FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 0-19618
FIRST COMMUNITY BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
Indiana 35-1833586 (State or other jurisdiction of incorporation or
organization) (IRS Employer Identification No.)
136 East Harriman
Bargersville, IN 46106
(Address of principal executive offices) (Zip Code)
(317) 422-5171
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Sections 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Outstanding Shares of Common Stock on August 1, 2001 1,041,926
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
Page No.
-------
Forward Looking Statement.....................................................3
Part I. Financial Information:
Item 1. Financial Statements:
Consolidated Condensed Balance Sheet............................4
Consolidated Condensed Statement of Income......................5
Consolidated Condensed Statement of Comprehensive Income .......6
Consolidated Condensed Statement of Stockholders' Equity........7
Consolidated Condensed Statement of Cash Flows..................8
Notes to Unaudited Consolidated Condensed Financial Statements..9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................10
Item 3. Quantitative and Qualitative Disclosures About Market Risk.........15
Part II. Other Information:
Item 1. Legal Proceedings..................................................16
Item 2. Changes In Securities..............................................16
Item 3. Defaults Upon Senior Securities....................................16
Item 4. Submission of Matters to a Vote of Security Holders...............16
Item 5. Other Information..................................................16
Item 6. Exhibits and Reports on Form 8-K...................................16
Signatures....................................................................17
2
FORWARD LOOKING STATEMENT
This Quarterly Report on Form 10-Q ("Form 10-Q") contains statements which
constitute forward looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements appear in a number of
places in this Form 10-Q and include statements regarding the intent, belief,
outlook, estimate or expectations of the Company (as defined below), its
directors or its officers primarily with respect to future events and the future
financial performance of the Company. Readers of this Form 10-Q are cautioned
that any such forward looking statements are not guarantees of future events or
performance and involve risks and uncertainties, and that actual results may
differ materially from those in the forward looking statements as a result of
various factors. The accompanying information contained in this Form 10-Q
identifies important factors that could cause such differences. These factors
include changes in interest rates; loss of deposits and loan demand to other
financial institutions; substantial changes in financial markets; changes in
real estate values and the real estate market or regulatory changes.
3
Item 1. Financial Statements
- ------- --------------------
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Condensed Balance Sheet
(Unaudited)
June 30, December 31,
2001 2000
--------------------------------------------------------
Assets
Cash and due from banks $ 1,651,874 $ 1,871,880
Short-term interest-bearing deposits 8,527,041 3,014,502
--------------------------------------------------------
Cash and cash equivalents 10,178,915 4,886,382
Investment securities
Available for sale 8,014,654 9,198,559
Held to maturity 0 1,348,778
--------------------------------------------------------
Total investment securities 8,014,654 10,547,337
Loans 127,770,096 124,557,898
Allowance for loan losses (1,002,733) (1,007,174)
--------------------------------------------------------
Net loans 126,767,363 123,550,724
Premises and equipment 4,707,908 4,825,460
Federal Home Loan Bank of Indianapolis stock, at cost 925,000 777,800
Interest receivable 1,001,438 1,172,511
Cash value of life insurance 2,395,870 2,353,161
Other assets 874,659 1,081,502
--------------------------------------------------------
Total assets $ 154,865,807 $ 149,194,877
========================================================
Liabilities
Deposits
Noninterest-bearing $ 15,462,248 $ 13,214,606
Interest-bearing 110,368,441 109,793,721
--------------------------------------------------------
Total deposits 125,830,689 123,008,327
Federal Home Loan Bank of Indianapolis advances 15,500,000 13,000,000
Other borrowings 2,571,362 2,586,424
Interest payable 374,047 472,442
Other liabilities 857,331 811,666
--------------------------------------------------------
Total liabilities 145,133,429 139,878,859
--------------------------------------------------------
Commitments and Contingent Liabilities
Stockholders' Equity
Preferred stock, no-par value
Authorized and unissued - 1,000,000 shares
Common stock, no-par value
Authorized - 4,000,000 shares
Issued and outstanding - 1,041,926 and 1,039,926 shares 7,036,030 7,023,225
Retained earnings and contributed capital 2,660,615 2,352,588
Accumulated other comprehensive income (loss) 35,733 (59,795)
--------------------------------------------------------
Total stockholders' equity 9,732,378 9,316,018
--------------------------------------------------------
Total liabilities and stockholders' equity $ 154,865,807 $ 149,194,877
========================================================
See notes to consolidated condensed financial statements.
4
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Condensed Statement of Income
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------------------------------------------------------
2001 2000 2001 2000
---------------------------------------------------------------------------
Interest Income
Loans, including fees $ 2,781,903 $ 2,527,357 $ 5,538,938 $ 5,013,262
Investment securities
Taxable 13,314 54,195 37,762 137,642
Tax exempt 90,518 124,107 188,110 249,418
Interest-bearing time deposits 44,503 71,030 66,245 143,868
Dividends 17,920 15,342 37,633 32,401
---------------------------------------------------------------------------
Total interest income 2,948,158 2,792,031 5,868,688 5,576,591
---------------------------------------------------------------------------
Interest Expense
Deposits 1,352,425 1,466,788 2,797,581 2,935,441
FHLB advances 223,171 61,681 444,822 126,842
Other borrowings 46,672 47,211 93,196 95,321
---------------------------------------------------------------------------
Total interest expense 1,622,268 1,575,680 3,335,599 3,157,604
---------------------------------------------------------------------------
Net Interest Income 1,325,890 1,216,351 2,533,089 2,418,987
Provision for loan losses 69,250 55,000 103,500 119,100
---------------------------------------------------------------------------
Net Interest Income After Provision for Loan Losses 1,256,640 1,161,351 2,429,589 2,299,887
---------------------------------------------------------------------------
Other Income
Trust fees 3,510 8,629 22,150 17,989
Service charges on deposit accounts 188,008 122,500 340,288 229,610
Gain on sale of loans 1,980 0 4,648 0
Gain (loss) on sale of securities 12,522 (1,849) 12,522 (1,849)
Other operating income 75,242 58,879 143,160 101,011
---------------------------------------------------------------------------
Total other income 281,262 188,159 522,768 346,761
---------------------------------------------------------------------------
Other Expenses
Salaries and employee benefits 589,166 556,008 1,167,387 1,108,859
Premises and equipment 177,412 158,479 350,568 321,939
Advertising 34,353 40,836 63,075 82,819
Data processing fees 160,568 120,445 312,084 231,519
Deposit insurance expense 14,736 6,558 30,334 13,378
Printing and office supplies 43,402 65,832 78,195 139,639
Legal and professional fees 60,248 45,276 110,155 98,768
Telephone expense 30,389 27,319 59,628 58,175
Other operating expense 150,907 47,380 285,768 225,465
---------------------------------------------------------------------------
Total other expenses 1,261,181 1,068,133 2,457,194 2,280,561
---------------------------------------------------------------------------
Income Before Income Tax 276,721 281,377 495,163 366,087
Income tax expense 63,930 55,047 103,822 36,588
---------------------------------------------------------------------------
Net Income $ 212,791 $ 226,330 $ 391,341 $ 329,499
===========================================================================
Basic earnings per share $ .20 $ .22 $ .38 $ .33
Diluted earnings per share $ .20 $ .21 $ .36 $ .32
See notes to consolidated condensed financial statements.
5
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Condensed Statement of Comprehensive Income
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------------------------------------
2001 2000 2001 2000
------------------------------------------------------------
Net income $ 212,791 $ 226,330 $ 391,341 $ 329,499
Other comprehensive income, net of tax
Unrealized gains (losses) on securities available for sale
Unrealized holding gains (losses) arising during The
period, net of tax benefit (expense) of ($7,214),
($14,082), ($67,591) and $1,501 11,002 21,469 103,091 (2,288)
Less: Reclassification adjustment for gains
(losses) included in net income, net of tax
benefit (expense) of ($4,959), $732, $(4,959) and $732 7,563 (1,117) 7,563 (1,117)
------------------------------------------------------------
3,439 22,586 95,528 (1,171)
------------------------------------------------------------
Comprehensive income $ 216,230 $ 248,916 $ 486,869 $ 328,328
============================================================
See notes to consolidated condensed financial statements
6
FIRST COMMUNITY BANCSHARES, INC AND SUBSIDIARIES
Consolidated Condensed Statement of Stockholders' Equity
For the Six Months Ended June 30, 2001
(Unaudited)
Retained
Common Stock Earnings Accumulated
--------------------------------- And Other
Shares Contributed Comprehensive
Outstanding Amount Capital Income (loss) Total
-------------------------------------------------------------------------------------
Balances, January 1, 2001 1,039,926 $7,023,225 $2,352,588 $ (59,795) $9,316,018
Net income for the period 391,341 391,341
Unrealized gains on securities 95,528 95,528
Cash dividend ($.04 per share) (83,314) (83,314)
Options exercised, net of cost 2,000 12,625 12,625
Tax benefits on options exercised 180 180
-------------------------------------------------------------------------------------
Balances, June 30, 2001 1,041,926 $7,036,030 $2,660,615 $ 35,733 $9,732,378
=====================================================================================
See notes to consolidated condensed financial statements.
7
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Condensed Statement of Cash Flows
(Unaudited)
Six Months Ended
June 30,
--------------------------------------
2001 2000
--------------------------------------
Operating Activities
Net income $ 391,341 $ 329,499
Adjustments to reconcile net income to net cash provided by
operating activities
Provision for loan losses 103,500 119,100
Depreciation and amortization 184,655 175,813
Investment securities amortization (accretion) 35,509 (21,459)
(Gain) Loss on sale of securities (12,522) 1,849
Net change in:
Cash value of life insurance (42,709) (36,561)
Interest receivable 171,073 38,703
Interest payable (98,395) 76,283
Other assets 69,013 (9,993)
Other liabilities 22,147 87,477
--------------------------------------
Net cash provided by operating activities 823,612 760,711
--------------------------------------
Investing Activities
Proceeds from paydowns, maturities, and sales of securities available for sale 2,517,113 2,634,286
Purchases of securities held to maturity 0 (4,973,179)
Proceeds from paydowns, maturities, and sales of securities held to maturity 150,769 10,522,000
Purchases of FHLB stock (147,200) 0
Net change in loans (3,221,349) (6,803,200)
Purchases of property and equipment (67,103) (311,428)
--------------------------------------
Net cash provided (used) by investing activities (767,770) 1,068,479
--------------------------------------
Financing Activities
Net change in
Noninterest-bearing, NOW and savings deposits 9,273,607 1,796,504
Certificates of Deposit (6,451,245) (5,064,752)
Proceeds from borrowings 3,500,000 6,000,000
Repayment of borrowings (1,015,062) (5,460,457)
Purchase of stock 0 (89,755)
Cash dividends (83,234) (81,154)
Rights and options exercised, net of costs 12,625 170,854
--------------------------------------
Net cash provided (used) by financing activities 5,236,691 (2,728,760)
--------------------------------------
Net Change in Cash and Cash Equivalents 5,292,533 (899,570)
Cash and Cash Equivalents, Beginning of Period 4,886,382 4,603,201
--------------------------------------
Cash and Cash Equivalents, End of Period $ 10,178,915 $ 3,703,631
======================================
Supplemental cash flow disclosures
Interest paid $ 3,433,994 $ 3,081,321
Held to maturity securities transferred to available for sale securities 1,196,445 0
Income tax paid 0 20,000
Loans to finance the sale of real estate owned 98,790 0
Dividend payable 41,677 41,598
See notes to consolidated condensed financial statements.
8
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Condensed Financial Statements
Note 1: Basis of Presentation
- -----------------------------
The consolidated financial statements include the accounts of First Community
Bancshares, Inc. (the "Company") and its wholly owned subsidiaries, First
Community Bank & Trust, a state chartered bank (the "Bank") and First Community
Real Estate Management, Inc. ("FCREMI"). FCREMI holds and manages real estate
used by the Company and the Bank. A summary of significant accounting policies
is set forth in Note 1 of Notes to Financial Statements included in the December
31, 2000, Annual Report to Shareholders. All significant intercompany accounts
and transactions have been eliminated in consolidation.
The interim consolidated financial statements have been prepared in accordance
with instructions to Form 10-Q, and therefore do not include all information and
footnotes necessary for a fair presentation of financial position, results of
operations and cash flows in conformity with generally accepted accounting
principles.
The interim consolidated financial statements at June 30, 2001, and for the
three and six months ended June 30, 2001 and 2000, have not been audited by
independent accountants, but reflect, in the opinion of management, all
adjustments (which include only normal recurring adjustments) necessary to
present fairly the financial position, results of operations and cash flows for
such periods.
Note 2: Earnings Per Share
- --------------------------
Three Months Ended Three Months Ended
June 30, 2001 June 30, 2000
------------- -------------
Weighted Weighted
Average Per Share Average Per Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
Basic earnings per share
Income available to common stockholders $ 212,791 1,041,223 $ .20 $ 226,330 1,014,372 $ .22
======== ========
Effect of dilutive stock options 78 2,482
Effect of convertible debt 10,568 90,910 10,568 90,910
----------------------- ---------------------
Diluted earnings per share
Income available to common stockholders
and assumed conversions $ 223,358 1,132,211 $ .20 $ 236,898 1,107,764 $ .21
=================================== =================================
9
Six Months Ended Six Months Ended
June 30, 2001 June 30, 2000
------------- -------------
Weighted Weighted
Average Per Share Average Per Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
Basic earnings per share
Income available to common stockholders $ 391,341 1,040,611 $ .38 $ 329,499 1,013,150 $ .33
======== ========
Effect of dilutive stock options 128 3,922
Effect of convertible debt 21,136 90,910 10,568 45,455
----------------------- ---------------------
Diluted earnings per share
Income available to common stockholders
and assumed conversions $ 412,477 1,131,649 $ .36 $ 340,067 1,062,527 $ .32
=================================== =================================
Item 2. Management's Discussion and Analysis of Financial
- ------- Condition and Results of Operations
-------------------------------------------------
General
- -------
The Bank is a subsidiary of the Company and operates as an Indiana commercial
bank. In 1998, the Company formed a new subsidiary, First Community Real Estate
Management, Inc. whose purpose is to purchase and lease back to the Bank
properties originally owned by the Bank thereby allowing the Bank to redeploy
its capital to other uses. The Bank makes monthly lease payments to FCREMI as
lessee of these locations. These lease payments are sufficient to service the
debt incurred by FCREMI to purchase these properties. As a bank holding company,
the Company depends upon the operations of its subsidiaries for all revenue and
reports its results of operations on a consolidated basis with its subsidiaries.
The Bank's profitability depends primarily upon the difference between the
income on its loans and investments and the cost of its deposits and borrowings.
This difference is referred to as the spread or net interest margin. The
difference between the amount of interest earned on loans and investments and
the interest incurred on deposits and borrowings is referred to as net interest
income. Interest income from loans and investments is a function of the amount
of loans and investments outstanding during the period and the interest rates
earned. Interest expense related to deposits and borrowings is a function of the
amount of deposits and borrowings outstanding during the period and the interest
rates paid.
Financial Condition
- -------------------
Total assets increased $5.7 million, or 3.8%, to $154.9 million at June 30,
2001, from $149.2 million at December 31, 2000. Net loans increased from $123.6
million on December 31, 2000 to $126.8 million on June 30, 2001. Deposits
increased from $123.0 million on December 31, 2000 to $125.8 million on June 30,
2001, an increase of 2.3%. FHLB advances increased $2.5 million or 19.2% during
the same time frame. Stockholder's equity was $9.7 million at June 30, 2001 as
compared to $9.3 million at December 31, 2000.
The Bank has continued to see demand in both its commercial real estate and
installment sections of the loan portfolio during the six months ended June 30,
2001. These net loan increases of $3.2 million were primarily funded by new
advances from the Federal Home Loan Bank of Indianapolis. Management will seek
out alternative funding sources, such as FHLB advances, from time to time when
the terms of these funding sources outperform traditional deposit terms in the
Bank's primary markets or for asset-liability matching purposes.
10
Results of Operations Comparison of Three Months Ended June 30, 2001 and
June 30, 2000
- ------------------------------------------------------------------------
The Company had net income of $213,000 for the three months ended June 30, 2001
compared to $226,000 for the three months ended June 30, 2000, a decrease of
$13,000. Net interest income increased to $1.3 million for the three months
ended June 30, 2001 from $1.2 million for the three months ended June 30, 2000,
an increase of $110,000 or 9.0%.
The Company made a $69,000 provision for loan losses for the three months ended
June 30, 2001 compared to a $55,000 provision in the same period last year. Loan
loss reserve calculations are reviewed monthly by both the Bank's senior lending
officer and the board of directors. The calculations consider all loans in the
portfolio, with special consideration given to classified loans and
non-performing loans. The Company believes the current loan loss reserve levels
are adequate at this time.
The Company felt the effects of three rate drops during the three months ended
June 30, 2001, equal to a 1.25% decline in the fed funds rate, as determined by
the board of governors of the Federal Reserve Bank. These decreases in the fed
funds rate came after three similar rate drops, equal to 1.50%, during the first
quarter of 2001. During the second quarter ended June 30, 2001, the Bank had a
significant portion of the deposit portfolio that was maturing or variable rate
in nature and as such, able to be priced at the current lower interest rate
levels. This was the primary reason the Company's net interest income was up
$110,000 between the current and year ago period.
Management continued to focus on increasing non-interest income during the
quarter ended June 30, 2001. As a result of these efforts, non-interest income
increased $93,000 or 49.5% from $188,000 for the three months ended June 30,
2000 to $281,000 for the three months ended June 30, 2001. Non-interest income
increased primarily due to increased service charges on deposit accounts of
$66,000, but also saw increases in other operating income of $16,000 and gains
recognized on securities sales of $13,000. The increases in service charges on
deposit accounts can be attributed to more demand deposit accounts being
serviced by the Bank coupled with fee change differences between periods. The
increases in other operating income is primarily due to ATM surcharges and cash
surrender value increases on Company owned life insurance. The Bank began
surcharging foreign card transactions at its' ATM's during the second quarter of
2000.
Non-interest expenses increased $193,000 during the quarter ended June 30, 2001,
when compared to the quarter ended June 30, 2000. The primary increase of
$104,000 between periods was in other operating expenses, which had adjustments
of approximately $67,000 during the quarter ended June 30, 2000. Without the
adjustments, this increase would have only been $37,000, which can mainly be
attributed to higher costs in relation to maintaining repossessed assets. Data
processing fees increased to $161,000 for the three months ended June 30, 2001
from $120,000 for the three months ended June 30, 2000. These increases are
primarily related to servicing more demand deposit, savings accounts, and loan
accounts as well as the Bank's switch to front-end imaging of daily items made
during the quarter ended June 30, 2000. Advertising and printing and office
supplies had decreases of $6,000 and $22,000 respectively between the two
periods. Management has made a commitment to continue to monitor all
non-interest expenses to further reduce expenses when practicable.
Income taxes increased $9,000 for the three months ended June 30, 2001, when
compared to the same period in 2000 primarily due to a decrease in the Company's
tax exempt securities portfolio. The Company's effective tax rate was 23.1%
during the quarter ended June 30, 2001 compared to an effective tax rate of
19.6% during the quarter ended June 30, 2000.
Results of Operations Comparison of Six Months Ended June 30, 2001 and
June 30, 2000
- ----------------------------------------------------------------------
The Company reported net income of $391,000 for the six months ended June 30,
2001, an increase of $62,000 or 18.9% over the $329,000 reported for the six
months ended June 30, 2000. Net interest income increased to
11
$2.5 million for the six months ended June 30, 2001, compared to $2.4 million
for the six months ended June 30, 2000. This represents a 4.7% increase between
the two periods.
The Company made a $104,000 provision for loan losses for the six months ended
June 30, 2001 compared to a $119,000 provision for the six months ended June 30,
2000. As previously discussed, loan loss reserves are reviewed monthly by both
the Bank's senior lending officer and the board of directors.
Non-interest income increased by $176,000 or 50.7% for the six months ended June
30, 2001, compared to the year earlier period. Increases in number of demand
deposit and savings accounts being serviced along with operational procedural
changes have led to this improvement. The Company was servicing more demand
deposits during the six months ended June 30, 2001 compared to the year ago
period, which coupled with fee changes have increased service charges collected
on deposit accounts by $111,000. The Company implemented ATM surcharging during
the second quarter of 2000 at most of it's terminals and added terminals at two
on-site locations in August 2000 and January 2001 respectively. These changes
have led to increases in other operating income of $28,000 between periods. The
increases in surcharge fees were partially offset by smaller interchange fees
being collected, due to less transaction volume at the terminals. The Company
also recognized gains on the sale of securities of $13,000 during the six months
ended June 30, 2001, compared to a loss on the sale of securities of $2,000
during the six months ended June 30, 2000.
Non-interest expenses were $2.5 million for the six months ended June 30, 2001,
compared to $2.3 million during the six months ended June 30, 2000. The company
has seen increases in salaries, premises, deposit insurance, legal, and other
expenses while experiencing decreases in advertising and printing expenses
during the comparable periods. The primary increase has been in data processing
fees of $81,000 between the current six months ended June 30, 2001 and prior six
months ended June 30, 2000. This increase can be attributed to servicing more
demand, savings, and loan accounts as well as the Company's switch to front end
imaging of daily items during the quarter ended June 30, 2000 as discussed
above. The primary decrease in non-interest expense is in printing and office
supplies. This area saw a decrease of $62,000 from $140,000 during the six
months ended June 30, 2001, compared to $78,000 during the six months ended June
30, 2000. This is a result of management continuing to monitor all expense
areas' and implementing systems or procedural changes when deemed beneficial to
the Company.
Income taxes increased $67,000 for the six months ended June 30, 2001, when
compared to the same period in 2000 due to both a decrease in the Company's tax
exempt securities portfolio along with higher pre-tax income. The Company's
effective tax rate was 21.0% during the six months ended June 30, 2001, compared
to an effective tax rate of 10.0% during the six months ended June 30, 2000.
Asset Quality
- -------------
The Bank currently classifies loans as substandard, doubtful and loss to assist
management in addressing collection risks and pursuant to regulatory
requirements, which are not necessarily consistent with generally accepted
accounting principles. Substandard loans represent credits characterized by the
distinct possibility that some loss will be sustained if deficiencies are not
corrected. Doubtful loans possess the characteristics of substandard loans, but
collection or liquidation in full is doubtful based upon existing facts,
conditions and values. A loan classified as a loss is considered uncollectible.
As of June 30, 2001, the Bank had $2.7 million of loans classified as
substandard, none as doubtful and none as loss. The allowance for loan losses
was $1,003,000 or .79% of net loans receivable at June 30, 2001 compared to
$1,007,000 or .82% of net loans receivable at December 31, 2000. A portion of
classified loans are non-accrual loans. First Community had non-accrual loans
totaling $525,000 at June 30, 2001 compared to $402,000 at December 31, 2000.
12
Asset/Liability Management
- --------------------------
One of the actions undertaken by the Company's management has been to adopt
asset/liability management policies in an attempt to reduce the susceptibility
of the Company's net interest spread to the adverse impact of volatile interest
rates. This goal can be achieved by attempting to match maturities (or
time-to-repricing) of assets with maturities or repricing of liabilities and
then actively managing any mismatch. Accomplishing this objective requires
attention to both the asset and liability sides of the balance sheet. The
difference between maturity of assets and maturity of liabilities is measured by
the interest-rate gap.
At June 30, 2001, the Company's one-year cumulative interest-rate gap as a
percent of total assets was a negative 9.4%. This negative interest-rate gap
represents substantial risk for the Company in an environment of rising interest
rates. A negative interest-rate gap means the Company's earnings are vulnerable
in periods of rising interest rates because during such periods the interest
expense paid on liabilities will generally increase more rapidly than the
interest income earned on assets. Conversely, in a falling interest-rate
environment, the total interest expense paid on liabilities will generally
decrease more rapidly than the interest income earned on assets. A positive
interest-rate gap would have the opposite effect.
Asset management goals have been directed toward obtaining a suitable balance of
asset quality, liquidity and diversification in order to stabilize and improve
earnings. The asset management strategy has concentrated on shortening the
maturity of its loan portfolio by increasing adjustable-rate loans and
short-term installment and commercial loans. However, increasing short-term
installment and commercial loans increases the overall risk of the loan
portfolio. Such risk relates primarily to collection and to the loans that often
are secured by rapidly depreciating assets. The Company's ratio of
non-performing assets to total assets was .76% at June 30, 2001 and .46% at
December 31, 2000.
The primary goal in the management of liabilities has been to extend the
maturities and improve the stability of deposit accounts. Management has
attempted to combine a policy for controlled growth with a strong, loyal
customer base to control interest expense.
The following schedule illustrates the interest-rate sensitivity of
interest-earning assets and interest-bearing liabilities at June 30, 2001.
Mortgages which have adjustable or renegotiable interest rates are shown as
subject to change every one to three years based upon the contracted-for
adjustment period. This schedule does not reflect the effects of possible
prepayments or enforcement of due-on-sale clauses.
13
At June 30, 2001 Maturing or Repricing
--------------------------------------------------------------------
One Year 1 - 3 3 - 5 Over 5
or Less Years Years Years Total
--------------------------------------------------------------------
(Dollars in 000's)
Interest-earning assets:
Adjustable rate mortgages $ 14,546 $ 9,817 $ 3,921 $ 156 $ 28,440
Fixed rate mortgages 4,814 1,373 4,686 18,133 29,006
Commercial loans 21,192 4,317 1,860 1,158 28,527
Consumer loans 15,256 15,755 6,412 1,820 39,243
Tax-exempt loans and leases 29 250 505 1,770 2,554
Investments 800 2,817 2,372 2,026 8,015
FHLB stock 925 925
Interest-bearing deposits 8,527 8,527
-------- -------- -------- -------- --------
Total interest-earning assets 66,089 34,329 19,756 25,063 145,237
-------- -------- -------- -------- --------
Interest-bearing liabilities:
Fixed maturity deposits 44,494 12,980 2,517 2,528 62,519
Other deposits 28,695 12,543 5,104 1,507 47,849
FHLB advances 7,500 8,000 15,500
-------- -------- -------- -------- --------
Total interest-bearing liabilities 80,689 33,523 7,621 4,035 125,868
-------- -------- -------- -------- --------
Excess (deficiency) of interest-earning assets over (14,600) 806 12,135 21,028 19,369
interest-bearing liabilities
Cumulative excess (deficiency) of interest-earning assets
over interest-bearing liabilities (14,600) (13,794) (1,659) 19,369
Cumulative ratio at June 30, 2001 as a percent of total assets (9.43)%
14
Liquidity and Capital Resources
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Liquidity refers to the ability of a financial institution to generate
sufficient cash to fund current loan demand, meet savings deposit withdrawals
and pay operating expenses. The primary sources of liquidity are cash,
interest-bearing deposits in other financial institutions, marketable
securities, loan repayments, increased deposits and total institutional
borrowing capacity.
Cash and interest-bearing deposits, when combined with investments, have
remained a relatively constant percent of total assets, while increasing in
dollar volume. Management's goal is to maintain approximately twenty percent
(20%) to twenty-five percent (25%) of total assets in cash, interest-bearing
deposits and investments in order to satisfy the Company's need for liquidity
and other short-term obligations.
Management believes that it has adequate liquidity for the Company's short- and
long-term needs. Short-term liquidity needs resulting from normal
deposit/withdrawal functions are provided by the Company retaining a portion of
cash generated from operations in a Federal Home Loan Bank ("FHLB") daily
investment account. This account acts as a short-term liquidity source while
providing interest income to the Company. Long-term liquidity and other
liquidity needs are provided by the ability of the Company to borrow from the
FHLB. The balance of its FHLB advances was $15.5 million at June 30, 2001 and
$13.0 million at December 31, 2000.
At June 30, 2001, the Bank had a tier 1 leverage ratio of approximately 6.8% and
a total risk-based capital ratio of approximately 9.6%. The regulatory tier 1
leverage and total risk-based capital requirements are 4.0% and 8.0%
respectively.
Impact of Inflation and Changing Prices
- ---------------------------------------
The financial statements and related data presented herein have been prepared in
accordance with generally accepted accounting principles. These principles
require the measurement of financial position and operating results in terms of
historical dollars, without considering changes in the relative purchasing power
of money over time due to inflation.
The primary assets and liabilities of the Company are monetary in nature.
Consequently, interest rates generally have a more significant impact on
performance than the effects of inflation. Interest rates, however, do not
necessarily move in the same direction or with the same magnitude as the price
of goods and services. In a period of rapidly rising interest rates, the
liquidity and the maturity structure of the Company's assets and liabilities are
critical to the maintenance of acceptable performance levels.
Other
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The Securities and Exchange Commission maintains a Web site that contains
reports, proxy and information statements, and other information regarding
registrants that file electronically with the Commission, including the Company.
The address is (http://www.sec.gov).
Item 3. Quantitative and Qualitative Disclosures About Market Risk
- ------- ----------------------------------------------------------
Although the Company files a Form 10-K in lieu of Form 10-KSB, the Company
qualifies as a small business issuer. Therefore, Item 7A is not required under
Section 229.305 of Regulation S-K.
15
Part II - Other Information
Item 1. Legal Proceedings.
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None.
Item 2. Changes in Securities.
- ------- ----------------------
On May 30, 2001 the Company issued options for the
purchase of 1,000 shares of common stock to each of four
outside directors with an exercise price of $5.75 per
share in reliance on the exemption provided by Section
4(2) of the Securities Act of 1933, as amended (the
"Act").
On June 4, 2001 the Company issued 1,000 shares of
common stock to an outside director upon exercise of
outstanding options in reliance upon the exemption
provided by Section 4(2) of the Act.
Item 3. Defaults upon Senior Securities.
- ------- --------------------------------
Not applicable.
Item 4. Submission of Matters to a Vote by Security Holders.
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On May 30, 2001, the Company held its annual meeting of
shareholders. A total of 922,706 shares were represented
in person or by proxy at the meeting. Albert R. Jackson,
Jr. was elected to the Board of Directors for a
three-year term expiring in 2004. 920,441 shares were
voted in favor of the election of Mr. Jackson, 0 shares
were voted against and there were 2,265 abstentions or
broker non-votes. Eugene W. Morris retired from the
Board of Directors of the Company effective at the
annual meeting and the Company reduced the size of the
Board of Directors to five (5) members. In recognition
of Mr. Morris' years of contribution to the Company and
to the Bank, he was named as Director Emeritus of the
Bank. Continuing Directors include Frank D. Neese and
Roy Martin Umbarger, whose terms expire in 2002 and
Merrill M. Wesemann, M.D. and Albert R. Jackson, III
whose terms expire in 2003.
Item 5. Other Information.
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None.
Item 6. Exhibits and Reports on Form 8-K.
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(a) No reports were filed on Form 8-K during the
quarter ended June 30, 2001.
16
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 , 2001 By: /s/ Albert R. Jackson III
--------------- -------------------------------
Albert R. Jackson III
Chief Executive Officer and Director
Date: August , 2001 By: /s/ Randy J. Sizemore
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Randy J. Sizemore
Vice President of Finance
17