, staffing and other conditions.
Specific allowances are established to cover loan relationships, which are
identified as having significant cash flow weakness and for which a collateral
deficiency may be present. The allowances established under the specific
identification method are judged based upon the borrower's estimated cash flow
and projected liquidation value of related collateral.
Formula allowances, based on historical loss experience, are available to cover
homogeneous groups of loans not individually evaluated. The formula allowance is
developed and evaluated against loans in general by specific category
(commercial, mortgage, and consumer). The allowance is developed for each loan
category based upon a review of historical loss percentages for the Company and
other qualitative factors. The calculated percentage is considered in
determining the estimated allowance excluding any relationships specifically
identified and individually evaluated. While consideration is given to credit
weaknesses for specific loans and classifications within the various categories
of loans, the allowance is available for all loan losses.
In developing the allowance for loan losses, the Company also considers various
inherent risk factors, such as current economic conditions, the level of
delinquencies and non-accrual loans, trends in the volume and term of loans,
anticipated impact from changes in lending policies and procedures, and any
concentration of credits in certain industries or geographic areas. In addition,
management continually evaluates the adequacy of the allowance for loan losses
and makes specific adjustments to the allowance based on the results of risk
analysis in the credit review process, the recommendation of regulatory
agencies, and other factors, such as loan loss experience and prevailing
economic conditions.
13
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
The Audit Committee of the Board of Directors
First Community Bancshares, Inc.
We have reviewed the accompanying condensed consolidated balance sheet of First
Community Bancshares, Inc. and subsidiary (the Company) as of March 31, 2004,
and the related consolidated statements of income, cash flows and changes in
stockholders' equity for the three month periods ended March 31, 2004 and 2003.
These financial statements are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data, and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with auditing standards generally accepted in the United States,
which will be performed for the full year with the objective of expressing an
opinion regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying consolidated financial statements referred to above
for them to be in conformity with accounting principles generally accepted in
the United States.
We have previously audited, in accordance with auditing standards generally
accepted in the United States, the consolidated balance sheet of the Company as
of December 31, 2003, and the related consolidated statements of income, cash
flows and changes in stockholders' equity for the year then ended (not presented
herein) and in our report dated March 9, 2004, we expressed an unqualified
opinion on those consolidated financial statements. In our opinion, the
information set forth in the accompanying consolidated balance sheet as of
December 31, 2003, is fairly stated, in all material respects, in relation to
the consolidated balance sheet from which it has been derived.
/s/ Ernst & Young LLP
May 4, 2004
14
FIRST COMMUNITY BANCSHARES, INC.
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis is provided to address information about
the Company's financial condition and results of operations. This discussion and
analysis should be read in conjunction with the 2003 Annual Report to
Shareholders on Form 10-K and the other financial information included in this
report.
The Company is a multi-state bank holding company headquartered in Bluefield,
Virginia with total assets of $1.7 billion at March 31, 2004. Through the Bank,
FCBI provides financial and trust and investment advisory services to
individuals and commercial customers through 51 full-service banking locations
in West Virginia, Virginia and North Carolina as well as investment advisory
services through Stone Capital, with offices in Beckley and Bluefield, West
Virginia.
At March 31, 2004, the Company also engaged in mortgage brokerage and
origination through a wholly-owned subsidiary of the Bank, UFM, which has 8
offices throughout Virginia and North Carolina. However, as mentioned in this
report, the Company's plans are to exit the mortgage brokerage and origination
business. The Company has entered into a letter of intent with certain present
executive officers of UFM and hopes to close the transaction in the second
quarter of 2004, subject to execution of a definitive agreement and satisfaction
of the conditions which will be set forth therein.
FORWARD LOOKING STATEMENTS
The Company may from time to time make written or oral "forward-looking
statements", including statements contained in its filings with the Securities
and Exchange Commission ("SEC") (including this Quarterly Report on Form 10-Q
and the Exhibits hereto and thereto), in its reports to stockholders and in
other communications which are made in good faith by the Company pursuant to the
"safe harbor" provisions of the Private Securities Litigation Reform Act of
1995.
These forward-looking statements include, among others, statements with respect
to the Company's beliefs, plans, objectives, goals, guidelines, expectations,
anticipations, estimates and intentions that are subject to significant risks
and uncertainties and are subject to change based on various factors (many of
which are beyond the Company's control). The words "may", "could", "should",
"would", "believe", "anticipate", "estimate", "expect", "intend", "plan" and
similar expressions are intended to identify forward-looking statements. The
following factors, among others, could cause the Company's financial performance
to differ materially from that expressed in such forward-looking statements; the
strength of the United States economy in general and the strength of the local
economies in which the Company conducts operations; the effects of, and changes
in, trade, monetary and fiscal policies and laws, including interest rate
policies of the Board of Governors of the Federal Reserve System; inflation,
interest rate, market and monetary fluctuations; the timely development of
competitive new products and services of the Company and the acceptance of these
products and services by new and existing customers; the willingness of
customers to substitute competitors' products and services for the Company's
products and services and vice versa; the impact of changes in financial
services' laws and regulations (including laws concerning taxes, banking,
securities and insurance); technological changes; the effect of acquisitions,
including, without limitation, the failure to achieve the expected revenue
growth and/or expense savings from such acquisitions; the growth and
profitability of the Company's non-interest or fee income being less than
expected; unanticipated regulatory or judicial proceedings; changes in consumer
spending and saving habits; and the success of the Company at managing the risks
involved in the foregoing.
The Company cautions that the foregoing list of important factors is not
exclusive. The Company does not undertake to update any forward-looking
statement, whether written or oral, that may be made from time to time by or on
behalf of the Company.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
First Community's consolidated financial statements are prepared in accordance
with accounting principles generally accepted in the United States of America
and conform to general practices within the banking industry. First Community's
financial position and results of operations are affected by management's
application of accounting policies, including judgments made to arrive at the
carrying value of assets and liabilities and amounts reported for revenues,
expenses and related disclosures. Different assumptions in the application of
these policies could result in material changes in First Community's
consolidated financial position and/or consolidated results of operations.
Estimates, assumptions, and judgments are necessary principally when assets and
liabilities are required to be recorded at estimated fair value, when a decline
in the value of an asset carried on the financial statements at fair value
warrants an impairment write-down or valuation reserve to be established, or
when an asset or liability needs to be recorded based upon the probability of
occurrence of a future event. Carrying assets and liabilities at fair value
inherently results in more financial statement volatility. The fair values and
the information used to record valuation adjustments for certain assets and
liabilities are based either on quoted market prices or are provided by third
party sources, when available. When third party information
15
is not available, valuation adjustments are estimated in good faith by
management primarily through the use of internal modeling techniques and/or
appraisal estimates.
First Community's accounting policies are fundamental to understanding
Management's Discussion and Analysis of Financial Condition and Results of
Operations. The following is a summary of First Community's more subjective and
complex "critical accounting policies." In addition, the disclosures presented
in the Notes to the Consolidated Financial Statements and in management's
discussion and analysis, provide information on how significant assets and
liabilities are valued in the financial statements and how those values are
determined. Based on the valuation techniques used and the sensitivity of
financial statement amounts to the methods, assumptions, and estimates
underlying those amounts, management has identified the determination of the
allowance for loan losses, the valuation of loans held for sale and the
valuation of derivative instruments utilized in mortgage banking and hedging
activity to be the accounting areas that require the most subjective or complex
judgments.
ALLOWANCE FOR LOAN LOSSES: The allowance for loan losses is established and
maintained at levels management deems adequate to cover losses inherent in the
portfolio as of the balance sheet date and is based on management's evaluation
of the risks in the loan portfolio and changes in the nature and volume of loan
activity. Estimates for loan losses are determined by analyzing historical loan
losses, current trends in delinquencies and charge-offs, plans for problem loan
resolution, the opinions of FCBI's regulators, changes in the size and
composition of the loan portfolio and industry information. Also included in
management's estimates for loan losses are considerations with respect to the
impact of economic events, the outcome of which are uncertain. These events may
include, but are not limited to, a general slowdown in the economy, fluctuations
in overall lending rates, political conditions, legislation that may directly or
indirectly affect the banking industry and economic conditions affecting
specific geographic areas in which First Community conducts business.
As more fully described in the Notes to the Consolidated Financial Statements
and in the discussion included in the Allowance for Loan Losses section of
Management's Discussion and Analysis, the Company determines the allowance for
loan losses by making specific allocations to impaired loans and loan pools that
exhibit inherent weaknesses and various credit risk factors. Allocations to loan
pools are developed giving weight to risk ratings, historical loss trends and
management's judgment concerning those trends and other relevant factors. These
factors may include, among others, actual versus estimated losses, regional and
national economic conditions, business segment and portfolio concentrations,
industry competition and consolidation, and the impact of government
regulations. The foregoing analysis is performed by the Company's credit
administration department to evaluate the portfolio and calculate an estimated
valuation allowance through a quantitative and qualitative analysis that applies
risk factors to those identified risk areas.
This risk management evaluation is applied at both the portfolio level and the
individual loan level for commercial loans and credit relationships while the
level of consumer and residential mortgage loan allowance is determined
primarily on a total portfolio level based on a review of historical loss
percentages and other qualitative factors including concentrations, industry
specific factors and economic conditions. The commercial and commercial real
estate portfolios require more specific analysis of individually significant
loans and the borrower's underlying cash flow, business conditions, capacity for
debt repayment and the valuation of secondary sources of payment (collateral).
This analysis may result in specifically identified weaknesses and corresponding
specific impairment allowances.
The use of various estimates and judgments in the Company's ongoing evaluation
of the required level of allowance can significantly impact the Company's
results of operations and financial condition and may result in either greater
provisions against earnings to increase the allowance or reduced provisions
based upon management's current view of portfolio and economic conditions and
the application of revised estimates and assumptions.
LOANS HELD FOR SALE, DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES: UFM provides
a distribution outlet for the sale of loans produced by UFM's wholesale and
retail operations. It originates residential mortgage loans through its
production offices located in Eastern Virginia and sells the majority of its
loans through pooled commitments to national investors on a servicing released
basis. In addition, UFM acquires loans from a network of wholesale brokers for
subsequent resale to these national investors. UFM originates all loans with the
positive intent to sell. Loans held for sale are stated at the lower of cost or
market ("LOCOM"). The LOCOM analysis on pools of homogeneous loans is applied on
a net aggregate basis. Interest income with respect to loans held for sale is
accrued on the principal amount outstanding. LOCOM valuation techniques
applicable to loans held for sale are based on estimated market price
indications for similar loans. Pricing estimates are established by
participating mortgage purchasers and prevailing economic conditions. The
majority of the loans held for sale have established market pricing indications.
The loans held for sale portfolio at March 31, 2004 was $28.7 million compared
to $18.2 million at December 31, 2003.
Risks associated with this lending function include interest rate risk, which is
mitigated through the utilization of financial instruments (commonly referred to
as derivatives) to assist in offsetting the effect of changing interest rates.
The Company accounts for these instruments in accordance with FASB Statement No.
133, as amended "Accounting for Derivative Instruments and Hedging Activity."
This Statement established accounting and reporting standards for derivative
instruments
16
and for hedging activities. UFM uses forward mortgage contracts and options
(short position sales and options) to manage interest rate risk in the pipeline
of loans and interest rate lock commitments ("RLCs") from the point of the loan
commitment to the subsequent allocation and delivery to outside investors. As a
result of the timing from origination to sale, and the likelihood of changing
interest rates, forward commitments and options are placed with counter-parties
to attempt to counter the effect of changing interest rates. The options and
forward commitments to sell securities are considered to be derivatives and, as
such, are recorded on the consolidated balance sheets at fair value. The changes
in the fair value of derivatives are reflected in the consolidated statements of
income as gain or loss.
The fair value of the RLCs is based on prevailing interest rates, and the
assumed probability of closing (pull-through). The assumption of a given
pull-through percentage also enters into the determination of the volume of
derivative contracts. Pull-through assumptions are continually monitored for
changes in the interest rate environment and characteristics of the pool of
RLCs. Differences between pull-through assumptions and actual pull-through could
result in a mismatch in the volume of security contracts corresponding to RLCs
and lead to volatility in profit margins on the loan products ultimately
delivered. As more fully described in Note 8, to the Notes to Consolidated
Financial Statements under Recent Accounting Developments, effective January 1,
2004, the Company adopted the valuation techniques used to measure loan
commitments in a recent guidance issued by the SEC in Staff Accounting Bulletin
("SAB") 105. SAB 105 indicates that the value of internally generated loans has
little or no value at inception separate from the servicing intangible that is
created upon subsequent sale of the loan. Management applied SAB 105 in the
first quarter of 2004 through the elimination of the servicing component of the
sales price for the RLC valuation, which had a negative impact of $252,000 on
the market value of the commitments outstanding.
The valuation of RLCs is considered critical because of the impact of borrower
behavior and the impact that this behavior pattern will have on the pull-through
ratio during times of significant rate volatility. Customer behavior is modeled
by a mathematical tool based upon historical pull-through experience; however,
substantial volatility can be experienced, as has been the case over the last
year, as a result of the general movement in mortgage rates. As a result,
pull-through has varied significantly over this time period. While customer
behavior is difficult to model, the mathematical tool utilized by UFM
incorporates volatility derived from market data in an attempt to anticipate
borrower reaction to market rate movements and the corresponding desired
security coverage.
At March 31, 2004, UFM held an investment in forward mortgage contracts with a
notional value of $80.0 million and mortgage-backed security put options
totaling $3.0 million. These instruments are collectively referred to as hedging
instruments or securities. These contracts hedge interest rate risk associated
with RLCs and closed loans not allocated to a forward commitment of $89.1
million. At March 31, 2004, the fair value of the securities was a liability of
$194,000, which represents a $22,000 decrease in the fair value of the liability
since December 31, 2003. The fair value of the RLCs at March 31, 2004 declined
from the fair value at December 31, 2003.
For the three months ended March 31, 2004, the Company incurred $695,000 in the
cost of forward mortgage derivative contracts to originate and sell $111.4
million in loans, compared to the first three months of the prior year in which
$223.2 million in loans were originated for sale with underlying forward
mortgage contracts that cost $2.5 million. The lower cost of forward mortgage
contracts between the two periods is reflective of the volatility of the pricing
of these types of contracts during times of significant interest rate
volatility. Although the pricing of the contracts was favorable to the Company
in the current period, UFM's pricing and margin on loans sold were substantially
less favorable as a result of the market pricing dynamics and significant
competitive forces. The significant decrease in hedging cost as well as the
market price of loans sold, demonstrate the potential volatility to earnings and
the sensitivity to pull-through assumptions. The cost of these derivative
contracts is included as a component of mortgage banking income in the
consolidated statements of income, which represents the net revenues associated
with the origination, holding and sale of mortgage loans.
RECENT ACQUISITIONS AND BRANCHING ACTIVITY
The Company acquired PCB Bancorp, Inc., a Tennessee-chartered bank holding
company ("PCB Bancorp") after the close of business on March 31, 2004. PCB
Bancorp has six full service branch offices located in Johnson City, Kingsport
and surrounding areas in Washington and Sullivan Counties in East Tennessee. PCB
Bancorp had total assets of $171 million, loans of $128 million and total
deposits of $150 million as of the date of the merger. The assets, liabilities
and results of operations will be included in the Company's financial statements
beginning with the second quarter 2004.
Under the terms of the merger agreement, shares of PCB Bancorp common stock were
purchased for $40.00 per share in cash. The total deal value, including the
cash-out of outstanding stock options, was approximately $36.0 million.
Concurrent with the PCB Bancorp merger, Peoples Community Bank, the wholly-owned
subsidiary of PCB Bancorp, was merged into First Community Bank, N.A, a
wholly-owned subsidiary of the Company.
17
In June 2003, the Company acquired CommonWealth, a Virginia-chartered commercial
bank for total consideration of approximately $23.2 million. The merger was
accomplished through the exchange of .9015 shares of the Company's common stock
valued at $30.50, cash, or a combination of the Company's stock and cash
equivalent to $30.50 for each share of CommonWealth common stock. At
acquisition, CommonWealth had total assets of $136.5 million, net loans of
$120.0 million and total deposits of $105.0 million.
In the second and third quarters of 2003, the Company opened three de novo
branches in Winston-Salem, North Carolina. The Company does not anticipate that
these branches will be profitable until market development has proven successful
and adequate loan balances and corresponding loan revenue are established to
support the added facilities, infrastructure and other operating costs of these
branches.
As part of the Company's planned expansion into the Central Piedmont area of
North Carolina, the Company also opened two loan production offices in Charlotte
and Mount Airy, North Carolina in February 2004.
In January 2003, the Bank completed the acquisition of Stone Capital, based in
Beckley, West Virginia. This acquisition expanded the Bank's operations to
include a broader range of financial services, including wealth management,
asset allocation, financial planning and investment advice. Stone Capital at
March 31, 2004 had total assets of $61 million under management and continues to
operate under its name. Stone Capital was acquired through the issuance of 8,409
shares of Company common stock, which represents 50% of the total consideration.
In 2003, Stone Capital exceeded the annual revenue requirement outlined in the
acquisition agreement and another 2,541 shares were paid to the original
shareholders subsequent to December 31, 2003. The balance of the remaining
consideration ($175,000) is payable over the next two years in the form of
Company common stock, subject to the achievement of minimum revenue requirements
set forth in the acquisition agreement.
RESULTS OF OPERATIONS
GENERAL
Net income for the first quarter of 2004 totaled $4.2 million as compared with
$6.7 million in the first quarter of 2003. Basic and diluted earnings per share
for the first quarter were $0.37, down from $0.62 in the first quarter of 2003.
When comparing the first quarter 2004 earnings with that of 2003, the reduction
in the Company's earnings was largely attributable to a $1.9 million decline in
net income from the mortgage-banking segment. Reduced loan production and
margins in the segment, combined with an impairment charge of $651,000, produced
the decline in mortgage banking net income. The community-banking segment
reported segment net income of $5.7 million, which represents a decrease from
the community banking segment net income of $6.4 million in the first quarter of
2003. The decrease is attributed, in part, to increased overhead and operating
expense relative to the development and growth of the Company into new markets.
The mortgage banking segment losses led the Board to pursue alternative
strategies including the exit of the mortgage banking business. In the first
quarter, the Company entered into negotiations with certain present executive
officers of UFM which led to a letter of intent for the sale of the mortgage
subsidiary being signed April 16, 2004. As a result, in the first quarter 2004,
the aforementioned $651,000 impairment loss related to the planned disposal of
that subsidiary was recorded. Plans are to close this transaction in the second
quarter of 2004, subject to execution of a definitive agreement and the
satisfaction of the conditions set forth therein.
NET INTEREST INCOME (SEE TABLE I)
Net interest income, the largest contributor to earnings, was $16.0 million for
the three months ended March 31, 2004 compared to $15.2 million for the
corresponding period in 2003. For purposes of the following discussion,
comparison of net interest income is done on a tax equivalent basis, which
provides a common basis for comparing yields on earning assets exempt from
federal income taxes to those which are fully taxable. As indicated in Table I,
tax equivalent net interest income totaled $16.9 million for the three months
ended March 31, 2004, an increase of $0.8 million from the $16.1 million
reported in the first three months of 2003. This $0.8 million increase was based
on a $6.6 million increase in volume as earning assets were added to the
portfolio at declining replacement rates, which was partially offset by a $5.8
million reduction due to rate changes on the underlying assets as asset yields
fell in the declining rate environment. Management was able to help counter the
effect of the declining asset yield through aggressive management of deposit
rates. Average earning assets increased $134.4 million while interest-bearing
liabilities increased $109.6 million. As indicated in Table I, the yield on
average earning assets decreased 68 basis points from 6.76% for the three months
ended March 31, 2003 to 6.08% for the three months ended March 31, 2004.
However, this decrease was largely offset by a 52 basis point decline in the
cost of funds during the same period leaving the net interest rate spread (the
difference between interest income on earning assets and expense on interest
bearing liabilities) lower at 4.10% compared to 4.24% the same period last year.
The Company's tax equivalent net interest margin of 4.41% for the three months
ended March 31, 2004 decreased 23 basis points from 4.64% in 2003.
18
The largest contributor to the decrease in the yield on average earning assets
in 2004, on a volume-weighted basis, was the decrease in the overall tax
equivalent yield on loans held for investment of 78 basis points from the prior
year to 6.79%, as loans repriced downward in response to the declining rate
environment while the average balance increased $109.5 million. The decline in
asset yield is attributable to the current interest rate environment which
creates refinancing or repricing incentives for fixed rate borrowers to lower
their current borrowing costs. In addition, due to the volume of loans directly
tied to prime and other indices that are either adjustable incrementally or are
variable rate advances, asset yields have declined in response to rate cuts and
drops in the prime loan rate which began in 2001 and remain at a level not seen
since 1959.
The balance of average loans held for sale decreased by $34.5 million while the
yield increased 25 basis points to 5.40%. The yield on loans held for sale is
much more sensitive to interest rate change since these loans are only held for
30 to 60 days and are replenished with new loan volume at the then prevailing
rates. The change in rate on this pool of loans is reflective of the volatility
experienced in mortgage rates and the underlying mortgage-backed securities into
which they are delivered.
During the three months ended March 31, 2004, the taxable equivalent yield on
securities available for sale decreased 64 basis points to 4.79% while the
average balance increased by $60.3 million. Consistent with the current rate
environment, the Company and the securities industry as a whole have experienced
rapid turnover in securities as higher yielding securities are either called or
prepaid as the refinancing opportunity presents itself. Although the total
portfolio grew by $60.3 million from March 31, 2003, the relative rate on
securities acquired since that time has declined substantially. The increasing
average security balance is the result of continued reinvestment of available
funds largely created by higher average deposit levels. The first quarter 2004
average balance of investment securities held to maturity decreased by $3.0
million to $37.6 million while the yield decreased 40 basis points to 7.65%
compared to the first quarter 2003.
Compared to the first three months of 2003, average interest-bearing balances
with banks of $63.2 million increased $4.6 million while the yield decreased 18
basis points to 1.27%. This average balance increase was largely the result of
funds received from new deposit growth in existing markets and deposits obtained
in the acquisition of CommonWealth in the second quarter of 2003 as well as the
continued cash flow roll-off experience in the loan and investment portfolio.
The Company actively manages its product pricing by staying abreast of the
current economic climate and competitive forces in order to enhance repricing
opportunities available with respect to the liability side of its balance sheet.
In doing so, the cost of interest-bearing liabilities decreased by 52 basis
points from 2.51% for the three months ended March 31, 2003 to 1.99% for the
same period of 2004 while the average volume increased $109.6 million. Active
deposit liability pricing management is performed weekly.
When comparing the three months ended March 31, 2004 to the corresponding period
of the prior year, the 2004 average balance of FHLB and other short-term
convertible and callable borrowings increased by $45.8 million in 2004 to $145.8
million while the rate decreased 151 basis points to 4.39%, the result of
additional FHLB borrowings (at lower rates) in addition to balances acquired
with the CommonWealth Bank acquisition. The average balance of all other
borrowings increased $7 million for the first three months of 2004 vs. 2003 as a
result of the issuance of $15 million in trust preferred securities and the
repayment of an $8 million FHLB advance while the rate paid decreased 106 basis
points.
Average fed funds and repurchase agreements increased $3.1 million at March 31,
2004, while the average rate decreased 67 basis points compared to the same
period in 2003. In addition, the average balances of interest-bearing demand and
savings deposits increased $34.6 and $11.5 million, respectively, for the first
quarter 2004 while the corresponding average rate paid on these deposit
categories declined 18 and 21 basis points, respectively. Average time deposits
increased $7.7 million while the average rate paid decreased 65 basis points
from 3.14% in 2003 to 2.49% in 2004. The level of average non-interest-bearing
demand deposits increased $28.6 million to $186.1 million at March 31, 2004
compared to the corresponding period of the prior year. Average interest bearing
deposits and non-interest bearing demand deposits for the former CommonWealth
Bank branches totaled $60 million and $23.3 million at March 31, 2004.
19
TABLE I AVERAGE BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS
(DOLLARS IN THOUSANDS)
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 2004 MARCH 31, 2003
AVERAGE INTEREST YIELD/RATE AVERAGE INTEREST YIELD/RATE
BALANCE (1) (1) BALANCE (1) (1)
----------------------- ------------------------------------ -----------
Earning Assets:
Loans (2):
Held for Sale $ 15,110 $ 203 5.40% $ 49,560 $ 629 5.15%
Held for Investment:
Taxable 1,011,752 17,084 6.79% 900,732 16,814 7.57%
Tax-Exempt 4,557 70 6.18% 6,124 120 7.95%
----------------------- ------------------------------------ -----------
Total 1,016,309 17,154 6.79% 906,856 16,934 7.57%
Allowance for Loan Losses (14,728) (14,331)
----------------------- ------------------------
Net Total 1,001,581 17,154 892,525 16,934
Securities Available for Sale:
Taxable 323,887 3,265 4.05% 271,864 3,135 4.68%
Tax-Exempt 101,718 1,806 7.14% 93,464 1,753 7.61%
----------------------- ------------------------------------ -----------
Total 425,605 5,071 4.79% 365,328 4,888 5.43%
Securities Held to Maturity:
Taxable 495 5 4.06% 657 10 6.17%
Tax-Exempt 37,146 711 7.69% 39,959 797 8.09%
----------------------- ------------------------------------ -----------
Total 37,641 716 7.65% 40,616 807 8.05%
Interest Bearing Deposits 63,220 199 1.27% 58,627 209 1.45%
Fed Funds Sold - - 0.00% 2,093 6 1.16%
----------------------- ------------------------------------ -----------
Total Earning Assets 1,543,157 23,343 6.08% 1,408,749 23,473 6.76%
Other Assets 130,428 106,151
------------- --------------
Total $ 1,673,585 $1,514,900
============= ==============
Interest-Bearing Liabilities:
Demand Deposits $ 238,163 $ 326 0.55% $ 203,547 $ 365 0.73%
Savings Deposits 192,636 239 0.50% 181,175 317 0.71%
Time Deposits 606,177 3,750 2.49% 598,520 4,634 3.14%
----------------------- ------------------------------------ -----------
Total Deposits 1,036,976 4,315 1.67% 983,242 5,316 2.19%
Fed Funds Purchased & Repurchase
Agreements 97,316 292 1.21% 94,251 438 1.88%
FHLB Convertible and Callable Advances 145,787 1,591 4.39% 100,000 1,456 5.90%
Other Borrowings 17,033 208 4.91% 10,048 148 5.97%
----------------------- ------------------------------------ -----------
Total Interest-bearing liabilities 1,297,112 6,406 1.99% 1,187,541 7,358 2.51%
Demand Deposits 186,056 157,504
Other Liabilities 12,380 14,633
Stockholders' Equity 178,037 155,222
------------- --------------
Total $ 1,673,585 $1,514,900
============= ==============
Net Interest Income, tax equivalent $16,937 $16,115
========== ==========
Net Interest Rate Spread (3) 4.10% 4.24%
============ ===========
Net Interest Margin (4) 4.41% 4.64%
============ ===========
(1) Fully Taxable Equivalent at the rate of 35%.
(2) Non-accrual loans are included in average balances outstanding but with no
related interest income during the period of non-accrual.
(3) Represents the difference between the yield on earning assets and cost of
funds.
(4) Represents tax equivalent net interest income divided by average interest
earning assets.
20
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained at a level sufficient to absorb
probable loan losses inherent in the loan portfolio. The allowance is increased
by charges to earnings in the form of provisions for loan losses and recoveries
of prior loan charge-offs, and decreased by loans charged off. The provision for
loan losses is calculated to bring the allowance to a level, which, according to
a systematic process of measurement, reflects the amount needed to absorb
probable losses within the portfolio.
Management performs monthly assessments to determine the appropriate level of
allowance. Differences between actual loan loss experience and estimates are
reflected through adjustments that are made by either increasing or decreasing
the loss provision based upon current measurement criteria. Commercial, consumer
and mortgage loan portfolios are evaluated separately for purposes of
determining the allowance. The specific components of the allowance include
allocations to individual commercial credits and allocations to the remaining
non-homogeneous and homogeneous pools of loans. Management's allocations are
based on judgment of qualitative and quantitative factors about both macro and
micro economic conditions reflected within the portfolio of loans and the
economy as a whole. Factors considered in this evaluation include, but are not
necessarily limited to, probable losses from loan and other credit arrangements,
general economic conditions, changes in credit concentrations or pledged
collateral, historical loan loss experience, and trends in portfolio volume,
maturities, composition, delinquencies, and non-accruals. While management has
attributed the allowance for loan losses to various portfolio segments, the
allowance is available for the entire portfolio.
The allowance for loan losses was $14.5 million on March 31, 2004, compared to
$14.6 million at December 31, 2003 and $13.8 million on March 31, 2003. The
allowance for loan losses represents 405% of non-performing loans at March 31,
2004, versus 488.6% and 343% at December 31, 2003 and March 31, 2003,
respectively. When other real estate is combined with non-performing loans, the
allowance equals 236% of non-performing assets at March 31, 2003 versus 288% and
210% at December 31, 2003 and March 31, 2003, respectively. The increase in the
allowance since March 2003 is primarily attributable to the acquisition of
CommonWealth Bank and the application of risk factors specific to this
portfolio. The allowance attributable to the CommonWealth Bank portfolio at the
date of acquisition was $1.6 million.
FCBI's allowance for loan loss activity for the three month periods ended March
31, 2004 and 2003 are as follows:
FOR THE THREE MONTHS ENDED
MARCH 31,
2004 2003
-------- --------
(DOLLARS IN THOUSANDS)
Beginning balance $ 14,624 $ 14,410
Provision 532 589
Charge-offs (911) (1,668)
Recoveries 291 451
-------- --------
Ending Balance $ 14,536 $ 13,782
======== ========
Based on the allowance for loan losses of approximately $14.5 million, $14.6
million and $13.8 million at March 31, 2004, December 31, 2003 and March 31,
2003, respectively, the allowance to loans held for investment ratio was 1.43 at
both March 31, 2004 and December 31, 2003 vs. 1.54 for March 31, 2003.
Management considers the allowance adequate based upon its analysis of the
portfolio as of March 31, 2004.
The provision for loan losses for the three month period ended March 31, 2004
decreased slightly to $532,000 when compared to the three month period ending
March 31, 2003 at $589,000. The decrease is largely attributable to improving
asset quality and loan loss history, changes in risk factors assigned and a
decline in volume within certain portfolio segments. Net charge-offs for the
first three months of 2004 and the corresponding period of 2003 were $620,000
and $1.2 million, respectively. Expressed as a percentage of average loans held
for investment, net charge-offs decreased from 0.13% for the three month period
of 2003 to 0.06% for the same period of 2004. The decrease in net charge-offs is
primarily attributable to an approximate $1 million charge-off that occurred
during the first quarter 2003.
NON-INTEREST INCOME
Non-interest income consists of all revenues which are not included in interest
and fee income related to earning assets. Total non-interest income decreased
approximately $2.3 million, or 37.8%, from $6.0 million for the three months
ended March 31, 2003 to $3.8 million for the corresponding period in 2004. While
service charges on deposit accounts and other service
21
charges, commissions and fees reflected gains of 7.6% and 9%, respectively, the
non-interest income category decreased because of the decrease of $2.5 million
in mortgage banking income.
Non-interest income in the mortgage banking subsidiary, UFM, declined from $3.0
million in 2003 to $507,000 in 2004. The end of unprecedented refinance activity
in the latter half of 2003, coupled with rate volatility and changes in price
expectations by national investors who buy these loans and brokers who provide
wholesale production, as well as the impact of SAB 105, caused a decline in the
fair value of the mortgage pipeline, related securities and mortgage earnings.
The following table details the components of UFM's mortgage banking income
included in non-interest income for the periods ended March 31.
MORTGAGE BANKING INCOME Loan Sales and Settlement Component:
MARCH 31,
2004 2003
--------- --------
(AMOUNTS IN THOUSANDS)
Other Service Charges, Commissions & Fees $ 131 $ 360
Gain on Sale of Loans 952 4,752
Fee Income 334 620
Loss on Derivatives Settled (637) (2,520)
Option Expense (58) -
------- -------
722 3,212
Mark-to-Market Component:
Mark to Market Losses on Loan Commitments(1) (238) (578)
Mark to Market on Securities 23 330
------- -------
(215) (248)
------- -------
TOTAL MORTGAGE BANKING INCOME $ 507 $ 2,964
======= =======
MARCH 31,
2004 2003
--------- --------
(AMOUNTS IN THOUSANDS)
Interest Rate Lock Commitments:
Notional Value $82,609 $85,536
Fair Value(1) 60 1,805
Securities:
Notional Value 83,000 80,000
Fair Value (194) (375)
(1) Reflects the adoption of SAB 105, effective January 1, 2004.
At March 31, 2004, UFM held an investment in forward mortgage contracts with a
notional value of $80 million and mortgage-backed security put options totaling
$3 million. These contracts are used in an attempt to hedge interest rate risk
associated with RLCs and closed loans not allocated to a forward commitment of
$89.1 million. At March 31, 2004, the fair value of the securities was a
liability of $194,000, which represents a $22,000 reduction in the fair value of
the liability since December 31, 2003. In addition, the fair value of the RLCs
at March 31, 2004 was recorded in accordance with recent guidance issued by the
SEC under SAB 105 was recorded as $60,000. The market valuation of RLCs at March
31, 2004 assumes a 63.81% RLC pull-through. If actual pull-through in succeeding
months proves to be more or less than 63.81%, the full market value of RLCs may
or may not be realized and/or the valuation of RLCs may change.
For the period ended March 31, 2004, the Company incurred $695,000 in the cost
of forward mortgage derivative contracts and options to originate and sell
$111.4 million in loans compared to the prior year in which $223.2 million in
loans were originated for sale with underlying forward mortgage contracts that
cost $2.5 million. The cost of forward mortgage contracts between the two
periods is reflective of the volatility of the pricing of these types of
contracts during times of significant interest rate volatility. Although the
pricing of the contracts was favorable to the Company in the current year, UFM's
pricing and margin on loans sold were substantially less favorable as a result
of the market pricing dynamics and significant competitive forces. The
significant decrease in hedging cost, as well as the market price of loans sold,
demonstrates the potential volatility to earnings and the sensitivity to
pull-through assumptions. The cost of these derivative contracts is included as
a component of mortgage banking income in the consolidated statements of income,
which represents the net revenues associated with the origination, holding and
sale of mortgage loans.
22
NON-INTEREST EXPENSE
Non-interest expense totaled $13.4 million for 2004, increasing $2.2 million, or
20% over the first quarter of 2003. This increase is primarily attributable to
an $880,000 increase in salaries and benefits as a result of the addition of
CommonWealth Bank in June 2003 ($431,000), the salaries and benefits associated
with three North Carolina de novo branches opened in 2003 as well as the opening
of two new North Carolina loan production offices in the first quarter of 2004
($255,000) as well as a general increase in salaries and benefits as staffing
needs at several locations were satisfied in order to support added corporate
services and continued branch growth.
In 2004, occupancy and furniture and equipment expense increased by $245,000
compared to 2003. The general level of occupancy cost grew largely as a result
of the CommonWealth Bank acquisition ($90,000) as well as increases in
depreciation and insurance costs associated with new de novo branches ($51,000)
and depreciation associated with a significant investment in operating equipment
and technology infrastructure.
All other operating expense accounts increased $1.1 million, compared to 2003.
This increase included the previously discussed $651,000 impairment charge
related to the mortgage banking segment and increases in other operating
expenses largely related to the additional costs and other operating expenses
associated with the opening of three new branches in Winston-Salem and two loan
production offices in Charlotte and Mount Airy, North Carolina, the acquisition
of The CommonWealth Bank in Richmond, Virginia.
INCOME TAX
The effective income tax rate continues to benefit from the utilization of
tax-exempt municipal securities. Municipal securities, which have offered an
attractive tax equivalent yield, have assisted in countering the effect of the
declining interest rate environment. The Company's effective tax rate was 29.4%
for the three months ended March 31, 2004 and 28.9% for the three months ended
March 31, 2003.
FINANCIAL POSITION
SECURITIES
Securities held to maturity totaled $37.4 million at March 31, 2004, a slight
decrease of $595,000 from December 31, 2003, the result of paydowns, maturities
and calls within the portfolio during the first three months of 2004. The market
value of investment securities held to maturity was 105.9% and 105.4% of book
value at March 31, 2004 and December 31, 2003, respectively. Recent trends in
interest rates have had little effect on the underlying market value since
December 31, 2003.
Securities available for sale were $443.8 million at March 31, 2004 compared to
$444.5 million at December 31, 2003, a decrease of $647,000. This change
reflects the purchase of $43.4 million in securities, $46.4 million in
maturities and calls, and a market value increase of approximately $2.8 million,
along with the continuation of larger pay-downs on mortgage-backed securities
and collateralized mortgage obligations triggered by the low interest rate
environment. Securities available for sale are recorded at their estimated fair
market value. The unrealized gain or loss, which is the difference between
amortized cost and estimated market value, net of related deferred taxes, is
recognized in the stockholders' equity section of the balance sheet as either
accumulated other comprehensive income or loss. The unrealized gains after taxes
of $6.7 million at March 31, 2004, represent an increase of $1.7 million from
the $5.0 million gain at December 31, 2003 due to market value increases in the
first three months of 2004.
Although substantial investment has been made in the available for sale security
portfolio, the Company has attempted to maintain a shorter portfolio duration
(the cash-weighted term to maturity of the portfolio) to reduce the sensitivity
of the bonds price to changes in interest rates and lessen interest rate risk.
The longer the duration, the greater the impact of changing market rates for
similar instruments. At March 31, 2004, the average estimated life of the
investment portfolio was 4.6 years (reflective of currently anticipated
prepayments). This compares to 4.2 years at December 31, 2003. The approximate 4
month increase in average duration reflects the substantial amount of portfolio
replacement over the last twelve months and investment in longer-term municipal
securities.
LOAN PORTFOLIO
LOANS HELD FOR SALE: The relative size of the portfolio of loans originated by
the Company's mortgage brokerage division, UFM, and held for sale, was impacted
significantly by the refinancing activity that occurred during 2003 and
continues into 2004 as a result of the low interest rate environment. Loans held
for sale fluctuate on a daily basis reflecting retail originations, wholesale
purchases and sales to investors. At March 31, 2004, loans held for sale were
$28.7 million compared to $18.2
23
million at December 31, 2003. Average loans held for sale (which is a better
indicator of volume maintained) for the first quarter 2004, was down by 17%,
when comparing the first quarter 2004 average of $15.1 million to the trailing
quarter average of $18.2 million and down 70% compared to the first quarter 2003
average of $49.6 million.
LOANS HELD FOR INVESTMENT: Total loans held for investment decreased $6.4
million to $1.02 billion at March 31, 2004 because of several large payoffs, but
increased $122.6 million compared to March 31, 2003 as a result of the
CommonWealth Bank acquisition. Considering a $17.1 million increase in deposits
along with the decrease in loans during the first three months of 2004, the loan
to deposit ratio decreased slightly at March 31, 2004 compared to the December
31, 2003 level. The loan to deposit ratio, using only loans held for investment
(excluding loans held for sale), was 82.1% on March 31, 2004, 83.7% on December
31, 2003 and 77.8% on March 31, 2003. Intense competition for loans in the face
of low interest rates and what appears to be slower loan demand continue to
impact this measure of loan production. Resulting liquidity during the period
has been reinvested in the available for sale securities portfolio.
2004 first quarter average loans held for investment of $1.02 billion decreased
by $18.5 million compared to the trailing quarter 2003 average of $1.03 billion
but increased $109.5 million when compared to the first quarter average of 2003.
This increase compared to the first quarter 2003, was due to the CommonWealth
Bank acquisition; as the branches acquired reflected approximately $120 million
in average loans held for investment.
The held for investment loan portfolio continues to be diversified among loan
types and industry segments. The following table presents the various loan
categories and changes in composition as of March 31, 2004, December 31, 2003
and March 31, 2003.
LOAN PORTFOLIO OVERVIEW
(DOLLARS IN THOUSANDS)
MARCH 31, 2004 DECEMBER 31, 2003 MARCH 31, 2003
------------------------- ------------------------- -------------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
---------- ---------- ---------- ---------- ---------- ----------
LOANS HELD FOR INVESTMENT:
Commercial and Agricultural $ 63,322 6.21% $ 69,395 6.76% $ 59,724 6.66%
Commercial Real Estate 320,032 31.39% 317,421 30.94% 270,004 30.10%
Residential Real Estate 412,373 40.44% 421,288 41.05% 361,883 40.33%
Construction 106,219 10.42% 98,510 9.60% 78,576 8.76%
Consumer 115,631 11.34% 118,585 11.56% 126,241 14.07%
Other 2,252 0.22% 992 0.10% 766 0.09%
---------- ---------- ---------- ---------- ---------- ----------
Total $1,019,829 100.00% $1,026,191 100.00% $ 897,194 100.00%
========== ========== ========== ========== ========== ==========
LOANS HELD FOR SALE $ 28,656 $ 18,152 $ 50,753
========== ========== ==========
NON-PERFORMING ASSETS
Non-performing assets include loans on non-accrual status, loans contractually
past due 90 days or more and still accruing interest and other real estate owned
("OREO"). Non-performing assets were $6.2 million at March 31, 2004, $5.1
million at December 31, 2003 and $6.6 million at March 31, 2003, or 0.6%, 0.5%
and 0.7% of total loans and OREO, respectively. The following schedule details
non-performing assets by category at the close of each of the last five
quarters:
(IN THOUSANDS OF DOLLARS) MARCH 31 DECEMBER 31 SEPTEMBER 30 JUNE 30 MARCH 31
2004 2003 2003 2003 2003
------ ------ ------ ------ ------
Nonaccrual $3,588 $2,993 $2,277 $2,547 $3,997
Ninety Days Past Due and Accruing - - 124 86 21
Other Real Estate Owned 2,571 2,091 2,403 2,787 2,544
------ ------ ------ ------ ------
$6,159 $5,084 $4,804 $5,420 $6,562
====== ====== ====== ====== ======
Restructured loans
performing in accordance
with modified terms $ 392 $ 356 $ 362 $ 368 $ 341
====== ====== ====== ====== ======
24
At March 31, 2004, non-accrual loans increased $595,000 from December 31, 2003,
while ninety day past due and accruing loans outstanding remained at zero for
both periods. Ongoing activity within the classification and categories of
non-performing loans continues to include collections on delinquencies,
foreclosures and movements into or out of the non-performing classification as a
result of changing customer business conditions. The $595,000 increase in
non-accrual loans during the first quarter of 2004 is largely the result of an
addition of a commercial real estate loan in the amount of $903,000, while
certain non-accrual loans were paid, moved to a current status as a result of
improved performance, or were liquidated through foreclosure or repossession.
OREO increased $480,000 during the first quarter of 2004 from December 31, 2003
as a result of foreclosure on a commercial real estate loan previously on
non-accrual, in the amount of $500,000. Other real estate owned is carried at
the lesser of estimated net realizable fair market value or cost.
In addition to loans which are classified as non-performing and impaired, the
Company closely monitors certain loans which could develop into problem loans.
These potential problem loans present characteristics of weakness or
concentrations of credit to one borrower. Among these loans at March 31, 2004
was a loan of $12.8 million which warrants close monitoring of a borrower within
the hospitality industry. The loan represents the retained portion of a $16
million total loan shared with a participating bank. As with other hospitality
industry firms, the borrower has experienced reduced cash flow associated with
declines in the level of hotel occupancy. The loan is secured by real estate
improved with a national franchise hotel and parking building in a major
southeast city. The loan is further secured by the guarantee of the principals
of the borrowing entity. This loan, which was originated in 1999, performed
according to terms until it displayed delinquency in February and March 2003 and
was subsequently brought current. The loan remains current as to principal and
interest at March 31, 2004. This loan does, however, represent one of the
Company's largest credits and is within an industry which has suffered from
declining performance in recent years.
The Company is also monitoring a $3.1 million loan to a hospitality borrower for
a new property opened in 2003. The construction and opening of the hotel which
secures this loan was delayed and occupancy has not reached projected levels
necessary to adequately fund current debt service requirements. The loan is
guaranteed by the principals and is senior to a $1.3 million loan by the SBA.
The $3.1 million senior loan was 79 days delinquent on April 30, 2004. A
subsequent payment brought the loan to 57 days delinquent as of the filing date
of this report. The borrower has requested conversion to interest only payments
for one year to allow time for stabilization of occupancy and cash flow for the
property. Management does not consider this loan impaired. The Company has
delayed consideration of the modification request until the principals restore
the loan to current status and pending the Company's request for additional
collateral. The ultimate resolution of the issues dealing with the modification
is not expected to have a material adverse effect on consolidated financial
statements.
There were no specific allocations of the allowance for loan losses for the
$12.8 million loan; however, a $300,000 allocation was assigned to the $3.1
million loan as of March 31, 2004. These loans were appropriately considered in
evaluating the adequacy of the allowance for loan losses.
DEPOSITS AND OTHER BORROWINGS
Total deposits have grown $17.1 million or 1.4% since year-end 2003. In terms of
composition, non-interest-bearing deposits increased $3.2 million or 1.7% while
interest-bearing deposits grew $13.9 million or 1.4% from December 31, 2003.
Since March 31, 2003, non-interest bearing deposits grew $34.3 million and
interest-bearing deposits grew $54.7 million, largely the result of the
CommonWealth Bank acquisition in June 2003.
The Company acquired an additional $17.5 million in borrowed funds from the FHLB
with the acquisition of CommonWealth Bank and borrowed an additional $25 million
from the FHLB in June 2003. These increases together with a decrease due to the
repayment of a line of credit used to fund mortgages held by UFM brought the
Company's borrowings at March 31, 2003 to $136.3 million in convertible and
callable advances and $8.3 million of noncallable term advances from the FHLB of
Atlanta. For further discussion of FHLB borrowings, see Note 4 to the unaudited
consolidated financial statements included in this report. In addition, FCBI
issued trust preferred securities in September 2003 of $15.0 million which is
also included in the total borrowings of the Company.
STOCKHOLDERS' EQUITY
Total stockholders' equity reached $178.0 million at March 31, 2004, increasing
$3 million from the $175.0 million reported at December 31, 2003 through
earnings of $4.2 million less dividends paid of $2.8 million, an increase in
other comprehensive income of $1.7 million, increases of $87,000 due to Stone
Capital payments, a $34,000 increase due to stock option exercises and a net
decrease due to treasury share transactions of $161,000.
The Federal Reserve's risk based capital guidelines and leverage ratio measure
capital adequacy of banking institutions. Risk-based capital guidelines weight
balance sheet assets and off-balance sheet commitments based on inherent risks
associated with the respective asset types. At March 31, 2004, the Company's
total risk adjusted capital-to-asset ratio was 14.71% versus
25
14.55% at December 31, 2003. The Company's leverage ratio at March 31, 2004 was
8.98% compared with 8.83% at December 31, 2003. Both the risk adjusted
capital-to-asset ratio and the leverage ratio exceed the current
well-capitalized levels prescribed for banks of 10% and 5%, respectively.
PART I. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
LIQUIDITY AND CAPITAL RESOURCES
The Company maintains a significant level of liquidity in the form of cash and
cash equivalent balances ($78.6 million), investment securities available for
sale ($443.8 million) and Federal Home Loan Bank credit availability of
approximately $361.8 million. Cash and cash equivalents as well as advances from
the Federal Home Loan Bank are immediately available for satisfaction of deposit
withdrawals, customer credit needs and operations of the Company. Investment
securities available for sale represent a secondary level of liquidity available
for conversion to liquid funds in the event of extraordinary needs. The Company
also maintains approved lines of credit with correspondent banks as backup
liquidity sources.
The Company maintains a liquidity policy as a means to manage the liquidity risk
process and associated risk. The policy includes a Liquidity Contingency Plan
that is designed as a tool for the Company to detect liquidity issues promptly
in order to protect depositors, creditors and shareholders. The Plan includes
monitoring various internal and external indicators such as changes in core
deposits and changes in market conditions. It provides for timely responses to a
wide variety of funding scenarios ranging from changes in loan demand to a
decline in the Company's quarterly earnings to a decline in the market price of
the Company's stock. The Plan calls for specific responses designed to meet a
wide range of liquidity needs based upon assessments on a recurring basis by
management and the Board of Directors.
INTEREST RATE RISK (IRR) AND ASSET/LIABILITY MANAGEMENT
While the Company continues to strive to decrease its dependence on net interest
income, the Bank's profitability is dependent to a large extent upon its ability
to manage its net interest margin. The Bank, like other financial institutions,
is subject to interest rate risk to the degree that its interest-earning assets
reprice differently than its interest-bearing liabilities. The Bank manages its
mix of assets and liabilities with the goals of limiting its exposure to
interest rate risk, ensuring adequate liquidity, and coordinating its sources
and uses of funds. Specific strategies for management of IRR have included
shortening the amortized maturity of fixed-rate loans and increasing the volume
of adjustable rate loans to reduce the average maturity of the Bank's
interest-earning assets.
The Company's risk profile continues to reflect a position that is asset
sensitive. The substantial level of prepayments and calls on loans and
securities are consistent with the low rate environment that prevailed over the
past year, as well as the success of deposit funding campaigns instituted have
led to a strong liquidity position as reflected in the level of cash reserves
and due from balances of approximately $78.6 million. The Company continues to
reinvest the funds generated from asset paydowns and prepayments within a
framework that attempts to maintain an acceptable net interest margin in the
current interest rate environment. In addition, the mortgage operations of UFM
use investments commonly referred to as "forward" transactions and "options" or
derivatives to balance the risk inherent in interest rate lock commitments made
to prospective borrowers. The pipeline of loans is hedged to mitigate unusual
fluctuations in the cash flows derived upon settlement of the loans with
secondary market purchasers and, consequently, to achieve a desired margin upon
delivery. The hedge transactions are used for risk mitigation and are not for
trading purposes. The derivative financial instruments represented by these
hedging transactions are recorded at fair value in the Consolidated Balance
Sheets and the changes in fair value are reflected in the Consolidated
Statements of Income.
In addition, UFM utilizes mortgage derivative contracts as an interest rate risk
management tool to hedge against exposure to changing interest rates as loan
commitments are originated. A more complete discussion of loans held for sale,
derivative instruments and hedging activities and the underlying impact is
included within the Application of Critical Accounting Policies section of the
Management's Discussion and Analysis included herein. The Company's earnings
sensitivity measurements completed on a quarterly basis indicate that the
performance criteria, against which sensitivity is measured, are currently
within the Company's defined policy limits. A more complete discussion of the
overall interest rate risk is included in the Company's annual report on Form
10-K for December 31, 2003.
PART I. ITEM 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer along with the
Company's Chief Financial Officer, of the effectiveness of the design and
operation of the Company's disclosure controls and procedures pursuant to the
Securities Exchange Act of 1934 ("Exchange Act") Rule 13a-15(b). Based upon that
evaluation, the Company's Chief Executive Officer along with the Company's Chief
Financial Officer concluded that the Company's
26
disclosure controls and procedures are effective in timely alerting them to
material information relating to the Company (including its consolidated
subsidiaries) required to be included in the Company's periodic SEC filings.
There has not been any change in the Company's internal control over financial
reporting that occurred during the Company's most recent fiscal quarter that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
Disclosure controls and procedures are Company controls and other procedures
that are designed to ensure that information required to be disclosed by the
Company in the reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed by the Company in the reports that it files or submits
under the Exchange Act is accumulated and communicated to the Company's
management, including the Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow timely decisions regarding required disclosure.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is currently a defendant in various legal actions and asserted
claims involving lending and collection activities and other matters in the
normal course of business. While the Company and legal counsel are unable to
assess the ultimate outcome of each of these matters with certainty, they are of
the belief that the resolution of these actions should not have a material
adverse affect on the financial position of the Company.
In November 2003, the Company was sued by two former employees of The
CommonWealth Bank, alleging among other things, violation of employment law and
breach of contract, stemming from their termination. The Company and counsel
believe that the lawsuit, which seeks damages of more than $180,000 plus certain
retirement and employee benefits along with punitive damages for each of the two
former employees of The CommonWealth Bank is without merit, and intends to
vigorously defend this matter.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table sets forth purchases by the Company (on the open market) of
its equity securities during the quarter ended March 31, 2004.
(c) ISSUER PURCHASES OF EQUITY SECURITIES
MAXIMUM
NUMBER OF
TOTAL NUMBER OF SHARES THAT
TOTAL # OF AVERAGE SHARES PURCHASED MAY YET BE
SHARES PRICE PAID AS PART OF PUBLICLY PURCHASED
PURCHASED PER SHARE ANNOUNCED PLAN UNDER THE PLAN
------------- ------------ ---------------------- -----------------
January 1-31, 2004 - - - 300,053
February 1-29, 2004 - - - 300,053
March 1-31, 2004 5,000 $ 32.05 5,000 295,053
------------- ------------ ----------------------
Total 5,000 $ 32.05 5,000
============= ============ ======================
The Company's stock repurchase plan allowing the purchase of up to 436,000
shares was announced September 18, 2001 and amended by the Board on March 18,
2003 to purchase up to 500,000 shares. The plan has no expiration date and no
plans have expired during the reporting quarter. No determination has been made
to terminate the plan or to stop making purchases.
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
27
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
- -------------------- ------------------------------------------------------------------------------------------------
EXHIBIT NO. EXHIBIT
- -------------------- ------------------------------------------------------------------------------------------------
2.1 Agreement and Plan of Merger dated as of January 27, 2003, and amended as of February 25,
2003, among First Community Bancshares, Inc., First Community Bank, National Association, and
The CommonWealth Bank.(1)
- -------------------- ------------------------------------------------------------------------------------------------
3(i) Articles of Incorporation of First Community Bancshares, Inc., as amended.(2)
- -------------------- ------------------------------------------------------------------------------------------------
3(ii) Bylaws of First Community Bancshares, Inc., as amended.(2)
- -------------------- ------------------------------------------------------------------------------------------------
4.1 Specimen stock certificate of First Community Bancshares, Inc.(7)
- -------------------- ------------------------------------------------------------------------------------------------
4.2 Indenture Agreement dated September 25, 2003.(13)
- -------------------- ------------------------------------------------------------------------------------------------
4.3 Amended and Restated Declaration of Trust of FCBI Capital Trust dated September 25, 2003.(13)
- -------------------- ------------------------------------------------------------------------------------------------
4.4 Preferred Securities Guarantee Agreement dated September 25, 2003.(13)
- -------------------- ------------------------------------------------------------------------------------------------
10.1 First Community Bancshares, Inc. 1999 Stock Option Contracts(2) and Plan.(3)
- -------------------- ------------------------------------------------------------------------------------------------
10.1.1* Amendment to the First Community Bancshares, Inc. 1999 Stock Option Plan
- -------------------- ------------------------------------------------------------------------------------------------
10.2 First Community Bancshares, Inc. 2001 Non-Qualified Directors Stock Option Plan.(4)
- -------------------- ------------------------------------------------------------------------------------------------
10.3 Employment Agreement dated January 1, 2000 and amended October 17, 2000, between First
Community Bancshares, Inc. and John M. Mendez.(2)(5)
- -------------------- ------------------------------------------------------------------------------------------------
10.4 First Community Bancshares, Inc. 2000 Executive Retention Plan.(3)
- -------------------- ------------------------------------------------------------------------------------------------
10.5 First Community Bancshares, Inc. Split Dollar Plan and Agreement.(3)
- -------------------- ------------------------------------------------------------------------------------------------
10.6 First Community Bancshares, Inc. 2001 Directors Supplemental Retirement Plan.(2)
- -------------------- ------------------------------------------------------------------------------------------------
10.7 First Community Bancshares, Inc. Wrap Plan.(7)
- -------------------- ------------------------------------------------------------------------------------------------
10.8 Employment Agreement between First Community Bancshares, Inc. and J. E. Causey Davis.(8)
- -------------------- ------------------------------------------------------------------------------------------------
10.9 Agreement and Plan of Merger dated as of December 31, 2003 among First Community Bancshares,
Inc., First Community Bank, National Association and PCP Bancorp.(9)
- -------------------- ------------------------------------------------------------------------------------------------
10.10 Form of Indemnification Agreement between First Community Bancshares, its Directors and
Certain Executive Officers.(10)
- -------------------- ------------------------------------------------------------------------------------------------
10.11 Form of Indemnification Agreement between First Community Bank, N. A., its Directors and
Certain Executive Officers.(10)
- -------------------- ------------------------------------------------------------------------------------------------
10.12 First Community Bancshares 2004 Omnibus Stock Option Plan.(12)
- -------------------- ------------------------------------------------------------------------------------------------
11.0 Statement regarding computation of earnings per share.(6)
- -------------------- ------------------------------------------------------------------------------------------------
12.1 Code of Ethics.(11)
- -------------------- ------------------------------------------------------------------------------------------------
15.0* Consent of Independent Auditors.
- -------------------- ------------------------------------------------------------------------------------------------
31.1* Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
- -------------------- ------------------------------------------------------------------------------------------------
31.2* Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
- -------------------- ------------------------------------------------------------------------------------------------
32* Certification of Chief Executive and Chief Financial Officer Section 1350
- -------------------- ------------------------------------------------------------------------------------------------
* Furnished herewith.
28
(1) Incorporated by reference to the corresponding exhibit previously filed as
an exhibit to the Form 8-K filed with the Commission on January 28, 2003
and February 26, 2003.
(2) Incorporated by reference from the Quarterly Report on Form 10-Q for the
period ended June 30, 2002 filed on August 14, 2002.
(3) Incorporated by reference from the Annual Report on Form 10-K for the
period ended December 31, 1999 filed on March 30, 2000 as amended April 13,
2000.
(4) The options agreements entered into pursuant to the 1999 Stock Option Plan
and the 2001 Non-Qualified Directors Stock Option Plan are incorporated by
reference from the Quarterly Report on Form 10-Q for the period ended June
30, 2002 filed on August 14, 2002.
(5) First Community Bancshares, Inc. has entered into substantially identical
agreements with Messrs. Buzzo and Lilly, with the only differences being
with respect to titles, salary and the use of a vehicle.
(6) Incorporated by reference from Footnote 9 of the Notes to Consolidated
Financial Statements included herein.
(7) Incorporated by reference from the Annual Report on Form 10-K for the
period ended December 31, 2002 filed on March 25, 2003 as amended on March
31, 2003.
(8) Incorporated by reference from S-4 Registration Statement filed on March
28, 2003.
(9) Incorporated by reference to the corresponding exhibit previously filed as
an exhibit to the Form 8-K filed with the Commission on December 31, 2003.
(10) Form of indemnification agreement entered into by the Corporation and by
First Community Bank N. A. with their respective directors and certain
officers of each including, for the registrant and Bank: John M. Mendez,
Robert L. Schumacher, Robert L. Buzzo, Kenneth P. Mulkey, E. Stephen Lilly
and at the Bank level: Samuel L. Elmore. Incorporated by reference from the
Annual Report on Form 10-K for the period ended December 31, 2002 filed on
March 25, 2003 as amended on March 31, 2003.
(11) Incorporated by reference from the Annual Report Filed on Form 10-K for the
period ended December 31, 2003 filed on March 26, 2004.
(12) Incorporated by reference from the 2004 First Community Bancshares
Definitive Proxy filed on March 19, 2004.
(13) Incorporated by reference from the Quarterly Report on Form 10-Q for the
period ended September 30, 2003 filed on November 10, 2003.
(b) Reports on Form 8-K
A report on Form 8-K was filed on January 27, 2004 announcing the Company's
fourth quarter and year-to-date 2003 earnings.
A report on Form 8-K was filed on March 4, 2004 announcing the declaration
of the Company's first quarter dividend of $0.25 per share payable on or
about March 29, 2004 to stockholders of record on March 15, 2004.
29
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: May 7, 2004
/s/ John M. Mendez
- --------------------------------------------
John M. Mendez
President & Chief Executive Officer
(Duly Authorized Officer)
DATE: May 7, 2004
/s/ Robert L. Schumacher
- --------------------------------------------
Robert L. Schumacher
Chief Financial Officer
(Principal Accounting Officer)
30
Index to Exhibits
Exhibit No.
10.1.1 Amendement to First Community Bancshares, Inc. 1999 Stock Option Plan.
15.0 Consent of Independent Auditors
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.
32.0 Certification of Chief Executive and Chief Financial Officer Section 1350.
31