First Community Bancshares, Inc.
P O Box 5909
Princeton, West Virginia 24740
August 13, 1998
Securities and Exchange Commission
Washington, DC 20549
Gentlemen:
Pursuant to the requirements of the Securities Exchange Act of
1934, we are
transmitting herewith the attached Form 10-Q.
Sincerely,
First Community Bancshares, Inc.
Kenneth P. Mulkey
Controller
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: June 30, 1998 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.
Nevada 55-0694814
1001 Mercer Street, Princeton, West Virginia 24740
(304) 487-9000
Indicate by check mark whether the Registrant (1) has filed all
reports
required to be filed by Section 13 or 15(d) of the Securities
Exchange Act
of 1934 during the preceding 12 months (or for such shorter
period that the
Registrant was required to file such reports), and (2) has been
subject to such
filing requirements for the past 90 days.
Yes X No__
Indicate the number of shares outstanding of each of the issuer's
classes of
common stock, as of the latest practicable date.
Class Outstanding at August 13, 1998
Common Stock, $1 Par Value 7,032,400
1
First Community Bancshares,
Inc
FORM 10-Q
For the quarter ended June 30, 1998
INDEX
PART I. FINANCIAL INFORMATION PAGE NUMBER
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 1998 and
December 31, 1997 3
Consolidated Statements of Income and Comprehensive Income
for the Three and Six Month Periods Ended June 30, 1998 and
1997 4
Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 1998 and 1997 5
Consolidated Statements of Changes in Stockholders'
Equity for the Six Months Ended June 30,
1998 and 1997 6
Notes to Consolidated Financial Statements 7-9
Independent Accountants' Report 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations11-17
Item 3. Quantitative and Qualitative Disclosures About Market
Risk 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities and Use of Proceeds 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of 18
Security Holders
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18-20
SIGNATURES 21
2
ITEM 1. FINANCIAL STATEMENTS
FIRST COMMUNITY
BANCSHARES, INC.
CONSOLIDATED
BALANCE SHEETS
(Unaudited) June 30 December 31
(Amounts in Thousands, Except Share Data) 1998
1997
Assets
Cash and due from banks $ 35,761 $ 34,590
Interest bearing balances 75,993 145
Federal funds sold 21,160 12,406
Securities available for sale (amortized cost
of $119,719 June 30, 1998; $159,711
December 31, 1997) 121,714 161,795
Investment securities:
U.S. Treasury securities 1,099 4,098
U.S. Government agencies and corporations 15,735
26,377
States and political subdivisions 75,339 77,641
Other securities 1,060 1,058
Total Investment Securities (market
value, $96,323 June 30, 1998; $112,263
December 31, 1997) 93,233 109,174
Total loans, net of unearned income 656,196 671,817
Less: reserve for possible loan losses 11,738 11,406
Net loans 644,458 660,411
Premises and equipment, net 18,501 19,133
Interest receivable 6,758 7,688
Other assets 10,376 11,206
Intangible assets 25,372 25,774
Total Assets $1,053,326 $1,042,322
Liabilities
Deposits, non-interest bearing $ 112,540 $ 103,846
Deposits, interest-bearing 758,244 749,661
Total Deposits 870,784 853,507
Interest, taxes and other liabilities 9,162 11,455
Federal funds purchased - 2,705
Securities sold under agreement to repurchase 51,096
52,351
Other indebtedness 23,780 24,444
Total Liabilities 954,822 944,462
Stockholders' Equity
Common stock, $1 par value; 10,000,000 shares
authorized; 7,193,909 issued in 1998 and 1997;
7,032,400 and 7,062,898 shares outstanding in 1998 and 1997
7,194 7,194
Additional paid-in capital 36,122 36,122
Retained earnings 56,536 54,564
Unallocated common stock held by ESOP, at cost (1,274)
- -
Treasury stock, at cost (1,271) (1,271)
Accumulated other comprehensive income 1,197
1,251
Total Stockholders' Equity 98,504 97,860
Total Liabilities and Stockholders' Equity $1,053,326
$1,042,322
See Notes to Consolidated Financial Statements.
3
FIRST COMMUNITY
BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME AND
COMPREHENSIVE INCOME
(Unaudited)
(Amounts in Thousands, Except Six Months Ended
Three Months Ended
Share and Per Share Data) June 30
June 30
1998 1997 1998 1997
Interest Income:
Interest and fees on loans $ 32,017$ 27,815$ 15,951$ 14,859
Interest on securities available for sale4,891 4,510 2,155
2,329
Interest on investment securities:
U.S. Treasury securities 88 205 34 100
U.S. Government agencies and corporations 580 1,246
258 637
States and political subdivisions, tax exempt2,010 1,343
993 710
Other securities 42 42 21 21
Interest on federal funds sold 744 296 427 270
Interest on deposits in banks 904 23
781 8
Total Interest Income 41,276 35,480 20,620
18,934
Interest Expense:
Interest on deposits 17,339 12,923 8,716 6,947
Interest on borrowings 1,889 1,965 962
999
Total Interest Expense 19,228 14,888 9,678
7,946
Net Interest Income 22,048 20,592 10,942 10,988
Provision for possible loan losses 5,076 1,717
3,789 1,087
Net Interest Income After Provision for
Possible Loan Losses 16,972 18,875 7,153
9,901
Non-Interest Income:
Fiduciary income 884 793 430 454
Service charges on deposit accounts1,8611,472 970 806
Other charges, commissions and fees1,5941,412 857 715
Gain on settlement of pension plan, net of excise tax 1,062
- - - -
Net securities gains 21 - 21 -
Other operating income 288 310 174
188
Total Non-Interest Income 5,710 3,987 2,452
2,163
Non-Interest Expense:
Salaries and employee benefits 6,251 5,686 3,103 3,049
Occupancy expense of bank premises958 779 459 395
Furniture and equipment expense1,004 691 515 404
Goodwill amortization 1,035 482 500 366
Other operating expense 5,478 3,778 2,811
1,761
Total Non-Interest Expense 14,726 11,416 7,388
5,975
Income before income taxes 7,956 11,446 2,217 6,089
Income tax expense 2,466 3,610 681
1,950
Net Income 5,490 7,836 1,536 4,139
Other comprehensive income (54) 107 (173)
881
Comprehensive Income $ 5,436$ 7,943$ 1,363$
5,020
Basic and diluted earnings per common share$ .78$
1.12 $ .22$ .58
Weighted average shares outstanding7,055,9417,062,7567,049,061
7,062,756
See Notes to Consolidated Financial Statements.
4
FIRST
COMMUNITY BANCSHARES, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in Thousands)
Six Months Ended
June 30
1998 1997
Cash Flows From Operating Activities:
Net income $ 5,490 $ 7,836
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for possible loan losses5,076 1,717
Depreciation of premises and equipment 749
504
Amortization of intangibles 925 228
Investment amortization and accretion, net (145)
(77)
Gain on the sale of assets, net (83) (69)
Other liabilities, net (2,199) (3,062)
Interest receivable 930 226
Other assets, net 2,194 1,105
Other, net 29 36
Net cash provided by operating activities 12,966
8,444
Cash Flows From Investment Activities:
Increase (decrease) in cash realized from:
Maturities and calls of investment securities 16,006
14,134
Maturities and calls of securities available for sale63,407
11,214
Purchase of investment securities(120) (408)
Purchase of securities available for sale (23,185)
(3,521)
Net decrease (increase) in loans made to customers 9,079
(3,910)
Purchase of equipment (233) (481)
Sales of equipment 28 -
Net cash used in acquisitions - (9,803)
Net cash provided by investment activities 64,982
7,225
Cash Flows From Financing Activities:
Increase (decrease) in cash realized from:
Demand and savings deposits, net14,225 4,024
Time deposits, net 3,042 11,719
Short-term borrowings, net (3,960) (19,357)
Increase in long-term debt 3,000 11,500
Payments of long-term debt (3,664) (307)
Acquisition of unallocated ESOP shares (1,274)
- -
Cash paid in lieu of fractional shares (27)
(22)
Cash dividends paid (3,517) (3,334)
Net cash provided by financing activities 7,825
4,223
Net increase in cash and cash equivalents 85,773
19,892
Cash and cash equivalents at beginning of year 47,141
27,342
Cash and cash equivalents at end of quarter $132,914
$47,234
See Notes to Consolidated Financial Statements.
5
FIRST COMMUNITY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
(Amounts in Thousands, Except
Accumulated
Per Share Data) Additional Unallocated
Other
Common Paid-In Retained Common Stock Treasury
Comprehensive
Stock Capital Earnings Held by ESOP Stock
Income
Balance beginning of
the period,
January 1, 1997$30,216$13,100$46,815$ -$(1,288) $ 433
Net Income - - 7,836 - - -
Common dividends
declared ($.47
per common share) - -(3,334) - - -
Other comprehensive income - - -
- - - 107
Balance, June 30, 1997 $30,216$13,100 $51,317$ - $(1,288)
$540
Balance beginning of
the period,
January 1, 1998$ 7,194$36,122$54,564$ -$(1,271)$1,251
Net income - - 5,490 - - -
Common dividends
declared ($.50
per common share) - - (3,518) - - -
Purchase of unallocated common stock
by ESOP - - - (1,274) - -
Other comprehensive income - - -
- - - (54)
Balance, June 30, 1998 $ 7,194$36,122 $56,536 $(1,274) $(1,271) $
1,197
See Notes to Consolidated Financial Statements.
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Unaudited Financial Statements
The unaudited consolidated balance sheet as of June 30, 1998 and
the unaudited
consolidated statements of income and other comprehensive income,
cash flows
and changes in stockholders' equity for the periods ended June
30, 1998 and
1997 have been prepared by management of First Community
Bancshares, Inc.
(FCBI). In the opinion of management, all adjustments (including
normal
recurring accruals) necessary to present fairly the financial
position of FCBI
and subsidiaries at June 30, 1998 and its results of operations,
cash flows,
and changes in stockholders' equity for the periods ended June
30, 1998 and
1997, have been made. These results are not necessarily
indicative of the
results of consolidated operations for the full calendar year.
The consolidated balance sheet as of December 31, 1997 has been
extracted from
audited financial statements included in the Company's 1997
Annual Report to
Stockholders. Certain information and footnote disclosures
normally included
in financial statements prepared in accordance with generally
accepted
accounting principles have been omitted. It is suggested that
these financial
statements be read in conjunction with the financial statements
and notes
thereto included in the 1997 Annual Report of FCBI.
Note 2. Acquisitions
On April 9, 1997, the Company acquired 100% of the common stock
of Blue Ridge
Bank (Blue Ridge), headquartered in Sparta, North Carolina. Blue
Ridge is a
$105 million state-chartered bank with offices located in Sparta,
Elkin, Hays
and Taylorsville, North Carolina. Pursuant to the Agreement and
Plan of
Merger, the Company exchanged cash of $19.50 for each of Blue
Ridge's
1,212,148 common shares. In conjunction with the acquisition,
Blue Ridge
canceled outstanding stock options through the payment of
$727,948 representing
the difference between $19.50 and the respective option prices.
Total
consideration, including the payment for cancellation of the
options, was
$24.4 million and resulted in an intangible asset (goodwill) of
approximately
$14.1 million which is being amortized over a 15-year period.
The acquisition
was partially funded with loan proceeds of $11.5 million which
the Company
borrowed from an outside source. The acquisition was accounted
for under the
purchase method of accounting. Accordingly, results of
operations of Blue
Ridge are included in consolidated results from the date of
acquisition.
Subsequent to the merger, Blue Ridge operates as a wholly-owned
subsidiary of
FCBI.
The following unaudited proforma financial information shows the
effect of
the Blue Ridge acquisition as if the transaction were consummated
on January
1, 1997.
First Community Bancshares, Inc.
Unaudited Supplemental Proforma Financial Information
(Amounts in thousands except per share data)
Six Months Ended
June 30 1997
Net Interest Income $21,313
Net Income 7,820
Basic Earnings Per Common Share 1.12
Note 3. Cash Flows
For the six months ended June 30, 1998 and 1997, for purposes of
reporting
cash flows, cash and cash equivalents include cash and due from
banks and
interest-bearing balances available for immediate withdrawal of
$111.8
million at June 30, 1998 and $33.4 million at June 30, 1997, and
federal funds
sold of $21.2 million at June 30, 1998 and $13.9 million at June
30, 1997.
7
Note 4. Commitments and Contingencies
The Company is currently a defendant in various actions, some of
which have
remained dormant for a number of years, and most of which involve
lending
and collection activities in the normal course of business.
Certain of these
actions are described in greater detail in the Company's 1997
Report on Form
10-K. While the Company and legal counsel are unable to assess
the outcome of
each of these matters, they are of the belief that the resolution
of these
actions should not have a material adverse affect on the
financial position
or results of operations of the Company.
Note 5. Common Stock
On September 30, 1997, in connection with a change in the
Company's state
of domicile, the par value of the Company's common stock was
changed from $5
per share to $1 per share reducing total common stock by $23.0
million.
Additionally, in the first quarter of 1998, the Company declared
a
five-for-four stock split in the form of a 25% stock dividend.
Accordingly,
$1.4 million was transferred from additional paid-in capital to
common stock,
representing the par value of the new shares issued. Share and
per share
amounts for all periods presented have been restated to reflect
the stock
split.
In connection with the termination and settlement of a defined
benefit pension
plan in the first quarter of 1998, twenty-five percent of the
settlement
amount or $1,274,000 was contributed to another Company sponsored
plan. This
contribution was reflected as a prepaid contribution on the
Company's books
in the first quarter. The prepaid contribution was used to
purchase shares of
the Company's common stock in the second quarter of 1998 by the
trustee.
These shares will be allocated to the employee accounts over a
period not to
exceed seven years. The shares are reclassified as unallocated
common
stock in the stockholders' equity section of the balance sheet.
8
Note 6. Other Comprehensive Income
In June 1997, the Financial Accounting Standards Board ("FASB")
issued SFAS
No. 130, "Reporting Comprehensive Income," which requires
businesses to
disclose comprehensive income and its components in their general
purpose
financial statements. This statement requires the reporting of
all items of
comprehensive income in a financial statement that is displayed
with the same
prominence as other financial statements. This statement is
effective for the
fiscal years beginning after December 15, 1997, with
reclassification of
comparative financial statements and is applicable to interim
periods. The
Company currently has one component of other comprehensive income
which
includes unrealized gains or losses on securities available for
sale which are
detailed as follows:
(Amounts in Thousands)
For the Six Months Ended For the Six
Months Ended
June 30, 1998 June 30, 1997
Before-Tax Tax Net-of-Tax Before-
Tax Tax Net-of-Tax
Amount Benefit Amount Amount Expense Amount
Unrealized gains
on securities:
Unrealized holding gains
arising during the period$(90)$ 36 $(54) $ 178 $(71)
$ 107
Less: reclassification adjustment
for gains realized in net income 0 0 0
0 0 0
Net realized gains (90) 36 (54) 178 (71) 107
Other comprehensive income $(90) $ 36 $(54) $ 178 $(71)
$ 107
Accumulated Other Comprehensive Income:
Balance January 1, 1997 $ 433
Other Comprehensive Income, net 107
Balance June 30, 1997 $ 540
Balance January 1, 1998 $ 1,251
Other Comprehensive Income, net (54)
Balance June 30, 1998 $ 1,197
Note 7. Recent Accounting Pronouncements
During the first six months of 1998, the Financial Accounting
Standards Board
("FASB") issued SFAS No. 132 and 133 which pertain to Disclosures
about
Pensions and Other Postretirement Benefits and Accounting for
Derivative
Instruments and Hedging Activities, respectively. Management is
currently in
the process of evaluating the impact of these statements.
9
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors and Stockholders
of First Community Bancshares, Inc.
We have reviewed the accompanying consolidated balance sheet of
First
Community Bancshares, Inc. and subsidiaries as of June 30, 1998,
and the
related consolidated statements of income and comprehensive
income, changes
in stockholders' equity and cash flows for the periods
ended June 30, 1998 and 1997. These financial statements are the
responsibility of the Corporation's management.
We conducted our review 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 of making inquiries of persons responsible
for financial
and accounting matters. It is substantially less in scope than
an audit
conducted in accordance with generally accepted auditing
standards, the
objective of which is the expression of an opinion regarding the
financial
statements taken as a whole. Accordingly, we do not express such
an opinion.
Based on our review, we are not aware of any material
modifications that
should be made to such consolidated financial statements for them
to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted
auditing
standards, the consolidated balance sheet of First Community
Bancshares, Inc.
and subsidiaries as of December 31, 1997, 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
January 30,
1998, 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, 1997, is fairly
stated, in all
material respects, in relation to the consolidated balance sheet
from which it
has been derived.
Deloitte & Touche LLP
Pittsburgh, Pennsylvania
August 5, 1998
10
First Community Bancshares, Inc.
PART 1. 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 which
is not
otherwise apparent from the consolidated financial statements
incorporated
by reference or included in this report. This discussion and
analysis should
be read in conjunction with the 1997 Annual Report to Shareholders
and the
other financial information included in this report.
RESULTS OF OPERATIONS
The Company reported net income of $5.5 million for the six month
period ended
June 30, 1998, a 29.9% decrease from net income of $7.8 million
for the
corresponding period in 1997. Basic earnings per common share
between the
two periods decreased 30.4%, from $1.12 to $.78.
Net income for the second quarter of 1998 was impacted by a write-
off of a
portion of a commercial loan relationship which led to a $2.75
million
additional loan loss provision for the quarter. The Company
recognized the
write-off in operations for the quarter and retained existing
reserves to
strengthen the balance sheet and overall asset quality of the loan
portfolio.
The reduction in non-performing loans and additional provisions
totalling $2.9
million increased the reserve to nonperforming loans ratio to
112%, up from
79.3% at year-end 1997. Non-interest income for the six month
period ended
June 30, 1998 increased $1.7 million over the comparable period in
1997,
$419,000 of which was due to the Blue Ridge and branch
acquisitions throughout
1997 and $1,062,000 which was due to the pension plan termination
gain
recognized in the first quarter of 1998. Non-interest expense for
the six
month period ended June 30, 1998 increased $3.3 million of which
$3.1 million
was due to the Blue Ridge and branch acquisitions.
Net income for the second quarter of 1998 totalled $1.5 million,
63% lower
than net earnings for the corresponding second quarter of 1997.
Again the
decrease reflects added loan loss provisions of $2.9 million in
the second
uarter of 1998 which absorbed the above referenced loan charge-
off and brought
loan loss reserves to a level targeted to exceed 100% of non-
performing loans
at the close of the quarter.
Basic earnings per share for the quarter were $.22 versus $.58
for the three
months ended June 30, 1997. Earnings for the first half and
second quarter
of 1997 also benefited from a $700,000 recovery of litigation
reserves
recognized in June 1997, further accentuating the variance
between 1997 and
1998 earnings.
The per share amounts presented for 1997 have been restated to
reflect the
effect of the change in the number of outstanding shares as a
result of the
March 31, 1998 five-for-four stock split.
11
Net Interest Income
Net interest income, the largest contributor to earnings was $22.0
million
for the first six months of 1998 as compared with $20.6 million
for the
corresponding period in 1997. Tax equivalent net interest income
totaled
$23.6 million for 1998, an increase of $1.8 million over the $21.8
million
reported in the first six months of 1997. This increase in net
interest
income was the result of increases in average earning assets of
$146.6
million over the corresponding period in 1997.
The Company's tax equivalent net interest margin of 4.93% at
quarter-end
reflects the rising cost of funds from the first six months of
1997 when tax
equivalent net interest margin was 5.37%. The Company's growing
earning
asset base provided added net interest income to partially offset
the impact
of the increase in the cost of interest-bearing liabilities of 24
basis points
from 4.39% in the first six months of 1997 to 4.63% in the
corresponding
period in 1998.
Loans, the Company's highest yielding asset category, experienced
an increase
in average balances of $85.3 million or 14.7%, comparing the first
six months
of 1998 to the corresponding period in 1997. This increase in the
loan
portfolio which includes loans acquired in the Blue Ridge and
branch
acquisitions of $100 million was funded through increases in
deposits of
$160.6 million and calls and maturities of investments.
Significant average
deposit increases were achieved primarily due to the addition of
Blue Ridge
Bank and branches acquired throughout 1997. The tax equivalent
yield on the
loan portfolio was 9.79% for the first six months of 1998 as
compared with
9.78% for the same period in 1997. The tax equivalent yield on
securities
available for sale declined from 6.97% in 1997 to 6.90% in the
corresponding
first six months of 1998. Investment securities held to maturity
experienced
a 35 basis points increase in yield from 7.10% in the first six
months of
1997 to 7.45% for the corresponding period in 1998. The yield on
average
earning assets decreased 9 basis points from 9.04% for the six
months
ended June 30, 1997 to 8.95% for the corresponding period in 1998.
The cost of short-term borrowings increased 24 basis points over
the past
twelve months from 4.33% in 1997 to 4.57% for the corresponding
first six
months of 1998. Time deposits experienced a 32 basis points
increase from
5.25% in the first six months of 1997 to 5.57% for the
corresponding period in
1998. This market pressure on rates did not materially effect
short-term
deposits, such as interest-bearing demand deposits and savings
accounts,
with the cost of interest bearing demand deposits increasing only
6 basis
points over the corresponding period in 1997 and savings yields
dropping
slightly from 3.07% and 3.04%. With significant liquidity which
has been
accumulated in the first half of 1998 from rolloff and early
redemption of
investment securities, rates paid on non-core sources of funding
are expected
to drop resulting in improved interest margins in succeeding
quarters.
In comparing the second quarter of 1998 with the second quarter
of 1997, net
interest income remained relatively flat. Despite increases in
earning assets
between the quarters which resulted in an additional $1.7 million
in interest
income, deposit cost increased by $1.8 million between the
quarters. The
deposit cost was lead by a 32 basis point increase in the cost of
time
deposits.
12
AVERAGE BALANCE SHEETS AND
NET INTEREST INCOME ANALYSIS
Six Months Ended Six Months Ended
(Unaudited) June 30,1998
June 30, 1997
(Amounts in Average Interest Yield/Rate Average
Interest Yield/Rate
Thousands, Except %'s) Balance (1) (2) (2) Balance
(1) (2) (2)
Earning Assets:
Loans (3)
Taxable $ 651,163$ 31,524 9.76%$ 563,900$ 27,2699.75%
Tax-Exempt 13,921 75910.99% 15,873 839
10.66%
Total 665,084 32,283 9.79% 579,773 28,108 9.78%
Reserve for Possible Loan Losses (11,816) (9,597)
Net Total 653,268 570,176
Investments Available for Sale:
Taxable 128,158 4,392 6.91% 122,453 4,104 6.76%
Tax-Exempt 22,528 7676.86% 14,329
625 8.79%
Total 150,686 5,159 6.90% 136,782 4,7296.97%
Investment Securities Held to Maturity:
Taxable 25,005 899 7.25% 50,156 1,598 6.42%
Tax-Exempt 75,185 2,8027.52% 49,408 1,9067.78%
Total 100,190 3,701 7.45% 99,564 3,5047.10%
Interest-Bearing Deposits 32,969 904 5.53% 375 23 12.37%
Federal Funds Sold 27,328 744 5.49% 10,967 296
5.44%
Total Earning Assets964,441 42,7918.95% 817,864 36,660 9.04%
Other Assets 93,867 67,021
Total $1,058,308 $ 884,885
Interest-Bearing Liabilities:
Interest-bearing Demand Deposits$ 131,9631,835 2.80%$ 100,933
1,372 2.74%
Savings Deposits151,7472,287 3.04% 136,656 2,082 3.07%
Time Deposits478,772 13,217 5.57% 364,279 9,475 5.25%
Short-Term Borrowings 50,894 1,154 4.57% 63,403 1,360 4.33%
Other Indebtedness 23,749 7356.24% 19,192 599
6.29%
Total Interest-Bearing Liabilities 837,125 19,228 4.63%
684,463 14,888 4.39%
Demand Deposits 108,178 94,365
Other Liabilities12,884 14,564
Stockholders' Equity 100,121 91,493
Total $1,058,308 $ 884,885
Net Interest Earnings $ 23,563 $ 21,772
Net Interest Spread 4.32% 4.65%
Net Interest Margin 4.93% 5.37%
(1) Interest amounts represent taxable equivalent results for
the first
six months of 1998 and 1997.
(2) Fully Taxable Equivalent-using the statutory rate of 35%.
(3) Non-accrual loans are included in average balances
outstanding with no
related interest income.
13
Provision and Reserve for Possible Loan Losses
In order to maintain a balance in the reserve for possible loan
losses which
is sufficient to absorb potential loan losses, charges are made
to the
provision for possible loan losses (provision). The provision
was $5,076,000
for the first six months of 1998 compared with $1,717,000 for the
corresponding period in 1997. The second quarter of 1998
provision is
elevated as a result of the previously discussed $2.75 million
commercial loan
charge-off and efforts to increase the company's coverage ratio
of
non-performing loans to over 100%.
Net charge-offs for the first half of 1998 were $4.7 million as
compared to
$1.7 million for the corresponding period in 1997. Expressed as
a percentage
of average loans, net charge-offs were .71% for the six month
period ended
June 30, 1998 and .29% for the corresponding period in 1997.
The reserve for possible loan losses totaled $11.7 million at
June 30, 1998
and 11.4 million at December 31, 1997 resulting in reserve to
loan ratios of
1.80% and 1.70% for the respective periods.
The coverage ratio represents the percentage of non-performing
loans covered
through available reserves. As of June 30, 1998, this ratio was
112.2% as
compared to 109.8% at June 30, 1997 and 79.3% at December 31,
1997.
Management continually evaluates the adequacy of the reserve for
possible
loan losses and makes specific adjustments to it 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 reserves
adequate
based on the current risk profile in the loan portfolio.
However, there can
be no assurance that FCBI will not sustain losses in future
periods, which
could be substantial in relation to the size of the allowance at
June 30,
1998.
Non-Interest Income
Non-interest income consists of all revenues which are not
included in
interest and fee income related to earning assets. Total non-
interest income
increased $1,723,000, or 78.7% from $3,987,000 for the six months
ended June
30, 1997 to $5,710,000 for the corresponding period in 1998. The
largest
contributor to the increase in non-interest income in the most
recent quarter
is the recognition of a $1.062 million gain on the settlement of
the company's
defined benefit pension plan which was previously terminated. In
addition
to this non-recurring gain, service charges, commissions and
other revenues
increased 16.6% due in large part to the addition of the Blue
Ridge Bank and
branches acquired throughout 1997. Non-interest income increased
$289,000
when comparing the second quarter of 1997 to the corresponding
period in 1998.
Of this amount, the branches acquired in the third and fourth
quarters of 1997
added $128,000 in non-interest income.
Non-Interest Expense
Non-interest expense totaled $14.7 million in the first six
months of 1998
increasing $3.3 million over the corresponding period in 1997.
This increase
includes the effect of the acquisitions of Blue Ridge Bank and
branch
acquisitions which added an additional $921,000 in salaries and
benefits,
$354,000 in occupancy cost and furniture & fixtures and $807,000
in other
operating costs including goodwill amortization. Non-interest
expense
increased $1.4 million when comparing the second quarter of 1997
to the
corresponding period in 1998. Of this amount, the branches
acquired in the
third and fourth quarters of 1997 added $460,000 in increased
expense while
$700,000 of the increase is due to the recovery of litigation
reserves
recognized in June 1997.
Other operating expense of $5,478,000 for the six months ended
June 30, 1998
increased by $1.7 million from $3,778,000 in the corresponding
period in
1997. The primary contributors to the increase include the
$700,000
litigation reversal in the first six months of 1997 and the
increased cost of
operating the new branches acquired throughout 1997.
Additionally, credit
card fees increased by $142,000, Other Real Estate (ORE) costs
increased by
$110,000 and amortization of an investment in an unconsolidated
real estate
subsidiary increased by $140,000.
14
FINANCIAL POSITION
Securities
Securities totaled $215.0 million at June 30,1998 which
represented a decrease
of $56.0 million from December 31, 1997. This 20.7% decrease,
which is
primarily attributed to securities called prior to maturity and
prepayments
was used to reduce wholesale funding from the Federal Home Loan
Bank (FHLB)
and is evident in the increase in interest-bearing bank balances
which
represent overnight funds sold to various correspondents and the
FHLB.
Declining investment rates have continued to result in increases
in the volume
of securities called prior to final maturity. These funds are
currently
reinvested in the above referenced overnight funds.
Securities available for sale were $121.7 million at June 30,
1998 as compared
to $161.8 million at December 31, 1997. Securities available for
sale are
recorded at their fair market value at June 30, 1998 and December
31, 1997.
The unrealized gain or loss, which is the difference between book
value and
market value, net of related deferred taxes, is recognized in the
Stockholders' Equity section of the balance sheet as accumulated
other
comprehensive income. The unrealized gain after taxes of $1.3
million at
December 31, 1997, decreased $54,000 to an unrealized gain of
$1.2 million at
June 30, 1998.
Investment securities, which are purchased with the intent to
hold until
maturity, totaled $93.2 million at June 30, 1998 as compared to
$109.2 million
at December 31, 1997. The market value of investment securities
was 103%
of book value at December 31, 1997 and June 30, 1998.
Loans
The Company's lending strategy stresses quality growth,
diversified by
product, geography and industry. A common credit underwriting
structure and
review process is in place throughout the Company.
Total loans decreased $15.6 million from $671.8 million at
December 31, 1997
to $656.2 million at June 30, 1998. Likewise, the loan to
deposit ratio
decreased slightly from 79% at December 31, 1997 to 75% at June
30, 1998.
Average total loans have increased $85.3 million between the
second quarter of
1997 and 1998 due primarily to the addition of loan portfolios
from Blue
Ridge and the newly acquired branches, as well as effective
competition
with larger regional banks for small business customers both in
and around the
Company's primary markets. The loan portfolio continues to be
diversified
among loan types and industry segments. Commercial and
commercial real
estate loans represent the largest portion of the portfolio,
comprising $277.0
million or 42.2% of total loans at June 30, 1998 and $285.1
million or 42%
of total loans at December 31, 1997. Residential real estate
loans decreased
slightly in total dollars to $225.4 million but increased as a
percentage of
the portfolio to 34% of total loans at June 30, 1998 as compared
to $227.5
million or 31% at December 31, 1997. Loans to individuals also
decreased
slightly from $148.5 million or 22% of total loans at December
31, 1997 to
$143.7 million or 22% of total loans at June 30, 1998.
15
Non-Performing Assets
Non-performing assets are comprised of 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 $13.3
million at June
30, 1998, or 2.0% of total loans and OREO, compared with $15.9
million or
2.4% at December 31, 1997. The following schedule details non-
performing
assets by category at the close of each of the last five
quarters:
(In Thousands) June 30 March 31 December 31 September 30 June
30
1998 1998 1997 1997
1997
Non-Accrual $8,725 $10,832 $ 9,988 $11,507 $ 7,173
Ninety Days Past Due1,740 5,261 4,391 2,255 2,674
Other Real Estate Owned 2,878 1,594 1,472 2,279 2,483
$13,343 $17,687 $15,851 $16,041 $12,330
Restructured loans
performing in accordance
with modified terms$ 517$ 524$ 534$ 381$ 547
Non-accrual loans and loans ninety days past due decreased $1.3
million and
$2.7 million, respectively, when comparing June 30, 1998 and
December 31,
1997. The decrease in non-accrual loans is the result of the
June 1998
foreclosure on a furniture manufacturing facility which resulted
in a $2.75
million charge-off and a $1.5 million transfer to OREO. In
addition, ninety
day past due loans were reduced by the cure of a $1.0 commercial
loan
delinquency (paid current) referenced in the 1997 10-K along with
the
voluntary or forced collection of a number of smaller accounts
which were past
due but in the process of collection at year-end 1997.
Management believes that the extent of problem loans at June 30,
1998 is
disclosed as non-performing assets in the preceding chart.
However, there
can be no assurance that future circumstances, such as erosions
in economic
conditions and the related potential effect that such erosions
may have on
certain borrowers' ability to continue to meet payment
obligations, will not
lead to an increase in problem loan totals. Management further
believes that
non-performing asset carrying values will be substantially
recoverable after
taking into consideration the adequacy of applicable collateral
and, in
certain cases, partial writedowns which have been taken and
allowances that
have been established.
Stockholders' Equity
Total stockholders' equity reached $98.5 million at June 30, 1998
increasing
$.6 million over the $97.9 million reported for December 31,
1997. The
increase in stockholders' equity was the result of earnings net
of dividends
of $3.5 million. Also affecting this change in stockholders'
equity was a
decrease in the accumulated other comprehensive income decreasing
from
$1,251,000 at December 31, 1997 to $1,197,000 at June 30, 1998.
Stockholders'
equity also reflects the $1,274,000 cost of unallocated ESOP
shares purchased
during the second quarter of 1998.
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
commitments based
on inherent risks associated with the respective asset types. At
June 30,
1998, the company's risk adjusted capital-to-asset ratio was
12.29%. The
company's leverage ratio at June 30, 1998 was 6.94% compared with
6.96% at
December 31, 1997. Both the risk adjusted capital-to-asset ratio
and the
leverage ratio exceed the current minimum levels prescribed for
bank holding
companies of 8% and 3%, respectively.
16
Liquidity
The Company maintains a significant level of liquidity in the
form of cash
and due from bank balances ($111.8 million), investment
securities available
for sale ($121.7 million), federal funds sold ($21.2 million),
and Federal
Home Loan Bank of Pittsburgh credit availability of $151.2
million. Cash
advances from the Federal Home Loan Bank of Pittsburgh 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.
Other Items
Following the close of the second quarter, the Company entered
into an
agreement for the sale of approximately $9.5 million in credit
card
receivables comprising all of its MasterCard/Visa credit
portfolio. Along
with this sale, the Company transferred substantially all of its
merchant
point-of-sale contracts associated with the credit card acquiring
business.
This sale and transfer substantially removes the Company from the
credit card
business as a direct issuer and acquirer; however, the Company
will continue
to issue credit cards as agent for First Tennessee Bank, N.A. In
connection
with the sale of receivables and merchant contracts, the Company
realized a
net gain of $841,000 in July 1998. The Company continues to
process several
regional and national private label cards but is in various
stages of
negotiation for the sale and transfer of these accounts as well.
PART I. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
Since December 31, 1997, the Company's balance sheet profile has
shifted
toward a more asset sensitive position due to increased liquidity
from
investment security calls and growth in customer deposits. This
shift would
have the effect of lessening interest rate risk in a rising rate
environment.
The interest rate environment has remained relatively flat since
year-end 1997
and there have been no significant changes in market risks with
the exception
of the noted increase in asset sensitivity. A complete
discussion of market
risk is included in the Company's 1997 report on Form 10-K.
FCFT, INC.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
(a) There were no material developments in legal proceedings
during
the second quarter of 1998 nor through the date of this report.
A complete
discussion of material legal proceedings is included in the
Company's 1997
report on Form 10-K.
Item 2. Changes in Securities
(a) N/A
(b) N/A
(c) N/A
(d) N/A
Item 3. Defaults Upon Senior Securities
(a) N/A
(b) N/A
17
Item 4. Submission of Matters to a Vote of Security Holders
(a) N/A
(b) N/A
(c) N/A
(d) N/A
Item 5. Other Information
(a) N/A
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 15- Letter regarding unaudited interim financial
information
Exhibit 27- Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the second quarter of
1998.
18
Exhibit 15
August 13, 1998
To the Board of Directors and Stockholders
of First Community Bancshares, Inc.
Dear Sirs:
We have made a review, in accordance with standards established
by the
American Institute of Certified Public Accountants, of the
unaudited interim
financial information of First Community Bancshares, Inc. and
subsidiaries
for the periods ended June 30, 1998 and 1997, as indicated in our
report
dated August 5, 1998; because we did not perform an audit, we
expressed no
opinion on that information.
We are aware that our report referred to above, which is included
in your
Quarterly Report on Form 10-Q for the quarter ended June 30,
1998, is
incorporated by reference in Registration Statement No. 33-72616
on Form S-8
and Registration Statement No. 333-2996 on Form S-4.
We also are aware that the aforementioned report, pursuant to
Rule 436(c)
under the Securities Act of 1933, is not considered a part of the
Registration
Statement prepared or certified by an accountant or a report
prepared or
certified by an accountant within the meaning of Sections 7 and
11 of that
Act.
Yours truly,
Deloitte & Touche LLP
Pittsburgh, Pennsylvania
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the
Registrant has duly caused this report to be signed on its behalf
by the
undersigned thereunto duly authorized.
First Community Bancshares, Inc.
DATE: August 13, 1998
______________________________
James L. Harrison, Sr.
President & Chief Executive Officer
(Duly Authorized Officer)
DATE: August 13, 1998
______________________________
John M. Mendez
Vice President & Chief Financial Officer
(Principal Accounting Officer)
20