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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: September 30, 2002
------------------
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from:__________________ to __________________
Commission File 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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at October 31, 2002
Common Stock, $1 Par Value 9,888,482
-----------------
First Community Bancshares, Inc.
FORM 10-Q
For the quarter ended September 30, 2002
INDEX
PART I. FINANCIAL INFORMATION REFERENCE
---------
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 2002 and
December 31, 2001 3
Consolidated Statements of Income for the Three and Nine
Month Periods Ended September 30, 2002 and 2001 4
Consolidated Statements of Cash Flows for the
Nine Month Periods Ended September 30, 2002 and 2001 5
Consolidated Statements of Changes in Stockholders'
Equity for the Nine Months Ended September 30,
2002 and 2001 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 14-25
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. Changes in 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 27
Item 6. Exhibits and Reports on Form 8-K 28
SIGNATURES 29
2
PART I. ITEM 1. FINANCIAL STATEMENTS
FIRST COMMUNITY BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Share Data)
- --------------------------------------------------------------------------------
September December 31
2002 2001
Assets (Unaudited) (Note 1)
----------- -----------
Cash and due from banks $ 30,331 $ 47,566
Interest-bearing balances-FHLB 20,321 249
Securities available for sale (amortized cost of $322,938 at
September 30, 2002; $352,759 at December 31, 2001) 334,408 354,007
Securities held to maturity (fair value of $42,938 at
September 30, 2002; $43,393 at December 31, 2001) 40,211 41,884
Loans held for sale 68,821 65,532
Loans, net of unearned income 926,400 904,496
Less allowance for loan losses 14,080 13,952
----------- -----------
Net loans 912,320 890,544
Premises and equipment 23,632 21,713
Other real estate owned 2,668 3,029
Interest receivable 8,340 8,765
Other assets 16,843 18,468
Goodwill and other intangibles 26,012 26,478
----------- -----------
Total Assets $ 1,483,907 $ 1,478,235
=========== ===========
Liabilities
Deposits:
Noninterest-bearing $ 161,249 $ 161,346
Interest-bearing 943,977 916,914
----------- -----------
Total Deposits 1,105,226 1,078,260
Interest, taxes and other liabilities 13,928 16,007
Federal funds purchased -- 26,500
Securities sold under agreements to repurchase 94,964 79,262
FHLB borrowings and other indebtedness 120,053 145,165
----------- -----------
Total Liabilities 1,334,171 1,345,194
----------- -----------
Stockholders' Equity
Common stock, $1 par value; 15,000,000 shares authorized ; 9,956,714 and
9,955,425 issued in 2002 and 2001; and
9,918,482 and 9,936,442 outstanding in 2002 and 2001, respectively 9,957 9,955
Additional paid-in capital 58,642 60,189
Retained earnings 75,353 62,566
Treasury stock, at cost (1,098) (424)
Accumulated other comprehensive income 6,882 755
----------- -----------
Total Stockholders' Equity 149,736 133,041
----------- -----------
Total Liabilities and Stockholders' Equity $ 1,483,907 $ 1,478,235
=========== ===========
See Notes to Consolidated Financial Statements.
3
FIRST COMMUNITY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA) (UNAUDITED)
- --------------------------------------------------------------------------------
Nine Months Three Months
Ended Ended
September 30 September 30
2002 2001 2002 2001
-------------- -------------- -------------- ----------------
Interest Income:
Interest and fees on loans held for investment $ 54,646 $ 54,619 $ 18,597 $ 18,228
Interest on loans held for sale 2,521 2,110 851 763
Interest on securities-taxable 10,235 7,467 3,236 2,596
Interest on securities-nontaxable 5,101 4,484 1,679 1,634
Interest on federal funds sold and deposits in banks 170 746 88 169
----------- ----------- ----------- -----------
Total interest income 72,673 69,426 24,451 23,390
----------- ----------- ----------- -----------
Interest Expense:
Interest on deposits 19,603 24,586 6,206 7,879
Interest on borrowings 7,414 7,862 2,234 2,701
----------- ----------- ----------- -----------
Total interest expense 27,017 32,448 8,440 10,580
----------- ----------- ----------- -----------
Net interest income 45,656 36,978 16,011 12,810
Provision for loan losses 3,261 3,014 1,302 1,282
----------- ----------- ----------- -----------
Net interest income after provision for loan losses 42,395 33,964 14,709 11,528
----------- ----------- ----------- -----------
Noninterest Income:
Fiduciary income 1,287 1,380 443 470
Service charges on deposit accounts 5,135 4,325 1,866 1,517
Other service charges, commissions and fees 1,009 1,008 328 332
Mortgage banking income 7,594 7,067 2,238 2,778
Other operating income 582 730 100 236
Gain on sale of securities 208 197 22 153
----------- ----------- ----------- -----------
Total noninterest income 15,815 14,707 4,997 5,486
----------- ----------- ----------- -----------
Noninterest Expense:
Salaries and employee benefits 17,295 14,904 5,746 5,239
Occupancy expense of bank premises 2,160 2,005 738 668
Furniture and equipment expense 1,594 1,362 529 403
Goodwill and core deposit amortization 875 1,687 295 568
Other operating expense 10,077 8,326 3,177 2,825
----------- ----------- ----------- -----------
Total noninterest expense 32,001 28,284 10,485 9,703
----------- ----------- ----------- -----------
Income before income taxes 26,209 20,387 9,221 7,311
Income tax expense 7,692 6,322 2,778 2,311
----------- ----------- ----------- -----------
Net Income $ 18,517 $ 14,065 $ 6,443 $ 5,000
=========== =========== =========== ===========
Basic and diluted earnings per common share $ 1.86 $ 1.41 $ 0.65 $ 0.50
=========== =========== =========== ===========
Weighted average basic shares outstanding 9,935,464 9,945,772 9,928,069 9,943,522
=========== =========== =========== ===========
Weighted average diluted shares outstanding 9,982,611 9,977,277 9,978,136 10,003,547
=========== =========== =========== ===========
See Notes to Consolidated Financial Statements.
4
FIRST COMMUNITY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands) (Unaudited)
===============================================================================
Nine Months Ended
September 30
2002 2001
--------- ---------
Operating Activities:
Cash flows from operating activities:
Net income $ 18,517 $ 14,065
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Provision for loan losses 3,261 3,014
Depreciation of premises and equipment 1,215 1,108
Amortization of intangible assets 679 1,607
Net investment amortization and accretion 1,116 203
Net gain (loss) on the sale of assets 161 (86)
Net gain on sale of loans (8,324) (4,842)
Mortgage loans originated for sale (495,097) (385,858)
Proceeds from sale of mortgage loans 500,164 361,197
Increase in interest receivable 425 515
Increase in other assets (3,349) (1,569)
(Decrease) Increase in other liabilities (993) 2,923
--------- ---------
Net cash provided by (used in) operating activities 17,775 (7,723)
--------- ---------
Investing Activities:
Cash flows from investing activities:
Proceeds from sales of securities available for sale 14,919 18,883
Proceeds from maturities and calls of securities available for sale 52,983 82,986
Proceeds from maturities and calls of investment securities 1,662 1,478
Purchase of securities available for sale (38,978) (116,764)
Net increase in loans made to customers (24,343) (53,703)
Purchase of premises and equipment (3,500) (1,946)
Sale of equipment -- 13
--------- ---------
Net cash provided by (used in) investing activities 2,743 (69,053)
--------- ---------
Financing Activities:
Cash flows from financing activities:
Net increase in demand and savings deposits 39,133 20,601
Net (decrease) increase in time deposits (11,865) 33,267
Net (decrease) increase in FHLB and other indebtedness (35,953) 29,674
Repayment of other borrowings (112) (12)
Acquisition of treasury stock (1,607) (452)
Issuance of treasury stock 178 --
Dividends paid (7,455) (6,252)
--------- ---------
Net cash (used in) provided by financing activities (17,681) 76,826
--------- ---------
Cash and Cash Equivalents
Net increase in cash and cash equivalents 2,837 50
Cash and cash equivalents at beginning of period 47,815 50,243
--------- ---------
Cash and cash equivalents at end of period $ 50,652 $ 50,293
========= =========
See Notes to Consolidated Financial Statements.
5
FIRST COMMUNITY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
- -------------------------------------------------------------------------------
(DOLLARS 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, 2001 9,052 35,273 78,097 (202) (1,538) 120,682
----------
Comprehensive income:
Net income - - 14,065 - - 14,065
Other comprehensive income, net of tax:
Net unrealized gains on
securities available for sale - - - - 4,022 4,022
--------- ---------- --------
Comprehensive income - - 14,065 - 4,022 18,087
-------- --------- --------- -------- ---------- ---------
Common dividends declared
($.69 per share) - - (6,252) - - (6,252)
Purchase 21,436 treasury shares at
$21.08 per share - - - (452) - (452)
Treasury share distribution to ESOP 29 378 407
-------- -------- --------- -------- ---------- ---------
Balance September 30, 2001 9,052 35,302 85,910 (276) 2,484 132,472
======== ======== ========= ======== ========== =========
Balance January 1, 2002 9,955 60,189 62,566 (424) 755 133,041
----------
Comprehensive income:
Net income - - 18,517 - - 18,517
Other comprehensive income, net of tax:
Net unrealized gains on
securities available for sale - - - - 6,127 6,127
--------- ---------- --------
Comprehensive income - - 18,517 - 6,127 24,644
-------- -------- --------- -------- ---------- --------
Common dividends declared
($.75 per share) - - (7,455) - - (7,455)
Fractional share adjustment for 10%
STOCK DIVIDEND 2 (1,729) 1,725 (14) (16)
Purchase 55,844 treasury shares at
$28.74 per share - - - (1,607) - (1,607)
Option exercise 5,500 sh @$23.91 42 155 197
Treasury share distribution to ESOP 140 792 932
-------- -------- --------- -------- ---------- ---------
Balance September 30, 2002 9,957 58,642 75,353 (1,098) 6,882 149,736
======== ======== ========= ======== ========== =========
See Notes to Consolidated Financial Statements.
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. UNAUDITED FINANCIAL STATEMENTS
The unaudited consolidated balance sheet as of September 30, 2002, the unaudited
consolidated statements of income for the three and nine months ended September
30, 2002 and 2001 and the consolidated statements of cash flows and changes in
stockholders' equity for the nine months ended September 30, 2002 and 2001 have
been prepared by the management of First Community Bancshares, Inc. ("FCBI", the
"Company", "Registrant" or the "Corporation"). In the opinion of management, all
adjustments (including normal recurring accruals) necessary to present fairly
the financial position of FCBI and subsidiaries at September 30, 2002 and its
results of operations, cash flows, and changes in stockholders' equity for the
three and nine months ended September 30, 2002 and 2001 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, 2001 has been extracted from
audited financial statements included in the Company's 2001 Annual Report to
Stockholders. Certain information and footnote disclosures normally included in
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 2001 Annual Report of FCBI.
NOTE 2. RECLASSIFICATIONS
Certain amounts reflected in the December 31, 2001 balance sheet have been
reclassified to conform to the balance sheet presentation used in preparation of
the September 30, 2002 financial statements that are included in this periodic
report on Form 10-Q. The reclassification had no effect on net income or
stockholders' equity.
NOTE 3. STOCK DIVIDEND
On February 19, 2002, the Company's Board of Directors declared a 10% stock
dividend to shareholders of record as of March 1, 2002, which was distributed
March 28, 2002. Average shares outstanding and per share amounts included in the
consolidated financial statements have been adjusted to give effect to the stock
dividend. Stockholders' equity balances as of December 31, 2001 reflect the
effect of the 10% stock dividend. Fractional share adjustments are reflected in
the current period ended September 30, 2002.
NOTE 4. MERGERS AND ACQUISITIONS
On September 6, 2002, the Boards of Directors of FCBI, First Community Bank,
N.A. ("FCBNA"), Monroe Financial, Inc. ("Monroe") and the Bank of Greenville,
Inc. ("Greenville") entered into an agreement under which FCBI will acquire
Monroe and FCBNA will acquire Greenville through two simultaneous merger
transactions. The merger is presently valued at $2.0 million. The acquisition
will be accounted for as a purchase transaction in accordance with Financial
Accounting Standards Board ("FASB") Statement No. 141 and is currently
contingent upon the approval of the appropriate regulatory authorities and
Monroe's shareholders. The transaction is anticipated to be completed during the
fourth quarter of 2002.
On December 7, 2001, the Company completed the acquisition of four branches of
Branch Banking and Trust Company of Virginia ("BB&T") and F & M Bank - Southern
Virginia ("F&M") located in Clifton Forge, Emporia, and Drakes Branch, Virginia.
The total consideration paid of $3.6 million resulted in goodwill and identified
intangible assets of approximately $3.8 million. The consummation of this
transaction resulted in a $77 million cash payment to the Company for the
assumption of $114 million in deposits and the purchase of approximately $31
million in loans.
NOTE 5. BORROWINGS
Federal Home Loan Bank ("FHLB") borrowings and other indebtedness are comprised
of $100 million in convertible and callable advances and $20 million of
noncallable term advances from the Federal Home Loan Bank of Atlanta.
7
The callable advances may be called (redeemed) in quarterly increments 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 contractual maturities of the callable advances occur in 2010
and coupon rates range from 5.47% to 6.02%.
The above referenced noncallable term borrowings with the FHLB of $20 million as
of September 30, 2002 carry terms as follows: $10 million due in December 2002
at 4.30%; $8 million due in September 2003 at 5.95%; and $2 million due in
September 2008 at 6.27%.
In addition, during October 2002, United First Mortgage, Inc. ("UFM") entered
into an Early Purchase Program ("EPP") Agreement with Countrywide Home Loans,
Inc. ("Countrywide") whereby UFM will be entitled to sell certain of its
eligible loans to Countrywide prior to delivery of certain mortgage loan
documents. The terms of the agreement essentially provide for an additional
warehouse lending facility of $20 million available to UFM. Interest on this
credit facility is charged at the rate of 1 Month LIBOR plus 200 basis points.
The facility is scheduled to mature in December 2002.
NOTE 6. COMMITMENTS AND CONTINGENCIES
The Company is currently a defendant in various legal actions and asserted
claims involving lending and collection activities and other matters arising 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 effect on the financial position of the Company.
In October 2000, the Registrant prevailed, through a directed verdict, in a case
styled "Ann Tierney Smith, as Executrix of the Estate of Katherine B. Tierney,
Ann Barclay Smith and Laurence E. Tierney Smith vs. FCFT, Inc., et al." In this
matter, the Plaintiffs sought to abolish a charitable foundation trusteed by the
Company's Trust Division and obtain damages based upon alleged breach of
Registrant's fiduciary duty and conflict of interest. In June of 2002, the West
Virginia Supreme Court of Appeals granted Plaintiffs and co-defendant a hearing
set for November 13, 2002 to appeal the Circuit Court's decision. Registrant was
successful in having one of the Supreme Court Justices recused from this matter
due to his conflict of interest stemming from the Justice's personal lawsuit
against the Registrant as a dissenting shareholder of a bank acquired by the
Registrant. Legal Counsel and management are both confident that the Registrant
will again prevail in this matter. The Registrant's liability carrier has
assumed the defense of this matter under a reservation of rights.
The Company conducts mortgage banking operations through UFM, a wholly-owned
subsidiary of FCBNA. 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 contains 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 under terms of
other Loan Sales Agreements. The volume of contingent loan repurchases is
dependent on the quality of loan underwriting and systems employed by UFM for
quality control in the production of mortgage loans. To date, only one such loan
totaling $140,000 has been submitted for repurchase. This loan was, in turn,
resold to another investor after repurchase and cure of the borrower's defects.
Accordingly, loan repurchases have not had a material adverse effect on the
financial position 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. To date, UFM has been required to execute
only three such indemnification agreements for defaults which may occur over the
five-year period following the indemnification and no losses have occurred under
such agreements. Accordingly, loan indemnifications have not had a material
adverse effect on the financial position of UFM or the Company.
8
NOTE 7. OTHER COMPREHENSIVE INCOME
The Company currently has one component of other comprehensive income, which
includes unrealized gains and losses on securities available for sale and is
detailed as follows:
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30
2002 2001 2002 2001
---------------------------- ----------------------------
(AMOUNTS IN THOUSANDS) (AMOUNTS IN THOUSANDS)
OTHER COMPREHENSIVE INCOME:
Unrealized gains arising during the period $ 10,430 $ 6,901 $ 3,487 $ 3,215
Tax expense (4,178) (2,761) (1,395) (1,286)
-------------- ------------ ------------- ------------
Unrealized gains arising during the period, net of tax 6,252 4,140 2,092 1,929
Reclassification adjustment for gains realized in net
income (208) (197) (22) (153)
Tax expense of reclassification 83 79 9 61
-------------- ------------ ------------- ------------
Other comprehensive income 6,127 4,022 2,079 1,837
Beginning accumulated other comprehensive gain (loss) 755 (1,538) 4,803 647
-------------- ------------ ------------- ------------
Ending accumulated other comprehensive income $ 6,882 $ 2,484 $ 6,882 $ 2,484
============== ============ ============= ============
NOTE 8. 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 facilities that originate,
acquire, and sell residential mortgage products into the secondary market.
Information for each of the segments is presented below.
NINE MONTHS ENDED SEPTEMBER 30, 2002
-----------------------------------------------------------------------
(AMOUNTS IN THOUSANDS)
COMMUNITY MORTGAGE PARENT ELIMINATIONS TOTAL
BANKING BANKING
---------- ---------- ---------- ------------ ----------
Net interest income $ 44,714 $ 685 $ 196 $ 61 $ 45,656
Provision for loan losses 3,261 -- -- -- 3,261
---------- ---------- ---------- ---------- ----------
Net interest income after provision
for loan losses 41,453 685 196 61 42,395
Other income 7,997 7,594 413 (186) 15,818
Other expenses 24,733 6,758 638 (125) 32,004
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes 24,717 1,521 (29) -- 26,209
Income tax expense (benefit) 7,113 591 (12) -- 7,692
---------- ---------- ---------- ---------- ----------
Net income (loss) $ 17,604 $ 930 $ (17) $ -- $ 18,517
========== ========== ========== ========== ==========
Average assets $1,459,414 $ 55,155 $ 141,203 $ (192,399) $1,463,373
========== ========== ========== ========== ==========
9
Nine Months Ended September 30, 2001
-------------------------------------------------------------------------
(Amounts in Thousands)
Community Mortgage Parent Eliminations Total
Banking Banking
---------- ---------- ---------- ---------- ----------
Net interest income $ 36,357 $ 193 $ 230 $ 198 $ 36,978
Provision for loan losses 3,014 -- -- -- 3,014
---------- ---------- ---------- ---------- ----------
Net interest income after provision
for loan losses 33,343 193 230 198 33,964
Other income 7,745 7,067 26 (130) 14,708
Other expenses 22,042 5,747 428 68 28,285
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes 19,046 1,513 (172) -- 20,387
Income tax expense (benefit) 5,882 491 (51) -- 6,322
---------- ---------- ---------- ---------- ----------
Net income (loss) $ 13,164 $ 1,022 $ (121) $ -- $ 14,065
========== ========== ========== ========== ==========
Average assets $1,253,189 $ 41,831 $ 126,721 $ (162,003) $1,259,738
========== ========== ========== ========== ==========
NOTE 9. RECENT ACCOUNTING DEVELOPMENTS
In October 2002 the FASB issued Statement of Financial Accounting Standards
("FAS") No. 147-- "Acquisitions of Certain Financial Institutions". This new
Standard, which becomes effective October 1, 2002, provides interpretive
guidance on the application of the purchase method to acquisitions of financial
institutions. Accordingly, the requirement to amortize any excess of the fair
value of liabilities assumed over the fair value of tangible and identifiable
intangible assets acquired as an unidentifiable intangible asset no longer
applies to acquisitions within the scope of this Statement. In addition, this
Statement amends FASB Statement No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, to include in its scope long-term
customer-relationship intangible assets of financial institutions such as
depositor- and borrower-relationship intangible assets and credit cardholder
intangible assets. Consequently, those intangible assets are subject to the same
undiscounted cash flow recoverability test and impairment loss recognition and
measurement provisions that Statement 144 requires for other long-lived assets
that are held and used. Upon adopting FAS No. 147, which is effective October 1,
2002, goodwill reported as subject to amortization arising from a branch
acquisition that constitutes a business, as defined by FAS 147, will be
presented on a restated basis, whereby the amortization expense recorded will be
reversed. Amortization expense recorded during the nine months ended September
30, 2002 on goodwill that was subject to amortization was $695,000. The Company
has not yet completed its analysis to determine which branch acquisitions, if
any, meet the definition of a business.
In June 2002, the FASB issued Statement 146--"Accounting for Costs Associated
with Exit or Disposal Activities". This Statement is not anticipated to have a
material impact on the Company.
In April 2002, the FASB issued Statement 145. This Statement rescinds FASB
Statement No. 4, Reporting Gains and Losses from Extinguishment of Debt, and an
amendment of that Statement, FASB Statement No. 64, Extinguishments of Debt Made
to Satisfy Sinking-Fund Requirements. Statement 145 is not expected to have a
material impact on the Company's financial position or results of operations.
On June 29, 2001, the FASB approved Statements of Financial Accounting Standards
No. 141, Business Combinations (Statement 141) and No. 142, Goodwill and Other
Intangible Assets (Statement 142). These Statements significantly change the
accounting for business combinations, goodwill, and intangible assets. Statement
141 eliminated the pooling-of-interests method of accounting for business
combinations except for qualifying business combinations that were initiated
prior to July 1, 2001. The requirements of Statement 141 were effective for any
business combination accounted for by the purchase method that was completed
after June 30, 2001.
FASB Statement 142 superseded APB Opinion No. 17, Intangible Assets. Under
Statement 142, certain goodwill and indefinite lived intangible assets are no
longer amortized but are reviewed annually for impairment, or more frequently if
indications of impairment arise. Goodwill is required to be tested for
impairment between the annual tests if an event occurs or circumstances change
that will more-likely-than-not reduce the fair value of a reporting unit below
its carrying value. An indefinite lived intangible asset is required to be
tested for impairment between the annual tests if an event occurs or
circumstances change indicating that the asset might be impaired. Separable
intangible assets that have finite lives continue to be amortized over their
useful lives, for which Statements 142 and 147 do not impose limits.
10
Effective January 1, 2002, FCBI ceased amortization of certain goodwill in
accordance with FASB Statement 142. The impact on earnings and earnings per
share for the nine and three-month periods ended September 30, 2002 and 2001 is
presented below and included with the presentation of the impact of Statements
142.
(AMOUNTS IN THOUSANDS EXCEPT EARNINGS PER SHARE)
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2002 2001 2002 2001
---------- ---------- ---------- ----------
Reported net income $ 18,517 $ 14,065 $ 6,443 $ 5,000
Add back:
Goodwill amortization, net of tax, subject to FASB 142 -- 1,076 -- 362
---------- ---------- ---------- ----------
Adjusted net income $ 18,517 $ 15,141 $ 6,443 $ 5,362
========== ========== ========== ==========
Basic and diluted earnings per share:
Reported net income per share $ 1.86 $ 1.41 $ 0.65 $ 0.50
Add back:
Goodwill amortization, net of tax, subject to FASB 142 -- 0.11 -- 0.04
---------- ---------- ---------- ----------
Adjusted net income per share $ 1.86 $ 1.52 $ 0.65 $ 0.54
========== ========== ========== ==========
In accordance with the disclosure requirements of FASB Statement 142,
the following information is presented regarding intangibles subject to
amortization and those not subject to amortization.
AS OF DECEMBER 31, 2001
------------------------------
(AMOUNTS IN THOUSANDS)
GROSS NET
CARRYING ACCUMULATED CARRYING
AMOUNT AMORTIZATION AMOUNT
------- ------- -------
Goodwill subject to amortization $13,972 $ 2,761 $11,211
Goodwill not subject to amortization 23,259 9,120 14,139
------- ------- -------
Total goodwill 37,231 11,881 25,350
------- ------- -------
Core deposit intangibles subject to amortization 2,349 1,221 1,128
------- ------- -------
Total Goodwill and other intangible assets $39,580 $13,102 $26,478
======= ======= =======
The net carrying amount of goodwill of $25.35 million as of December 31, 2001 is
comprised of goodwill recorded in the community banking segment of $24.35
million and goodwill recorded in the mortgage banking segment of $1.0 million.
In accordance with FASB Statement 142, the amortization expense for goodwill and
core deposit intangibles subject to amortization for each of the next 5 years
from December 31, 2001 is as follows:
(AMOUNTS IN THOUSANDS)
2002 $ 1,165
2003 $ 1,105
2004 $ 1,086
2005 $ 1,078
2006 $ 1,038
FASB Statement 142 requires a transitional impairment test to be applied to all
goodwill and other indefinite-lived intangible assets within the first six
months after adoption. The impairment test involves identifying separate
11
reporting units based on the reporting structure of the Corporation, then
assigning all assets and liabilities, including goodwill, to these units.
Goodwill is assigned based on the reporting unit benefiting from the factors
that gave rise to the goodwill. Each reporting unit is then tested for goodwill
impairment by comparing the fair value of the unit with its book value,
including goodwill. If the fair value of the reporting unit is greater than its
book value, no goodwill impairment exists. However, if the book value of the
reporting unit is greater than its determined fair value, goodwill impairment
may exist and further testing is required to determine the amount, if any, of
the actual impairment loss. Any impairment loss determined with this
transitional test would be reported as a change in accounting principle. The
Corporation has completed its transitional impairment test of goodwill and based
on current information, does not expect to record an impairment loss as a result
of this test.
In October 2002, The FASB issued an Exposure Draft, Accounting for Stock-Based
Compensation--Transition and Disclosure, that would amend FASB Statement No.
123, Accounting for Stock-Based Compensation. The purpose of the proposed
amendment is to i) enable companies that choose to adopt the fair value based
method to report the full effect of employee stock options in their financial
statements immediately upon adoption and ii) make available to investors more
frequent disclosure about the cost of employee stock options. The proposed
changes would provide three methods of transition for companies that voluntarily
adopt the fair value method of recording expenses relating to employee stock
options. In addition, the amendment proposes more prominent disclosures about
the cost of stock-based employee compensation and an increase in the frequency
of those disclosures to include publication in quarterly financial statements.
Currently, companies are not required to present stock option disclosures in
interim financial statements. The FASB plans to issue the amendment to Statement
123 by the end of 2002 and its provisions would be effective immediately upon
issuance. The proposed disclosures to be provided in annual financial statements
would be required for fiscal years ending after December 15, 2002. The proposed
disclosures to be provided in interim financial information would be required as
of the first interim period beginning after December 15, 2002, with earlier
application encouraged.
NOTE 10. EARNINGS PER SHARE
The Company's basic and diluted earnings per share were $0.65 and $1.86 for the
three and nine months ended September 30, 2002, respectively. For the
corresponding periods of 2001, basic and diluted earnings per share were $0.50
and $1.41 as adjusted to reflect the 10% stock dividend. For the three and nine
month periods ending September 30, 2002, dilutive shares were 50,067 and 47,147,
respectively. For the corresponding periods of 2001, dilutive shares were 60,025
and 31,505, respectively. These dilutive shares did not materially affect the
Company's earnings per share.
NOTE 11. 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 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 nonaccrual loans, trends in the volume and term of
12
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. Management considers the level of allowance adequate based
on the current risk profile in the loan portfolio.
13
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
The Audit Committee of the Board of Directors
First Community Bancshares, Inc.
We have reviewed the accompanying consolidated balance sheet of First Community
Bancshares, Inc. (First Community) as of September 30, 2002 and the related
consolidated statements of income for the three and nine month periods ended
September 30, 2002 and 2001 and the consolidated statements of cash flows and
changes in stockholders' equity for the nine month periods ended September 30,
2002 and 2001. These consolidated 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 First Community
as of December 31, 2001, and the related consolidated statements of income,
changes in stockholders' equity, and cash flows for the year then ended (not
presented herein); and in our report dated February 8, 2002, 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, 2001, is fairly stated, in all material respects, in relation to
the consolidated balance sheet from which it has been derived.
/s/ Ernst & Young LLP
Charleston, West Virginia
October 18, 2002
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 2001 Annual Report to
Shareholders and the other financial information included in this report.
First Community Bancshares, Inc. ("FCBI") is a multi-state bank holding company
headquartered in Bluefield, Virginia with total assets of $1.48 billion at
September 30, 2002. FCBI through its community banking subsidiary, First
Community Bank, N. A. ("FCBNA"), provides financial, mortgage brokerage and
origination and trust services to individuals and commercial customers through
38 full-service banking locations in West Virginia, Virginia and North Carolina
as well as 11 mortgage brokerage facilities operated by United First Mortgage,
Inc. ("UFM") a wholly owned subsidiary of FCBNA.
FORWARD LOOKING STATEMENTS
FCBI (the "Company", "Registrant" or the "Corporation") may from time to time
make written or oral "forward-looking statements", including statements
contained in the Corporation's filings with the Securities and Exchange
Commission (including this Quarterly Report on Form 10-Q and the Exhibits hereto
and thereto), in its reports to stockholders and in other communications by the
Corporation, which are made in good faith by the Corporation 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 Corporation'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 Corporation'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
Corporation'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 Corporation
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 Corporation 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 Corporation'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
Corporation's noninterest or fee income being less than expected; unanticipated
regulatory or judicial proceedings; changes in consumer spending and saving
habits; and the success of the Corporation at managing the risks involved in the
foregoing.
The Corporation cautions that the foregoing list of important factors is not
exclusive. The Corporation 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 Corporation.
ACCOUNTING POLICIES AND JUDGMENTS
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. FCBI'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 FCBI's consolidated financial position and/or
consolidated results of operations.
Estimates, assumptions, and judgments are primarily necessary when assets and
liabilities are required to be recorded at 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 is not available, valuation adjustments
are estimated in good faith by management primarily through the use of internal
modeling techniques and/or appraisal estimates.
15
FCBI'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 FCBI's more subjective and complex or "Critical
Accounting Policies." Other significant accounting policies are discussed in
FCBI's 2001 Annual Report on Form 10-K filed with the Securities and Exchange
Commission.
CRITICAL ACCOUNTING POLICIES
The more critical accounting and reporting policies include FCBI's
accounting for loans held for investment, loans held for sale, the allowance for
loan and lease losses and derivative instruments. In particular, FCBI's
accounting policy relating to derivatives and the allowance for loan and lease
losses involve the use of estimates and require significant judgments to be made
by management.
LOANS HELD FOR INVESTMENT AND LOANS HELD FOR SALE
Loans held for investment are stated at the principal amounts outstanding, net
of unearned income. Interest income with respect to loans other than nonaccrual
loans is accrued on the principal amount outstanding. Significant loan fees are
deferred and included in interest income over the respective lives of the loans.
Loans are designated as held for sale when the Company has a positive intent to
sell them. The Company's mortgage subsidiary, UFM, originates, acquires, and
sells residential mortgage products on a servicing released basis into the
secondary market. Currently, UFM originates all loans with the positive intent
to sell. Loans held for sale are stated at the lower of cost or market. The
lower of cost or market 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.
ALLOWANCE FOR LOAN AND LEASE LOSSES
The allowance for loan and lease 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 our 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 geographical areas in which FCBI conducts business.
As discussed in Note 11 to the interim Consolidated Financial Statements, the
Company determines the allowance for credit 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 level of
consumer and residential mortgage loan allowance is maintained at 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 allowance for credit losses is established through provisions charged
against income. Loans deemed to be uncollectible are charged against the
allowance and recoveries of previously charged-off loans are credited to the
allowance.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Corporation's mortgage subsidiary, UFM, provides a distribution outlet for
origination and sale of loans to wholesale and retail purchasers. UFM 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. The loans held for sale portfolio at September 30, 2002 was
$68.8 million.
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
16
rates. The Company accounts for these instruments in accordance with Financial
Accounting Standards Board ("FASB") Statement No. 133 "Accounting for Derivative
Instruments and Hedging Activity" as amended by Statement No. 137 and No. 138.
This Standard established accounting and reporting standards for derivative
instruments and for hedging activities. UFM uses forward mortgage contracts
(short position sales) to manage interest rate risk in the pipeline of loans and
interest rate lock commitments ("RLC's") from the point of the loan commitment
to the subsequent sale to outside investors. As a result of the timing from
origination to sale, and the likelihood of changing interest rates, forward
commitments are placed with counter-parties to substantially lock the expected
margin on the sale of the loan. The forward commitment to sell the security is
considered to be a derivative and, as such, is recorded on the Consolidated
Balance Sheets at fair value and the changes in fair value are reflected in the
Consolidated Statements of Income.
The RLC's (representing forward commitments to fund loans which will be held for
sale) are also considered derivatives and are valued at estimated fair market
value based on prevailing interest rates, expected servicing release premiums
and the assumed probability of closing (pullthrough). The assumption of a given
pullthrough percentage also enters into the determination of the volume of
forward contracts. Pullthrough assumptions are continually monitored for changes
in the interest rate environment and characteristics of the pool of RLC's.
Failure to maintain appropriate or realistic pullthrough assumptions could
result in a mismatch in the volume of forward contracts and related RLC's
leading to losses and/or reduced margins on the ultimate delivery of the loan
products.
At September 30, 2002, the Company's mortgage subsidiary held an investment in
forward mortgage contracts with a notional value of $145 million. These
contracts hedge interest rate risk associated with RLC's and closed loan
inventory of $159 million. Adjustment of the forward mortgage contracts to
market value yielded a $1.9 million writedown at September 30, 2002, while the
adjustment to market value on RLC's and closed loan inventory yielded a $3.8
million write-up. The market valuation of RLC's at September 30, 2002 assumes
69% RLC pullthrough. If actual pullthrough in succeeding months proves to be
less than 69%, the full market value of RLC's may not be realized and/or the
valuation of RLC's may change.
RESULTS OF OPERATIONS
Net income for the first nine months of 2002 totaled $18.5 million, which is
$4.5 million, or 32% higher than net income of $14.1 million reported for the
corresponding period in 2001. Net income for the first nine months of the
current year resulted in basic and diluted earnings per share of $1.86 versus
$1.41 basic and diluted earnings per share reported in 2001 (adjusted for the
March 31, 2002 10% stock dividend), a 31.9% increase. The most significant
factors contributing to this increase are an $8.7 million increase in net
interest income and a $1.1 million increase in noninterest income. Partially
offsetting these increases was an increase of approximately $2.3 million in
salaries and benefits and a $1.8 million increase in other operating expenses.
Basic and diluted earnings per share increased $0.45 from $1.41 in 2001 to $1.86
for the nine months ended September 30, 2002.
Net income for the third quarter of 2002 of $6.4 million increased $1.4 million
or 28.9% over third quarter 2001 net income. Reflected in this increase were a
$685,000 increase in investment security income and a $2.1 million decrease in
interest expense, with net interest income increasing by $3.2 million, or
24.99%. Total noninterest income decreased by approximately $489,000, or 8.91%,
from the third quarter of 2001 while total noninterest expense increased
$782,000, 8.06%, when comparing the third quarter of 2002 to that of 2001. Basic
and diluted earnings per share were $0.65 for the quarter ended September 30,
2002 compared to $0.50 basic and diluted earnings per share for the same period
of 2001 representing an increase of 30%.
NET INTEREST INCOME-NINE MONTH COMPARISON (SEE TABLE I)
Net interest income (NII), the largest contributor to earnings, was $45.7
million for the nine months ended September 30, 2002 compared with $37.0 million
for the corresponding period in 2001. For purposes of this discussion,
comparison of NII 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. Table I on page 19 displays taxable equivalent
yields on earning assets and taxable equivalent Net Interest Spread (NIS) and
Net Interest Margin (NIM). As indicated on Table I, tax equivalent net interest
income totaled $48.5 million for the nine months ended September 30, 2002, an
increase of $8.9 million from the $39.6 million reported in the first nine
months of 2001. This increase in net interest income stems from an increase in
average earning assets of $197.5 million. The yield on earning assets decreased
87 basis points between 2001 and 2002 but was offset by a 125 basis point
decline in the cost of funds. The impact of these rate and volume changes was an
increase in the net interest rate spread from 3.91% to 4.30% for the nine months
ended September 30, 2002, a 39 basis point increase in the spread between
interest earning assets and interest bearing liabilities over the nine months
ended September 30, 2001. The Company's tax equivalent net interest margin of
4.78% for the nine months ended September 30, 2002
17
reflects an increase of 22 basis points compared to the first nine months of
2001 when the tax equivalent net interest margin was 4.56%.
As indicated in Table I, the overall tax equivalent yield on average earning
assets decreased 87 basis points from 8.31% to 7.44% for the nine months ended
September 30, 2002, compared to September 30, 2001. A large part of this
decrease was in the overall tax equivalent yield on loans held for investment of
85 basis points from the prior year to 7.96%. Decreases in key lending rates,
(throughout 2001 there were 11 reductions in the Federal Funds rate with an
associated 475 basis point reduction in the prime loan rate) were the principal
causes of this reduction in yield. Due to the volume of loans directly tied to a
prime rate, the reductions noted have a direct impact on variable and adjustable
rate loans tied to key rates. Variable rate loans generally reprice in concert
with the key rate changes whereas adjustable rate notes have predetermined reset
dates that define how the loan will reprice. In addition, the reductions in the
key lending rates also have an indirect effect on repricing of existing
portfolio loans caused by refinancing of existing fixed rate loans.
For the nine months ended September 30, 2002, the decrease in the tax equivalent
yield on loans held for investment was offset by an increase of $88.2 million in
the average balance. Approximately $30 million of this average loan growth is
the result of the BB&T and F&M branch purchases in the last quarter of 2001. The
increase in average outstanding loans, excluding the amount acquired through
acquisition, was funded largely through cash received in net settlement of the
branch acquisitions and increases in the level of customer deposits. The average
loans held for sale balance also increased $10.7 million while the yield
decreased by 44 basis points to 6.75%.
During the nine months ended September 30, 2002, the taxable equivalent yields
on securities available for sale decreased 69 basis points to 6.01% while the
tax equivalent yield on investment securities held to maturity remained at
8.16%, a 4 basis point increase from the nine months ended September 30, 2001.
The yield on interest-bearing balances with banks decreased substantially to
1.64% in concert with the above referenced 11 cuts in the Federal Funds rate.
The $111 million increase in the average balance of securities available for
sale when comparing the nine months ended September 30, 2002 to 2001, was
largely the result of investment of funds received from new deposit growth in
existing markets and deposits obtained in the acquisition of the four new BB&T
and F&M branches in the last quarter of 2001.
The cost of interest-bearing liabilities decreased by 125 basis points from
4.39% for the nine months ended September 30, 2001 to 3.14% for the same period
of 2002 while the average volume increased $161.3 million. Average FHLB
borrowings decreased by $2.9 million during the nine months ended September 30,
2002 compared to the prior year while the rate paid decreased 13 basis points to
5.89% from 6.02%. The rate paid on other borrowings remained virtually the same
compared to the rate paid in the same period last year. The average balances of
interest-bearing demand and savings deposits increased $46.2 and $36.1 million,
respectively, during the nine months ended September 30, 2002 while the
corresponding average rate on these deposits declined 57 and 21 basis points,
respectively. Average time deposits increased $53.9 million while the average
rate paid decreased 165 basis points from 5.52% in 2001 to 3.87% in 2002.
Average Fed Funds and repurchase agreements increased $28.1 million when
comparing the nine months ended September 30, 2002 to September 30, 2001 while
the average rate decreased 155 basis points. Additionally, average
noninterest-bearing demand deposits increased $27.4 million in 2002 compared to
the nine months ended September 30, 2001. Again, approximately $99.5 million of
the $136 million increase in average interest-bearing deposit growth was the
result of the branch acquisitions in the fourth quarter of 2001, along with
another $10.9 million in average noninterest bearing demand deposits.
NET INTEREST INCOME -QUARTERLY COMPARISON (SEE TABLE II)
NII for the quarter ended September 30, 2002 was $16 million, up $3.2 million
from the $12.8 million for the comparable quarter of 2001. A comparison of the
third quarter of 2002 to the third quarter of 2001 on a taxable equivalent basis
(refer to Table II) also reflects an increase in net interest income of $3.21
million, with net interest income at $16.96 million for the three months ended
September 30, 2002 compared to $13.75 million for the same period in 2001. A 122
basis point decrease in the rate paid on interest-bearing liabilities offset a
67 basis point decline in the average rate earned on interest-earning assets,
increasing the net interest margin by 38 basis points to 4.93% for the quarter
ended September 30, 2002. When comparing the two quarters, average earning
assets increased $166.6 million in the third quarter of 2002 compared to the
third quarter of 2001, which included increases in average securities available
for sale of $78.3 million and average loans held for investment of $78.7
million. In the third quarter of 2002, average interest-bearing deposits with
banks increased $2.5 million and average loans held for sale increased $9.8
million when compared to the third quarter of the prior year. Total
interest-bearing liabilities increased $133.4 million with average
interest-bearing deposits increasing $129.6 million, while the average rate paid
on these deposits dropped 124 basis points. For the same periods, average
Federal Funds purchased and repurchase agreements increased $28.9 million as the
average rate paid decreased 120 basis points.
18
TABLE 1 AVERAGE BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS
(DOLLARS IN THOUSANDS)
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2002 SEPTEMBER 30, 2001
AVERAGE INTEREST YIELD/RATE AVERAGE INTEREST YIELD/RATE
BALANCE (1) (2) (2) BALANCE (1) (2) (2)
---------- ---------- ---------- ------------ ---------- -----------
Earning Assets:
Loans (3)
Loans Held for Sale $ 49,906 2,521 6.75% $ 39,250 2,110 7.19%
Loans Held for Investment:
Taxable 913,785 54,385 7.96% 824,809 $54,250 8.79%
Tax-Exempt 6,550 402 8.20% 7,295 569 10.43%
---------- ------- ------ ---------- ------- ------
Total 920,335 54,787 7.96% 832,104 54,819 8.81%
Reserve for Loan Losses (14,391) (12,656)
---------- ------- ---------- -------
Net Total 905,944 54,787 819,448 54,819
Securities Available For Sale:
Taxable 251,945 10,145 5.38% 158,415 7,327 6.18%
Tax-Exempt 94,338 5,421 7.68% 76,878 4,463 7.76%
---------- ------- ------ ---------- ------- ------
Total 346,283 15,566 6.01% 235,293 11,790 6.70%
Held to Maturity Securities:
Taxable 1,708 91 7.12% 2,623 140 7.14%
Tax-Exempt 39,531 2,427 8.21% 39,752 2,435 8.19%
---------- ------- ------ ---------- ------- -------
Total 41,239 2,518 8.16% 42,375 2,575 8.12%
Interest Bearing Deposits 13,844 170 1.64% 23,316 746 4.28%
---------- ------- ---------- -------
Total Earning Assets 1,357,216 75,562 7.44% 1,159,682 72,040 8.31%
---------- ------- ---------- -------
Other Assets 106,157 100,056
---------- ----------
Total $1,463,373 $1,259,738
========== ==========
Interest-Bearing Liabilities:
Demand Deposits $ 187,191 1,487 1.06% $ 141,029 1,723 1.63%
Savings Deposits 166,638 1,484 1.19% 130,534 1,369 1.40%
Time Deposits 574,624 16,631 3.87% 520,762 21,493 5.52%
---------- ------- ------ ---------- ------- -----
928,453 19,602 2.82% 792,325 24,585 4.15%
Fed Funds Purchased & Repurchase
Agreements 85,059 1,427 2.24% 56,935 1,616 3.79%
FHLB Convertible and Callable Advances 125,659 5,537 5.89% 128,553 5,792 6.02%
Other Borrowings 10,091 451 5.98% 10,173 454 5.97%
---------- ------- ------ ---------- ------- -----
Total Interest-bearing Liabilities 1,149,262 27,017 3.14% 987,986 32,447 4.39%
Demand Deposits 156,814 129,459
Other Liabilities 15,348 15,091
Stockholders' Equity 141,949 127,202
---------- -----------
Total $1,463,373 $ 1,259,738
========== ============
Net Interest Income $48,545 $39,593
======= =======
Net Interest Rate Spread (3) 4.30% 3.91%
====== =====
Net Interest Margin 4.78% 4.56%
====== =====
(1) Interest amounts represent taxable equivalent results for the nine months
ended September 30, 2002 and 2001.
(2) Fully Taxable Equivalent-Using the Federal statutory rate of 35%.
(3) Nonaccrual loans are included in average balances outstanding with no
related interest income.
19
TABLE II AVERAGE BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS
(DOLLARS IN THOUSANDS)
Three Months Ended THREE MONTHS ENDED
SEPTEMBER 30, 2002 SEPTEMBER 30, 2001
AVERAGE INTEREST YIELD/RATE AVERAGE INTEREST YIELD/RATE
BALANCE (1) (2) (2) BALANCE (1) (2) (2)
--------------- ---------- -------- -------------- ---------- -----------
Earning Assets:
Loans (3)
Loans Held for Sale $ 51,779 851 6.52% $ 41,931 763 7.22%
Loans Held for Investment:
Taxable 922,752 18,510 7.96% 843,886 $18,124 8.52%
Tax-Exempt 6,742 134 7.88% 6,873 159 9.15%
------------ ------- ------ ---------- ------- ------
Total 929,494 18,644 7.96% 850,759 18,283 8.53%
Reserve for Loan Losses (14,278) (12,937)
------------ ------- ---------- -------
Net Total 915,216 18,644 837,822 18,283
Securities Available For Sale:
Taxable 241,722 3,217 5.28% 169,529 2,559 5.99%
Tax-Exempt 93,353 1,767 7.51% 87,232 1,705 7.75%
------------ ------- ------ ---------- ------- ------
Total 335,075 4,984 5.90% 256,761 4,264 6.59%
Held to Maturity Securities:
Taxable 1,086 20 7.31% 2,302 37 6.38%
Tax-Exempt 39,531 816 8.19% 39,763 810 8.09%
------------ -------- -------- ---------- ------- ------
Total 40,617 836 8.16% 42,065 847 7.99%
Interest Bearing Deposits 21,358 88 1.63% 18,868 169 3.55%
Total Earning Assets 1,364,045 25,403 7.39% 1,197,447 24,326 8.06%
------------ -------- ---------- --------
Other Assets 105,564 97,604
------------ ----------
Total $ 1,469,609 $1,295,051
============= ==========
Interest-Bearing Liabilities:
Demand Deposits $ 184,220 495 1.07% $ 144,427 467 1.28%
Savings Deposits 179,142 561 1.24% 130,656 370 1.12%
Time Deposits 573,216 5,149 3.56% 531,912 7,041 5.25%
----------- ------ ------- ---------- ------ ------
936,578 6,205 2.63% 806,995 7,878 3.87%
Fed Funds Purchased & Repurchase
Agreements 91,199 494 2.15% 62,294 526 3.35%
FHLB Convertible and Callable Advances 110,000 1,590 5.73% 135,000 2,022 5.94%
Other Borrowings 10,055 151 5.96% 10,169 153 5.97%
------------ ------- ------- ---------- ------- ------
Total Interest-bearing Liabilities 1,147,832 8,440 2.92% 1,014,458 10,579 4.14%
Demand Deposits 158,799 134,194
Other Liabilities 14,854 15,962
Stockholders' Equity 148,124 130,437
------------ -----------
Total $ 1,469,609 $ 1,295,051
============ ===========
Net Interest Income $16,963 $13,747
======= =======
Net Interest Rate Spread (3) 4.47% 3.92%
====== =======
Net Interest Margin 4.93% 4.55%
====== =======
(1) Interest amounts represent taxable equivalent results for the three months
ended September 30, 2002 and 2001.
(2) Fully Taxable Equivalent-Using the Federal statutory rate of 35%.
(3) Nonaccrual loans are included in average balances outstanding with no
related interest income.
20
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses was $14.1 million on September 30, 2002, up
slightly from the $14.0 million at December 31, 2001and up approximately $1.2
million from the $12.9 million on September 30, 2001. The provision and
underlying allowance for loan losses are quantified through a series of
objective measures, review of economic indications, and the estimation of levels
of losses within various loans and loan types that portray inherent weaknesses.
To maintain a balance in the allowance for loan losses sufficient to absorb
probable loan losses, charges are made to the provision for loan losses. The
year-to-date and third quarter 2002 provisions of $3.3 million and $1.3 million,
respectively, compare to the $3.0 million and $1.3 million for the corresponding
periods in 2001. The respective provisions are a result of management's formal
analysis to establish the allowance for loan losses at a level sufficient to
cover inherent losses within the portfolio and to absorb current period net
charge-offs.
FCBI's allowance for loan loss activity for the three and nine month periods
ended September 30, 2002 and 2001 is as follows:
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
2002 2001 2002 2001
------------- ------------ ------------- -------------
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
Beginning balance $ 14,194 $ 12,688 $ 13,952 $ 12,303
Provision 1,302 1,282 3,261 3,014
Charge-offs (1,591) (1,193) (3,654) (3,099)
Recoveries 175 112 521 671
---------- ---------- ----------- ----------
Ending Balance $ 14,080 $ 12,889 $ 14,080 $ 12,889
========== =========== =========== ==========
Based on the allowance for loan losses of approximately $14.1 million and $12.9
million at September 30, 2002 and 2001, respectively, the allowance to loans
held for investment ratios were 1.52% and 1.50% at the respective dates.
Net charge-offs for the three and nine months of 2002 were $1.4 million and $3.1
million compared with $1.1 million and $2.4 million for the corresponding
periods in 2001. Expressed as a percentage of average loans held for investment,
net charge-offs were .15% and .34% for the three and nine month periods of 2002,
and 0.13% and 0.29% for the same periods of 2001. The $705,000 increase in net
charge-offs between the nine month periods ended September 30, 2001 and 2002 was
largely due to a $639,000 commercial loan charge-off of a residential real
estate development loan, while consumer loan charge offs reflected little change
for the comparable periods. As of September 30, 2002, the allowance as a
percentage of non-performing loans was 263% compared to 280% at December 31,
2001. The decrease in this coverage ratio is reflective of both a $370,000
increase in nonperforming loans between December 31, 2001 and September 30,
2002, and the $128,000 increase in the allowance for loan losses. Included in
the increase in nonperforming loans is a $2.0 million land acquisition loan
which matured and was converted to nonaccrual status at September 30, 2002. This
loan has subsequently been renewed with the payment of interest to-date, the
establishment of both a six-month interest escrow and a plan for principal
reduction.
Following the events of September 11, 2001, the Company reviewed credits with
particular exposure to new weaknesses in the economy. In particular, the Company
has reviewed loans to the hospitality industry. The Company currently has $50.9
million in loans to owners/operators of hotels and motels. One credit totaling
$5.1 million has displayed signs of weakness and vulnerability to prevailing
lower occupancy rates. Although this loan continues to perform, the Company has
given appropriate consideration to the inherent risk of this loan in performing
its monthly analysis of the allowance for loan losses. The Company has also
taken steps to reduce its exposure to the hospitality industry by limiting its
consideration of new hotel/motel loans and through the sale of another
performing, but weakened credit in the amount of $5.0 million. This sale was
completed subsequent to September 30, 2002.
NONINTEREST 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 increased
approximately $1.1 million, or 7.53%, from $14.7 million for the nine months
ended September 30, 2001 to $15.8 million for the corresponding period in 2002.
The largest portion of this increase is attributable to an $810,000, or an
18.73% increase in service charges on deposit accounts (primarily the result of
a new customer-sensitive overdraft program that allows well-managed customer
deposit accounts greater
21
flexibility in managing overdrafts and that, in turn, produced higher levels of
overdraft charges with minimal charge-offs of overdrawn accounts). In addition,
the mortgage brokerage operations of UFM recognized an additional $527,000 in
other mortgage banking income for the nine months ended September 30, 2002
versus the comparable nine-month period in 2001. This increase is directly tied
to the increased loan production of UFM in 2002 compared to production in the
corresponding period of 2001. Partially offsetting these gains were reductions
in fiduciary and other operating income, which decreased $93,000 and $148,000,
respectively. Fiduciary earnings correspond to the asset management fees
recorded and have declined from the prior year as a direct result of a reduction
in estate and trust management activity and lower market values and yields on
assets under management. The decline in other operating income is due primarily
to a $42,000 reduction in earnings on insurance policies within a supplemental
executive retirement plan which is funded with Bank-owned life insurance. Also,
increased losses on the sale of repossessed assets (or reductions in gains on
the assets) accounted for an additional $87,000 of the decrease in other
operating income.
Total noninterest income for the third quarter of 2002 was $489,000 less than
that recorded in the third quarter of 2001 largely the result of a $540,000
reduction in mortgage banking income, a reduction in the amount of security
gains recognized of $131,000, and losses recognized on the sale of repossessions
(included within other operating income) of $61,000 in excess of those recorded
during the third quarter of 2001. The reduction in mortgage banking income is
the result of a combination of factors affecting the mortgage banking segment
including higher than anticipated hedging cost and higher than anticipated
fallout percentages (the percent of loan commitments extended that did not reach
the funding stage), both of which resulted in declining margins for the mortgage
banking subsidiary during the third quarter of 2002. These reductions in other
operating income for the quarter were partially offset by a $349,000 increase in
service charges on deposit accounts.
NONINTEREST EXPENSE
Non-interest expense totaled $32 million for the nine months ended September 30,
2002, increasing $3.7 million over the corresponding period in 2001. This
increase is primarily attributable to a $2.4 million increase in salaries and
benefits, $787,000 of which was due to the acquisition of the four BB&T & F&M
branches in the fourth quarter of 2001, along with a $634,000 increase in
salaries and commissions in the mortgage operations of UFM (mostly due to
increased loan production) and a general increase in salaries as staffing needs
at several locations were satisfied in order to support added corporate services
and continued branch growth.
In the first nine months of 2002, occupancy expense increased by $155,000 when
compared to the first nine months of 2001, $110,000 of which was due to the new
branches while additional occupancy expenses of UFM were largely responsible for
the remainder. Furniture, fixtures and equipment expense increased $232,000,
$86,000 of which was attributable to the new branches and UFM, with the majority
of the remaining increase due to additional depreciation on new software and
hardware utilized in the building and maintaining of the Company's technology
infrastructure.
With the adoption of FASB Statement No. 142, the Company ceased amortization of
certain goodwill beginning January 1, 2002, as required by the Statement.
Cessation of such amortization decreased goodwill expense by $1.1 million;
however, additional amortization associated with branch acquisitions was
continued and resulted in a net decrease of $810,000 during the first nine
months of 2002 compared to the same period last year. On a quarterly basis, the
net effect of the adoption of FASB Statement 142 along with the additional
goodwill associated with the branches was a decrease in amortization expense of
$273,000 in the third quarter of 2002 compared to the same period of 2001. In
October 2002, the FASB issued Statement 147 which provided interpretive guidance
with respect to the application of the purchase method of accounting to bank
acquisitions. The Company has not yet determined the impact Statement 147 will
have on amortization of intangibles related to branch acquisitions.
Also impacting the increase in noninterest expense for the nine months ended
September 30, 2002 compared to 2001 were increased expenses reported in the
other operating expense category. These accounts include increases in other
operating costs associated with UFM of $241,000 (tied to increased loan
production), and in other accounts (largely due to the acquisition of the new
branches) such as an increase in telephone and data communications expense of
$131,000, an increase in ATM service fees of $109,000 and an increase of courier
and travel expense of $152,000. Advertising expense was also up $385,000 from
the same period last year due to ad campaigns for new products and branches.
Also, for the nine months ended September 30, 2001, a litigation settlement led
to reimbursement of legal costs which reduced legal fees by $150,000 in the
prior period.
Noninterest expense for the three months ended September 30, 2002 totaled $10.5
million, a $782,000 increase over the $9.7 million for the quarter ended
September 30, 2001. As noted in the year to date discussion, the majority of
this increase was a $507,000 increase in salaries and employee benefits which is
largely attributed to the branches acquired in December 2001 ($277,000),
increases due to higher loan origination activity ($20,000) of UFM in 2002
22
and a general increase in salaries along with the addition of personnel
Company-wide to support the continued growth of the Bank. Other operating
expenses increased $352,000 and, as discussed earlier, increased largely due to
additional data communication costs and equipment installation at the new
branches and increased advertising costs associated with a series of campaigns
targeted at increasing the customer base of the Bank and the Company's rollout
of its internet banking product.
Furniture and equipment expense increased $126,000 for the quarter ended
September 30, 2002 compared to September 30, 2001. As discussed earlier, this
additional expense was associated with the new branches and increased costs
associated with data processing and communication equipment.
The effective income tax rate has been impacted by the Company's continued
emphasis on the utilization of tax-exempt municipal securities and the
discontinuance of amortization of goodwill that was not deductible for income
tax purposes. Municipal securities, which have offered an attractive tax
equivalent yield, helped counter the effect of the declining interest rate
environment and have lowered the Company's effective tax rate from 31.6% and
31.0% in the three and nine months ended September 30, 2001, to 30% and 29.3% in
the corresponding periods of 2002.
FINANCIAL POSITION
SECURITIES
Investment securities, which are purchased with the intent to hold until
maturity, totaled $40.2 million at September 30, 2002, a decrease of $1.7
million from December 31, 2001. This 3.99% decrease is the result of maturities
and calls within the portfolio during the first nine months of 2002. The market
value of investment securities held to maturity was 106.8% and 103.6% of book
value at September 30, 2002 and December 31, 2001, respectively. The market
value of fixed rate debt securities reacts inversely to falling interest rates;
consequently, recent trends in interest rates have had a positive effect on the
underlying market value since December 31, 2001, due to a general shift in
market rates for similar securities.
Securities available for sale were $334.4 million at September 30, 2002 compared
to $354.0 million at December 31, 2001, a decrease of $19.6 million. This change
reflects the purchase of $39 million in securities, $52.9 million in maturities
and calls, the sale of $14.8 million in securities, and the continuation of
larger pay-downs on mortgage-backed securities and CMO's triggered by the 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 $6.9 million at September 30, 2002, represents an increase of $6.1 million
from the $755,000 gain at December 31, 2001 due to market value increases in the
first nine months of 2002.
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 2001 and continues during 2002.
AVERAGE loans held for sale (see Table I) increased $10.7 million during the
first nine months of 2002 compared to the first nine months of 2001 due to a
substantial increase in mortgage purchase and refinance activity prompted by the
lower interest rate environment.
LOANS HELD FOR INVESTMENT
Total loans held for investment increased $21.9 million from $904.5 million at
December 31, 2001 to $926.4 million at September 30, 2002. However, the
substantial increase in deposits during the latter half of 2001 and the first
half of 2002 has lowered the loan to deposit ratio from its September 30, 2001
level. The loan to deposit ratio, using only loans held for investment
(excluding loans held for sale), was 83.82% on September 30, 2002, 83.88% on
December 31, 2001 and 90.5% on September 30, 2001. The lower levels of loans to
deposits are due, in part, to the lower loan to deposit ratios of the branches
acquired in the fourth quarter of 2001.
AVERAGE loans held for investment (see Table I) increased $88.2 million when
comparing the first nine months of 2002 to the same period of 2001, the result
of sales and marketing efforts, a concentration on relationship management and
development, and the acquisition of approximately $31 million of loans in
December 2001 as part of the BB&T and F&M branch acquisitions.
23
The held for investment loan portfolio continues to be diversified among loan
types and industry segments. The following tabular presentation of the loan
portfolio is presented as of September 30, 2002, December 31, 2001 and September
30, 2001 and provides an analytical overview of the growth experienced since
September 30, 2001 and the change in composition among the various categories.
LOAN PORTFOLIO OVERVIEW
(DOLLARS IN THOUSANDS)
SEPTEMBER 30, 2002 DECEMBER 31, 2001 SEPTEMBER 30, 2001
------------------------ ---------------------- ------------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-------- ------- --------- ------- ---------- -------
LOANS HELD FOR INVESTMENT:
Commercial and Agricultural $ 84,462 9.12% $ 96,641 10.68% $ 128,227 14.76%
Commercial Real Estate 282,944 30.55% 259,717 28.72% 248,237 28.59%
Residential Real Estate 358,185 38.66% 332,671 36.78% 282,475 32.52%
Construction 68,228 7.36% 77,402 8.56% 73,405 8.45%
Consumer 131,959 14.24% 137,104 15.16% 135,037 15.54%
Other 622 0.07% 961 0.11% 1,308 0.15%
-------- ------- --------- ------- ---------- -------
Total $926,400 100.00% $ 904,496 100.00% $ 868,689 100.00%
======== ======= ========= ======= ========== =======
LOANS HELD FOR SALE $ 68,821 $ 65,532 $ 40,759
======== ========= ==========
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 $8.0 million at September 30, 2002, $6.8
million at June 30, 2002 and $8.0 million at December 31, 2001, or 0.86%, 0.73%
and 0.88% 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) SEPTEMBER 30 JUNE 30 MARCH 31 DECEMBER 31 SEPTEMBER 30
2002 2002 2002 2001 2001
--------- ------- --------- ------- ----------
Nonaccrual $ 4,987 $4,131 $ 4,644 $ 3,633 $ 5,361
Ninety Days Past Due 367 254 192 1,351 1,418
Other Real Estate Owned 2,668 2,452 2,538 3,029 2,595
-------- ------ --------- ------- ---------
$ 8,022 $6,837 $ 7,374 $ 8,013 $ 9,374
======== ======= ========= ======= =========
Restructured loans
performing in accordance
with modified terms $ 347 $ 440 $ 523 $ 449 $ 443
======== ====== ========= ======= =========
At September 30, 2002, nonaccrual loans increased $856,000 from June 30, 2002,
while ninety day past due loans increased $113,000. 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 $856,000 increase in nonaccrual loans in the third quarter is
largely due to the net effect of a $2.0 million commercial land acquisition loan
which matured and was placed on nonaccrual status at September 30, 2002 and two
loans in the amounts of $360,000 and $639,000 (relating to one borrower), which
moved out of the nonaccrual loan category. The land acquisition loan referenced
has subsequently been renewed with the payment of interest to-date, the
establishment of both a six-month interest escrow and a plan for principal
reduction. In addition, as previously mentioned, the Company has identified the
hospitality industry as one showing inherent weakness due to current state of
the economy and has made a concerted effort to reduce exposure in this area. To
this end, the Company sold $5.0 million in loan balances out of the hospitality
sector subsequent to the September 30, 2002 balance sheet date.
24
OREO increased $216,000 during the third quarter of 2002 from June 30, 2002.
This increase in OREO is due, in part, to the aforementioned $360,000 movement
from the nonaccrual category with no other significant transactions during the
third quarter of 2002. Other real estate owned is carried at the lesser of net
estimated realizable fair market value or cost.
STOCKHOLDERS' EQUITY
Total stockholders' equity reached $149.7 million at September 30, 2002
increasing $16.7 million through earnings and comprehensive income (net of
dividends of $7.5 million) over the $133.0 million, reported at December 31,
2001. 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 September 30, 2002, the
Company's total risk adjusted capital-to-asset ratio was 13.16% versus 12.10% in
December 31, 2001. The Company's leverage ratio at September 30, 2002 was 8.13%
compared with 7.93% at December 31, 2001. 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.
LIQUIDITY
The Company maintains a significant level of liquidity in the form of cash and
cash equivalent balances ($50.65 million), investment securities available for
sale ($334.4 million) and Federal Home Loan Bank credit availability of
approximately $323.3 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 enhance the liquidity
risk process. 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.
RECENT LEGISLATIVE DEVELOPMENTS
On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002
("Act"). The stated goals of the Act are to increase corporate responsibility,
to provide for enhanced penalties for accounting and auditing improprieties at
publicly traded companies and to protect investors by improving the accuracy and
reliability of corporate disclosures pursuant to the securities laws.
The Act generally applies to all companies, both U.S. and non-U.S., that file or
are required to file periodic reports with the Securities and Exchange
Commission ("SEC") under the Securities Exchange Act of 1934 ("Exchange Act").
Given the extensive SEC role in implementing rules relating to many of the Act's
new requirements, the final scope of these requirements remains to be
determined.
The Act includes very specific additional disclosure requirements and new
corporate governance rules, requires the SEC and securities exchanges to adopt
extensive additional disclosure, corporate governance and other related rules
and mandates further studies of certain issues by the SEC and the Comptroller
General. The Act represents significant federal involvement in matters
traditionally left to state regulatory systems, such as the regulation of the
accounting profession, and to state corporate law, such as the relationship
between a board of directors and management and between a board of directors and
its committees.
This Act addresses, among other matters: audit committees; certification of
financial statements by the chief executive officer and the chief financial
officer; the forfeiture of bonuses and profits made by directors and senior
officers in the twelve month period covered by restated financial statements; a
prohibition on insider trading during pension plan black out periods; disclosure
of off-balance sheet transactions; a prohibition on personal loans to directors
and officers (excluding Federally insured financial institutions); expedited
filing requirements for stock transaction reports by officers and directors;
disclosure of a code of ethics and filing a Form 8-K for a change or waiver of
such code; "real time" filing of periodic reports; the formation of a public
accounting oversight board; auditor independence; and various increased criminal
penalties for violations of securities laws.
25
PART I. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 Bank seeks to control its IRR exposure to insulate net interest income and
net earnings from fluctuations in the general level of interest rates. To
measure its exposure to IRR, the Bank performs quarterly simulations using
financial models which project net interest income through a range of possible
interest rate environments including rising, declining, most likely, and flat
rate scenarios. The results of these simulations indicate the existence and
severity of IRR in each of those rate environments based upon the current
balance sheet position and assumptions as to changes in the volume and mix of
interest-earning assets and interest-paying liabilities and management's
estimate of yields attainable in those future rate environments and rates which
will be paid on various deposit instruments and borrowings.
The Company's risk profile continues to reflect a slightly asset sensitive
position. The substantial level of prepayments and calls consistent with the
declining rate environment that occurred in the prior year, as well as the
success of deposit funding campaigns instituted in the prior year have led to
an increase in the banks overall liquidity position as reflected in the level of
cash reserves, due from balances and Fed Funds Sold of approximately $50.7
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 or derivatives to balance the risk inherent in interest
rate lock commitments (also deemed to be derivatives) 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 derived from 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.
As discussed under "Derivative Instruments and Hedging Activities" under
Critical Accounting Policies, the Company's mortgage subsidiary held an
investment in the underlying notional value of investments in securities
("forward commitments") of $145 million versus option adjusted interest rate
lock commitments and closed loan inventory being hedged of $159 million. As of
September 30, 2002, the change in the market value of investments in hedge
securities reflected a decline in market value of $1.9 million while the
interest rate lock commitments reflect an appreciation in value of $3.8 million.
This hedging strategy is managed through a series of mathematical tools that are
used to quantify the exposure to changes in interest rates.
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 for December 31, 2001.
PART I. ITEM 4. CONTROLS AND PROCEDURES
Within the 90 days prior to the date of 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-14. Based upon that
evaluation, the Company's Chief Executive Officer along with the Company's Chief
Financial Officer concluded that the Company's 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 Securities and Exchange Commission ("SEC")
filings. There have been no significant changes in the Company's internal
controls or in other factors which could significantly affect these controls
subsequent to the date the Company carried out its evaluation.
26
Disclosure controls and procedures are our controls and other procedures that
are designed to ensure that information required to be disclosed by us in the
reports that we file or submit 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
us in the reports that we file under the Exchange Act is accumulated and
communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
(a) 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 October 2000, in a case styled "Ann Tierney Smith, as Executrix
of the Estate of Katherine B. Tierney, Ann Barclay Smith and
Laurence E. Tierney Smith vs. FCFT, Inc., et al, Civil Action No.
97-CV-408-K", the Registrant prevailed through entry of a directed
verdict in a suit, wherein the Plaintiffs sought to abolish a
charitable foundation trusteed by the Company plus obtain damages
of $3 million based upon an alleged breach of Registrant's
fiduciary duty and conflict of interest. In June of 2002, the West
Virginia Supreme Court of Appeals granted Plaintiffs and
co-defendant a hearing (set for November 13, 2002) to appeal the
Circuit Court's decision. Registrant was successful in seeking to
have one of the Supreme Court Justices recuse himself from this
matter due to his conflict of interest stemming from the
Justice's personal lawsuit against the Registrant as a dissenting
shareholder of a bank acquired by the Registrant. Legal Counsel
and management are both confident that the Registrant will prevail
in this matter. The Registrant's liability carrier has assumed the
defense of this matter under a reservation of rights.
Item 2. Changes in Securities and Use of Proceeds
Not Applicable
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5. Other Information
Not Applicable
27
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3(i) Articles of Incorporation and Amendments previously filed on August 14,
2002 as part of the June 30, 2002 10-Q
3(ii) Bylaws and Amendments previously filed on August 14, 2002 as part of the
June 30, 2002 10-Q
10.1 Employment Agreement dated January 1, 2000 and amended October 17, 2000,
between the Company and John M. Mendez previously filed.
10.2 Employment Agreement dated October 7, 2002 between the Company and Robert
L. Buzzo (1)
10.3 Employment Agreement dated October 7, 2002 between the Company and E.
Stephen Lilly (1)
12 Statement regarding computation of ratios-previously filed as a part of
Annual Report on Form 10-K, March 26, 2002
15 Letter regarding unaudited interim financial information
(1) The employment agreements betweeen Mssrs. Buzzo and Lilly are
substantially the same as the employment agreement between FCBI and John M.
Mendez dated January 1, 2000, and amended October 17, 2000, and previously
filed as an exhibit on Form 10-Q dated August 14, 2002, with the only
differences being with respect to titles, salary and the use of a Company
vehicle.
(b) Reports on Form 8-K
A report on Form 8-K was filed on September 11, 2002 announcing a merger
agreement with Monroe Financial, Inc.
A report on Form 8-K was filed on October 18, 2002 announcing the Company's
third quarter 2002 earnings and depicting certain financial information as
of September 30, 2002 and comparative income statements for the three and
nine-month periods ending September 30, 2002 and 2001, respectively.
28
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: November 14, 2002
/s/ John M. Mendez
- ------------------------------
John M. Mendez
President & Chief Executive Officer
(Duly Authorized Officer)
DATE: November 14, 2002
/s/ Robert L. Schumacher
- ------------------------------
Robert L. Schumacher
Chief Financial Officer
(Principal Accounting Officer)
29
CERTIFICATION
PURSUANT TO RULE 13A-14
AS ADOPTED PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, John M. Mendez, certify that:
1. I have reviewed this quarterly report on Form 10-Q of First
Community Bancshares, Inc.;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
(a) Designed such disclosure controls and
procedures to ensure that material
information relating to the registrant,
including its consolidated subsidiaries, is
made known to us by others within those
entities, particularly during the period in
which the periodic report is being prepared;
(b) Evaluated the effectiveness of the
registrant 's disclosure controls and
procedures as of a date within 90 days prior
to the filing date of this quarterly report
(the "Evaluation Date"); and
(c) Presented in this quarterly report our
conclusions about the effectiveness of the
disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and to the audit committee of the
registrant's board of directors (or persons performing the
equivalent function):
(a) All significant deficiencies in the design
or operation of internal controls which
could adversely affect the registrant's
ability to record, process, summarize and
report financial data and have identified
for the registrant's auditors any material
weaknesses in internal controls;
(b) Any fraud, whether or not material, that
involves management or other employees who
have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 14, 2002
/s/ John M. Mendez
-------------------------------------
John M. Mendez
President and Chief Executive Officer
30
CERTIFICATION
PURSUANT TO RULE 13A-14
AS ADOPTED PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Robert L. Schumacher, certify that:
1. I have reviewed this quarterly report on Form 10-Q of First
Community Bancshares, Inc.;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
(a) Designed such disclosure controls and
procedures to ensure that material
information relating to the registrant,
including its consolidated subsidiaries, is
made known to us by others within those
entities, particularly during the period in
which the periodic report is being prepared;
(b) Evaluated the effectiveness of the
registrant 's disclosure controls and
procedures as of a date within 90 days prior
to the filing date of this quarterly report
(the "Evaluation Date"); and
(c) Presented in this quarterly report our
conclusions about the effectiveness of the
disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and to the audit committee of the
registrant's board of directors (or persons performing the
equivalent function):
(a) All significant deficiencies in the design
or operation of internal controls which
could adversely affect the registrant's
ability to record, process, summarize and
report financial data and have identified
for the registrant's auditors any material
weaknesses in internal controls;
(b) Any fraud, whether or not material, that
involves management or other employees who
have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 14, 2002
/s/Robert L. Schumacher
-------------------------
Robert L. Schumacher
Chief Financial Officer
31
Index to Exhibits
Exhibit No.
15 Letter regarding unaudited interim financial information