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
September 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 (IRS Employer Identification No.)
incorporation or organization)
136 East Harriman
Bargersville, IN 46106
(Address of principal executive offices)
(Zip Code)
(317) 422-5171
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Sections 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Outstanding Shares of Common Stock on November 1, 2001 1,042,926
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 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.......16
Part II. Other Information:
Item 1. Legal Proceedings................................................17
Item 2. Changes In Securities............................................17
Item 3. Defaults Upon Senior Securities..................................17
Item 4. Submission of Matters to a Vote by Security Holders..............17
Item 5. Other Information................................................17
Item 6. Exhibits and Reports on Form 8-K.................................17
Signatures....................................................................18
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)
September 30, December 31,
2001 2000
-------------------------------
Assets
Cash and due from banks $ 2,407,293 $ 1,871,880
Short-term interest-bearing deposits 2,428,634 3,014,502
-------------------------------
Cash and cash equivalents 4,835,927 4,886,382
Investment securities
Available for sale 4,180,493 9,198,559
Held to maturity 0 1,348,778
-------------------------------
Total investment securities 4,180,493 10,547,337
Loans held for sale 1,549,362 0
Loans 128,034,956 124,557,898
Allowance for loan losses (1,083,614) (1,007,174)
-------------------------------
Net loans 126,951,342 123,550,724
Premises and equipment 4,622,972 4,825,460
Federal Home Loan Bank of Indianapolis stock, at cost 1,025,000 777,800
Interest receivable 954,501 1,172,511
Cash value of life insurance 2,410,941 2,353,161
Other assets 1,188,814 1,081,502
-------------------------------
Total assets $ 147,719,352 $ 149,194,877
===============================
Liabilities
Deposits
Noninterest-bearing $ 10,260,375 $ 13,214,606
Interest-bearing 108,033,708 109,793,721
-------------------------------
Total deposits 118,294,083 123,008,327
Federal Home Loan Bank of Indianapolis advances 15,500,000 13,000,000
Other borrowings 2,563,902 2,586,424
Interest payable 333,802 472,442
Other liabilities 1,064,593 811,666
-------------------------------
Total liabilities 137,756,380 139,878,859
-------------------------------
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 - 1,042,926 and 1,039,926 shares 7,043,990 7,023,225
Retained earnings and contributed capital 2,891,773 2,352,588
Accumulated other comprehensive gain (loss) 27,209 (59,795)
-------------------------------
Total stockholders' equity 9,962,972 9,316,018
-------------------------------
Total liabilities and stockholders' equity $ 147,719,352 $ 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 Nine Months Ended
September 30, September 30,
------------------------------------------------------------
2001 2000 2001 2000
------------------------------------------------------------
Interest Income
Loans, including fees $ 2,781,189 $ 2,685,337 $ 8,320,127 $ 7,698,599
Investment securities
Taxable 9,784 25,460 47,546 163,102
Tax exempt 55,171 115,065 243,281 364,483
Interest-bearing time deposits 17,952 9,606 84,197 153,474
Dividends 18,263 16,664 55,896 49,065
------------------------------------------------------------
Total interest income 2,882,359 2,852,132 8,751,047 8,428,723
------------------------------------------------------------
Interest Expense
Deposits 1,125,798 1,503,495 3,923,379 4,438,936
FHLB advances 230,656 62,064 675,478 188,906
Other borrowings 46,857 47,409 140,053 142,730
------------------------------------------------------------
Total interest expense 1,403,311 1,612,968 4,738,910 4,770,572
------------------------------------------------------------
Net Interest Income 1,479,048 1,239,164 4,012,137 3,658,151
Provision for loan losses 118,750 40,000 222,250 159,100
------------------------------------------------------------
Net Interest Income After Provision for Loan Losses 1,360,298 1,199,164 3,789,887 3,499,051
------------------------------------------------------------
Other Income
Trust fees 8,456 2,240 30,606 20,229
Service charges on deposit accounts 173,926 126,078 514,214 355,688
Gain on sale of loans 7,321 0 11,969 0
Gain (loss) on sale of securities 33,018 (4,666) 45,540 (6,515)
Other operating income 72,975 83,161 216,135 184,172
------------------------------------------------------------
Total other income 295,696 206,813 818,464 553,574
------------------------------------------------------------
Other Expenses
Salaries and employee benefits 600,737 567,478 1,768,124 1,676,337
Premises and equipment 174,491 197,913 525,059 519,852
Advertising 33,878 37,762 96,953 120,581
Data processing fees 167,855 140,954 479,939 372,473
Deposit insurance expense 14,821 16,464 45,155 29,842
Printing and office supplies 42,970 53,238 121,165 192,877
Legal and professional fees 39,227 41,529 149,382 140,297
Telephone expense 29,094 29,415 88,722 87,590
Other operating expense 148,880 154,462 434,648 379,927
------------------------------------------------------------
Total other expenses 1,251,953 1,239,215 3,709,147 3,519,776
------------------------------------------------------------
Income Before Income Tax 404,041 166,762 899,204 532,849
Income tax expense 131,168 9,714 234,990 46,302
------------------------------------------------------------
Net Income $ 272,873 $ 157,048 $ 664,214 $ 486,547
============================================================
Basic earnings per share $ .26 $ .15 $ .64 $ .48
Diluted earnings per share .25 .15 .61 .47
See notes to consolidated condensed financial statements.
5
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Condensed Statement of Comprehensive Income
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------------------------------------------
2001 2000 2001 2000
------------------------------------------------------------------
Net Income $ 272,873 $ 157,048 $ 664,214 $ 486,547
Other comprehensive income, net of tax
Unrealized gains (losses) on securities
available
Unrealized holding gains arising during the
period, net of tax expense of $7,487,
$51,842, $75,108 and $50,342 11,419 79,039 114,510 76,572
Less: Reclassification adjustment for gains
(losses) included in net income, net of tax
benefit (expense) of $(13,075), $1,848,
$(18,040), and $2,581 19,943 (2,818) 27,506 (3,934)
------------------------------------------------------------------
(8,524) 81,857 87,004 80,686
------------------------------------------------------------------
Comprehensive income $ 264,349 $ 238,905 $ 751,218 $ 567,233
==================================================================
See notes to consolidated condensed financial statements
6
FIRST COMMUNITY BANCSHARES, INC AND SUBSIDIARIES
Consolidated Condensed Statement of Stockholders' Equity
For the Nine Months Ended September 30, 2001
(Unaudited)
Retained
Common Stock Earnings Accumulated
------------------------------- and Other
Shares Contributed Comprehensive
Outstanding Amount Capital Gain (loss) Total
----------------------------------------------------------------------------------------
Balances, January 1, 2001 1,039,926 $7,023,225 $2,352,588 $ (59,795) $9,316,018
Net income for the period 664,214 664,214
Unrealized gains on securities 87,004 87,004
Cash dividend ($.12 per share) (125,029) (125,029)
Options exercised, net of cost 3,000 20,625 20,625
Tax benefits on options 140 140
----------------------------------------------------------------------------------------
Balances, September 30, 2001 1,042,926 $7,043,990 $2,891,773 $ 27,209 $9,962,972
========================================================================================
See notes to consolidated condensed financial statements.
7
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Condensed Statement of Cash Flows
(Unaudited)
Nine Months Ended
September 30,
-----------------------------------
2001 2000
-----------------------------------
Operating Activities
Net income $ 664,214 $ 486,547
Adjustments to reconcile net income to net cash provided by
operating activities
Provision for loan losses 222,250 159,100
Depreciation and amortization 278,264 286,704
Investment securities (accretion) amortization 43,494 (4,868)
Origination of loans for sale (1,669,438) 0
Proceeds from the sale of loans 132,045 0
Gain on sale of loans (11,969) 0
(Gain) loss on sale of securities available for sale (45,540) 6,515
Net change in:
Cash value of life insurance (57,780) (56,985)
Interest receivable 218,010 80,296
Interest payable (138,640) 79,819
Other assets 59,909 (89,413)
Other liabilities 234,959 166,562
-----------------------------------
Net cash provided (used) by operating activities (70,222) 1,114,277
-----------------------------------
Investing Activities
Purchases of securities held to maturity 0 (4,973,179)
Purchase of FHLB stock (247,200) 0
Proceeds from paydowns, maturities, and sales of securities available for sale 6,362,193 4,256,137
Proceeds from paydowns, maturities, and sales of securities held to maturity 150,769 10,522,000
Net change in loans (3,829,169) (10,186,455)
Purchases of property and equipment (75,776) (395,637)
-----------------------------------
Net cash provided (used) by investing activities 2,360,817 (777,134)
-----------------------------------
Financing Activities
Net change in
Noninterest-bearing, NOW and savings deposits 2,766,830 (959,625)
Certificates of Deposit (7,481,074) 776,686
Proceeds from borrowings 8,000,000 13,000,000
Repayment of borrowings (5,522,522) (14,117,360)
Purchase of stock 0 (89,953)
Cash dividends (124,909) (122,752)
Rights and options exercised, net of costs 20,625 170,854
-----------------------------------
Net cash used by financing activities (2,341,050) (1,342,150)
-----------------------------------
Net Change in Cash and Cash Equivalents (50,455) (1,005,007)
Cash and Cash Equivalents, Beginning of Period 4,886,382 4,603,201
-----------------------------------
Cash and Cash Equivalents, End of Period $ 4,835,927 $ 3,598,194
===================================
Supplemental cash flow disclosures
Interest paid $ 4,877,550 $ 4,690,753
Held to maturity securities transferred to available for sale securities 1,196,445 0
Loans transferred to real estate owned 305,091 0
Loans to finance the sale of real estate owned 98,790 0
Income tax paid 0 99,733
Dividend payable 41,717 41,597
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 Stockholders. All significant intercompany accounts
and transactions have been eliminated in consolidation.
The interim consolidated financial statements have been prepared in accordance
with instructions to Form 10-Q, and therefore do not include all information and
footnotes necessary for a fair presentation of financial position, results of
operations and cash flows in conformity with generally accepted accounting
principles.
The interim consolidated condensed financial statements at September 30, 2001,
and for the three months and nine months ended September 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
September 30, 2001 September 30, 2000
------------------ ------------------
Weighted Weighted
Average Per Share Average Per Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
Basic earnings per share
Income available to common
shareholders $ 272,873 1,042,154 $ .26 $ 157,048 1,039,940 $ .15
========= =========
Effect of dilutive stock options 505
Effect of convertible debt 10,568 90,910 10,568 90,910
--------------------------- -------------------------
Diluted earnings per share
Income available to common
shareholders and assumed
conversions $ 283,441 1,133,569 $ .25 $ 167,616 1,130,850 $ .15
===================================== ===================================
9
Nine Months Ended Nine Months Ended
September 30, 2001 September 30, 2000
------------------ ------------------
Weighted Weighted
Average Per Share Average Per Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
Basic earnings per share
Income available to common
shareholders $ 664,214 1,041,131 $ .64 $ 486,547 1,022,145 $ .48
========= =========
Effect of dilutive stock options 253 2,614
Effect of convertible debt 31,704 90,910 21,136 60,607
--------------------------- -------------------------
Diluted earnings per share
Income available to common
shareholders and assumed
conversions $ 695,918 1,132,294 $ .61 $ 507,683 1,085,366 $ .47
===================================== ===================================
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 decreased $1.5 million, or 1.0%, to $147.7 million at September 30,
2001, from $149.2 million at December 31, 2000. Net loans increased $3.4
million, or 2.8% from $123.6 million on December 31, 2000 to $127.0 million on
September 30, 2001. Total investment securities decreased from $10.5 million at
December 31, 2000 to $4.2 million at September 30, 2001. Deposits decreased $4.7
million or 3.8% from $123.0 million on December 31, 2000 to $118.3 million on
September 30, 2001. FHLB advances increased $2.5 million or 19.2% during the
same time frame. Stockholders equity was $10.0 million at September 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 nine months ended
September 30, 2001. These net loan increases of $3.4 million were primarily
funded by new advances from the Federal Home Loan Bank ("FHLB") of Indianapolis.
Management seeks out alternative funding sources, such as FHLB advances, when
the terms of these funding sources outperform traditional deposit terms in the
Bank's primary markets or for asset-liability matching purposes.
10
The decrease in deposits is directly related to the pricing methodology used by
management during the period and the efforts being made to shift the
concentration of deposits from higher costing products to lower costing
products. The results include a net increase of $2.8 million in
noninterest-bearing, NOW and savings deposits and a decrease of $7.5 million in
certificates of deposit during the nine months ended September 30, 2001. The net
outflow of deposits were primarily funded by sales and maturities of securities
owned by the Company.
Results of Operations Comparison of Three Months Ended September 30, 2001 and
September 30, 2000
- -----------------------------------------------------------------------------
The Company had net income of $273,000 and $157,000 for the three months ended
September 30, 2001 and 2000, respectively. Net interest income was $1.5 million
for the three months ended September 30, 2001 as compared to $1.2 million for
the three months ended September 30, 2000. This stark increase in net interest
income is due to both the shift in concentration of the deposit portfolio and
the result of interest bearing deposits being repriced at a faster pace than
interest earning assets in the falling interest rate environment the Company has
witnessed during the nine months ended September 30, 2001.
The Company made a $119,000 provision for loan loss for the three months ended
September 30, 2001 compared to a $40,000 provision in the same period last year.
Loan loss reserve calculations are reviewed monthly by 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.
Total other income increased by $89,000 or 43.0% for the three months ended
September 30, 2001, compared to the prior year. Service charges on deposit
accounts and trust fees increased a combined $54,000 partially offset by a
decrease in other operating income of $10,000. In addition, the Bank recognized
gains of $7,000 in relation to mortgage banking activities during the quarter
ended September 30, 2001 and gains on securities sales of $33,000 compared to no
mortgage banking activity during the quarter ended September 30, 2000 and losses
on securities sales of $5,000.
Total other expenses only increased by $13,000 for the three months ended
September 30, 2001, compared to the three months ended September 30, 2000.
Management has continually analyzed all operating aspects of the Company in
search of greater efficiencies. Increases in salaries and data processing fees
of $60,000 were almost completely negated by decreases in premises, advertising,
deposit insurance expense, office supplies, legal/professional, and other
operating expenses of $47,000.
Income taxes increased $121,000 for the three months ended September 30, 2001
compared to the prior year as the Company saw it's effective tax rate increase
from 5.8% during the three months ended September 30, 2000 to an effective tax
rate of 32.5% for the three months ended September 30, 2001. The increase in
taxes is primarily due to the Bank having an increase in pre-tax income of
$237,000 coupled with a smaller tax exempt securities portfolio.
Results of Operations Comparison of Nine Months Ended September 30, 2001 and
September 30, 2000
- ----------------------------------------------------------------------------
Net income for the nine months ended September 30, 2001, was $664,000 compared
with $487,000 for the nine months ended September 30, 2000, an increase of
$177,000 or 36.4%. Interest income for the nine months ended September 30, 2001
increased to $8.8 million, or 3.8% from the $8.4 million in interest income
reported in the same period of the prior year. Interest expense for the nine
months ended September 30, 2001 decreased to $4.7 million, or .1% from the $4.8
million in interest expense for the nine months ended September 30, 2000. As a
result, net interest income for the nine months ended September 30, 2001
increased $354,000 or 9.7% to $4.0 million, compared to $3.7 million in the year
ago period.
11
The Company made a $222,000 provision for loan loss for the nine months ended
September 30, 2001 compared to a $159,000 provision for the nine months ended
September 30, 2000. As previously discussed, loan loss reserve calculations are
reviewed monthly by the Bank's senior lending officer and the board of
directors.
Total other income increased by $265,000 or 47.9% for the nine months ended
September 30, 2001, compared to the year ago period. Service charges on deposits
increased $159,000 or 44.6% between the two periods primarily due to both an
increase in the number of demand accounts being serviced by the Bank and some
changes to the fee schedules which the Bank imposes on its demand accounts. In
addition, the Bank recognized gains on the sale of loans of $12,000 during the
nine months ended September 30, 2001 as compared to no activity in that area
during the nine months ended September 30, 2000. As previously discussed,
certain securities were sold at gains of $46,000 during the current period
compared to losses on the sale of securities of $7,000 during the year earlier
period. Other operating income also increased $32,000 or 17.4% from $184,000 for
the nine months ended September 30, 2000 to $216,000 for the nine months ended
September 30, 2001. The primary reason for this increase is due to the Bank
collecting surcharges from foreign cardholders at all 10 of its ATM's during
2001, a change that was made in June/July 2000.
Total other expenses increased by $189,000, or 5.4% to $3.7 million for the nine
months ended September 30, 2001, compared to $3.5 million for the nine months
ended September 30, 2000. The primary reason for these increases is due to data
processing fees increasing $108,000 from $372,000 for the nine months ended
September 30, 2000 to $480,000 for the nine months ended September 30, 2001. The
Bank switched its daily item processing and monthly statement rendering process
to imaging in May 2000, which is the primary reason for the increase. Management
believes this investment in technology will be beneficial to the Company going
forward due to increased back-office research efficiencies and increased ability
to satisfy customer demands for these types of services. Advertising and
printing/office supplies decreased a combined $95,000 between the two periods as
management continued to search for operating inefficiencies and to make changes
where applicable. Premises, legal/professional, and telephone remained
relatively unchanged.
Income taxes increased $189,000 for the nine months ended September 30, 2001
when compared to the same period in 2000. The increase in taxes is primarily due
to the Bank having an increase in pre-tax income of $366,000 coupled with a
smaller tax exempt securities portfolio during the nine months ended September
30, 2001, as compared to the year ago period.
Impact of New Accounting Standards
- ----------------------------------
Accounting for a Business Combination. Statement of Financial Accounting
Standards ("SFAS") No. 141 requires that all business combinations should be
accounted for using the purchase method of accounting; use of the pooling method
is prohibited. A business combination occurs when an enterprise acquires all or
a portion of the net assets that constitutes a business or equity interest of
one or more other enterprises and obtains control over the enterprise or
enterprises. All two-party and multi-party business combinations, including
"roll-up" and "put-together" transactions are included in the scope of this
Statement.
This Statement requires that goodwill be recognized initially as an asset in the
financial statements and measured as the excess of the cost of an acquired
entity over the net of the amounts assigned to identifiable assets acquired and
liabilities assumed. In addition, SFAS No. 141 requires all other intangibles,
such as core deposit intangibles for a financial institution, to be identified.
The provisions of Statement No. 141 are effective for any business combination
that is initiated after June 30, 2001.
Accounting for Goodwill. Under the provisions of SFAS No. 142, goodwill should
not be amortized but should be tested for impairment at the reporting unit
level. An impairment test of goodwill should be done on an
12
annual basis unless events or circumstances indicate impairment has occurred in
the interim period. The annual impairment test can be performed at any time
during the year as long as the measurement date is used consistently from year
to year.
Impairment testing is a two step process. The first step is a comparison of the
fair value of a reporting unit to its carrying amount including goodwill. If the
fair value of the reporting unit is greater than its carrying value, goodwill is
not impaired and no further work is required. Companies should perform the first
step of the impairment test on all goodwill within six months of initially
applying the Statement. If the fair value is less, the second step should be
performed. The second step is to compare the fair value of goodwill to its
carrying amount. If the fair value of goodwill is less than its carrying value,
then the goodwill is deemed impaired and a loss recognized. Any impairment loss
recognized as a result of completing the transitional impairment test should be
treated as a change in accounting principle and recognized in the first interim
period financial statements.
The provisions of Statement No. 142 would be effective for fiscal years
beginning after December 15, 2001. Early adoption would be permitted for
companies with a fiscal year beginning after March 15, 2001 provided that the
first quarter financial statements have not been previously issued. In all
cases, the Statement must be adopted as of the beginning of a fiscal year.
Goodwill and intangible assets acquired in a transaction completed after June
30, 2001 but before this Statement is initially applied would be accounted for
in accordance with the amortization and nonamortization provisions of the
Statement. The useful economic life of previously recognized intangible assets
should be reassessed upon adoption of the Statement, and remaining amortization
periods should be adjusted accordingly. Intangible assets deemed to have an
indefinite life would no longer be amortized.
Since the Company has no legacy goodwill and is not currently in the process of
acquiring another company, the adoption of SFAS 141 and 142 will have no impact
on the Company's financial statements.
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 September 30, 2001, the Bank had $3,536,000 of assets classified as
substandard, none as doubtful and none as loss. The allowance for loan losses
was $1,084,000 or .85% of net loans receivable at September 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 $464,000 at September 30, 2001 compared to $402,000 at December 31,
2000.
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 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 September 30, 2001, the Company's one-year cumulative interest-rate gap as a
percent of total assets was a negative 15.6% compared to a negative 11.07% at
December 31, 2000. This negative interest-rate gap
13
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 fact that such
loans often are secured by rapidly depreciating assets. The Company's ratio of
non-performing assets to total assets was 1.43% at September 30, 2001 compared
to .46% at December 31, 2000. In light of the current economic conditions,
management has been monitoring the Bank's non-performing assets closely. These
non-performing assets are weighted heavier on the Bank's allowance for loan loss
calculation. The Company believes its current loan loss reserve levels are
adequate at this time.
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 September 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 on enforcement of due-on-sale clauses.
14
At September 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 $ 14,456 $ 8,632 $ 5,248 $ 153 $ 28,489
Fixed rate mortgages 5,208 2,899 3,321 19,051 30,479
Commercial loans 21,224 4,638 2,269 1,725 29,856
Consumer loans 15,854 15,439 6,080 978 38,351
Tax-exempt loans and leases 44 372 263 1,730 2,409
Investments 573 1,106 845 1,656 4,180
FHLB stock 1,025 1,025
Interest-bearing deposits 2,429 2,429
--------------------------------------------------------------------
Total interest-earning assets 60,813 33,086 18,026 25,293 137,218
--------------------------------------------------------------------
Interest-bearing liabilities:
Fixed maturity deposits 47,915 8,121 4,379 1,196 61,611
Other deposits 28,465 11,792 4,643 1,523 46,423
FHLB advances 7,500 8,000 15,500
--------------------------------------------------------------------
Total interest-bearing liabilities 83,880 27,913 9,022 2,719 123,534
--------------------------------------------------------------------
Excess (deficiency) of interest-earning
assets over interest-bearing liabilities (23,067) 5,173 9,004 22,574 13,684
Cumulative excess (deficiency) of
interest-earning assets over
interest-bearing liabilities (23,067) (17,894) (8,890) 13,684
Cumulative ratio at September 30, 2001 as
a percent of total assets (15.6)%
15
Liquidity and Capital Resources
- -------------------------------
Liquidity refers to the ability of a financial institution to generate
sufficient cash to fund current loan demand, meet savings deposit withdrawals
and pay operating expenses. The primary sources of liquidity are cash,
interest-bearing deposits in other financial institutions, marketable
securities, loan repayments, increased deposits and total institutional
borrowing capacity.
Cash and interest-bearing deposits, when combined with investments, have
remained a relatively constant percent of total assets, while increasing in
dollar volume. Management's goal is to maintain approximately twenty percent
(20%) to twenty-five percent (25%) of total assets in cash, interest-bearing
deposits and investments in order to satisfy the Company's need for liquidity
and other short-term obligations.
Management believes that it has adequate liquidity for the Company's short- and
long-term needs. Short-term liquidity needs resulting from normal
deposit/withdrawal functions are provided by the Company retaining a portion of
cash generated from operations in a Federal Home Loan Bank ("FHLB") daily
investment account. This account acts as a short-term liquidity source while
providing interest income to the Company. Long-term 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 September 30, 2001
and $13.0 million at December 31, 2000.
At September 30, 2001, the Bank had a tier 1 leverage ratio of approximately
7.2% and a total risk-based capital ratio of approximately 10.0%. The regulatory
tier 1 leverage and total risk-based capital requirements are 4.0% and 8.0%
respectively.
Impact of Inflation and Changing Prices
- ---------------------------------------
The financial statements and related data presented herein have been prepared in
accordance with generally accepted accounting principles. These principles
require the measurement of financial position and operating results in terms of
historical dollars, without considering changes in the relative purchasing power
of money over time due to inflation.
The primary assets and liabilities of the Company are monetary in nature.
Consequently, interest rates generally have a more significant impact on
performance than the effects of inflation. Interest rates, however, do not
necessarily move in the same direction or with the same magnitude as the price
of goods and services. In a period of rapidly rising interest rates, the
liquidity and the maturity structure of the Company's assets and liabilities are
critical to the maintenance of acceptable performance levels.
Other
- -----
The Securities and Exchange Commission maintains a Web site that contains
reports, proxy information statements, and other information regarding
registrants that file electronically with the Commission, including First
Community. 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.
16
Part II - Other Information
Item 1. Legal Proceedings.
- ------- ------------------
None.
Item 2. Changes in Securities.
- ------- ----------------------
None.
Item 3. Defaults upon Senior Securities.
- ------- --------------------------------
Not applicable.
Item 4. Submission of Matters to a Vote by Security Holders.
- ------- ----------------------------------------------------
None.
Item 5. Other Information.
- ------- ------------------
None.
Item 6. Exhibits and Reports on Form 8-K.
- ------- --------------------------------
(a) No reports were filed on Form 8-K during the quarter
ended September 30, 2001.
17
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, 2001 By: /s/ Albert R. Jackson III
----------------- ------------------------------------
Albert R. Jackson III
Chief Executive Officer and Director
Date: November 14, 2001 By: /s/ Randy J. Sizemore
----------------- ------------------------------------
Randy J. Sizemore
Vice President of Finance
18