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, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
----------- -----------
Commission File 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 (IRS
Employer Identification No.)
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, 2002 1,044,926
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 Sheets..........................4
Consolidated Condensed Statements of Income....................5
Consolidated Condensed Statements of Comprehensive Income .....6
Consolidated Condensed Statements of Stockholders' Equity......7
Consolidated Condensed Statements 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
Item 4. Controls and Procedures.........................................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...................................................................16
Certification pursuant to the Sarbanes-Oxley Act of 2002.....................17
Certification of Controls and Procedures.....................................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; the status of the economy in our
market area; decisions made with respect to the classification of loans and the
amount of our loan loss reserves; or regulatory changes.
3
Item 1. Financial Statements
- ------- --------------------
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Condensed Balance Sheet
September 30, December 31,
2002 2001
--------------------------------
(Unaudited)
Assets
Cash and due from banks $ 6,648,693 $ 1,683,913
Short-term interest-bearing deposits 1,951,033 5,003,537
--------------------------------
Cash and cash equivalents 8,599,726 6,687,450
Investment securities available for sale 3,441,362 3,968,964
Mortgage loans held for sale 359,390 554,261
Loans 128,360,426 127,241,655
Allowance for loan losses (1,251,795) (1,114,466)
--------------------------------
Net loans 127,108,631 126,127,189
Premises and equipment 4,336,358 4,564,691
Federal Home Loan Bank of Indianapolis stock, at cost 1,025,000 1,025,000
Interest receivable 706,738 849,933
Cash value of life insurance 2,510,154 2,432,547
Other assets 1,170,641 1,167,454
--------------------------------
Total assets $ 149,258,000 $ 147,377,489
================================
Liabilities
Deposits
Noninterest-bearing $ 13,488,048 $ 11,037,797
Interest-bearing 107,929,799 106,685,724
--------------------------------
Total deposits 121,417,847 117,723,521
Federal Home Loan Bank of Indianapolis advances 13,500,000 15,500,000
Other borrowings 2,532,146 2,555,914
Interest payable 229,644 298,583
Other liabilities 1,073,019 1,108,065
--------------------------------
Total liabilities 138,752,656 137,186,083
--------------------------------
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 - 1,044,926 and 1,042,926 shares 7,058,865 7,043,990
Retained earnings and contributed capital 3,387,765 3,145,348
Accumulated other comprehensive income 58,714 2,068
--------------------------------
Total stockholders' equity 10,505,344 10,191,406
--------------------------------
Total liabilities and stockholders' equity $ 149,258,000 $ 147,377,489
================================
See notes to consolidated condensed financial statements.
4
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Income
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------------------------------------
2002 2001 2002 2001
------------------------------------------------------------
Interest Income
Loans, including fees $ 2,415,090 $ 2,781,189 $ 7,167,511 $ 8,320,127
Investment securities
Taxable 29,961 9,784 69,104 47,546
Tax exempt 30,962 55,171 97,220 243,281
Interest-bearing time deposits 14,036 17,952 58,409 84,197
Dividends 16,147 18,263 48,506 55,896
------------------------------------------------------------
Total interest income 2,506,196 2,882,359 7,440,750 8,751,047
------------------------------------------------------------
Interest Expense
Deposits 714,904 1,125,798 2,307,675 3,923,379
FHLB advances 195,186 230,656 584,029 675,478
Other borrowings 46,252 46,857 139,103 140,053
------------------------------------------------------------
Total interest expense 956,342 1,403,311 3,030,807 4,738,910
------------------------------------------------------------
Net Interest Income 1,549,854 1,479,048 4,409,943 4,012,137
Provision for loan losses 60,000 118,750 921,500 222,250
------------------------------------------------------------
Net Interest Income After Provision for Loan Losses 1,489,854 1,360,298 3,488,443 3,789,887
------------------------------------------------------------
Other Income
Trust fees 7,358 8,456 28,158 30,606
Gain on sale of loans 58,753 7,321 112,725 11,969
Service charges on deposit accounts 214,746 173,926 585,838 514,214
Gain on sale of securities 48,077 33,018 48,077 45,540
Non-customer ATM fee income 45,457 42,327 121,999 113,477
Other operating income 106,190 30,648 257,197 102,658
------------------------------------------------------------
Total other income 480,581 295,696 1,153,994 818,464
------------------------------------------------------------
Other Expenses
Salaries and employee benefits 649,152 600,737 1,958,610 1,768,124
Premises and equipment 182,223 174,491 533,237 525,059
Advertising 30,396 33,878 90,517 96,953
Data processing fees 187,836 167,855 554,463 479,939
Deposit insurance expense 5,095 14,821 15,437 45,155
Printing and office supplies 35,325 42,970 124,218 121,165
Legal and professional fees 48,303 39,227 186,171 149,382
Telephone expense 28,909 29,094 85,935 88,722
Other operating expense 164,504 148,880 496,845 434,648
------------------------------------------------------------
Total other expenses 1,331,743 1,251,953 4,045,433 3,709,147
------------------------------------------------------------
Income Before Income Tax 638,692 404,041 597,004 899,204
Income tax expense 218,332 131,168 145,799 234,990
------------------------------------------------------------
Net Income $ 420,360 $ 272,873 $ 451,205 $ 664,214
============================================================
Basic earnings per share $ .40 $ .26 $ .43 $ .64
Diluted earnings per share $ .38 $ .25 $ .43 $ .61
Dividends per share $ .05 $ .04 $ .20 $ .12
See notes to consolidated condensed financial statements.
5
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Comprehensive Income
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------------------------------------
2002 2001 2002 2001
--------------------------------------------------------------
Net income $ 420,360 $ 272,873 $ 451,205 $ 664,214
Other comprehensive income, net of tax
Unrealized holding gains arising during the
period, net of tax expense of $24,467,
$7,487, $56,198 and $75,108 37,302 11,419 85,680 114,510
Less: Reclassification adjustment for gains
included in net income, net of tax benefit
expense of $19,043, $13,075, $19,043
and $18,034 29,034 19,943 29,034 27,506
--------------------------------------------------------------
8,268 (8,524) 56,646 87,004
--------------------------------------------------------------
Comprehensive income $ 428,628 $ 264,349 $ 507,851 $ 751,218
==============================================================
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, 2002
(Unaudited)
Retained
Common Stock Earnings Accumulated
------------------------------ And Other
Shares Contributed Comprehensive
Outstanding Amount Capital Income Total
------------------------------------------------------------------------------
Balances, January 1, 2002 1,042,926 $7,043,990 $3,145,348 $ 2,068 $10,191,406
Net income for the period 451,205 451,205
Unrealized gains on securities 56,646 56,646
Cash dividends (208,788) (208,788)
Options exercised, net of cost 2,000 14,875 14,875
------------------------------------------------------------------------------
Balances, September 30, 2002 1,044,926 $7,058,865 $3,387,765 $ 58,714 $ 10,505,344
==============================================================================
See notes to consolidated condensed financial statements.
7
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Cash Flows
(Unaudited)
Nine Months Ended
September 30,
------------------------------
2002 2001
------------------------------
Operating Activities
Net income $ 451,205 $ 664,214
Adjustments to reconcile net income to net cash provided by
operating activities
Provision for loan losses 921,500 222,250
Depreciation and amortization 271,417 278,264
Investment securities amortization 28,627 43,494
Gain on sale of securities (48,077) (45,540)
Net change in:
Cash value of life insurance (77,607) (57,780)
Interest receivable 143,195 218,010
Interest payable (68,939) (138,640)
Mortgage loans held for sale 194,871 (1,549,362)
Other adjustments (77,978) 294,868
------------------------------
Net cash provided by (used in) operating activities 1,738,214 (70,222)
------------------------------
Investing Activities
Proceeds from paydowns, maturities, and sales of securities
available-for-sale 3,704,744 6,362,193
Purchases of securities available-for-sale (3,063,302) 0
Proceeds from paydowns, maturities, and sales of securities
held-to-maturity 0 150,769
Purchases of FHLB stock 0 (247,200)
Net change in loans (2,209,033) (3,829,169)
Purchases of property and equipment (43,084) (75,776)
Proceeds received from sale of other real estate 255,846 0
------------------------------
Net cash provided by (used in) investing activities (1,354,829) 2,360,817
------------------------------
Financing Activities
Net change in
Noninterest-bearing, NOW and savings deposits 13,226,902 2,766,830
Certificates of Deposit (9,532,576) (7,481,074)
Proceeds from borrowings 0 8,000,000
Repayment of borrowings (2,023,768) (5,522,522)
Cash dividends (156,542) (124,909)
Rights and options exercised, net of costs 14,875 20,625
------------------------------
Net cash provided by (used in) financing activities 1,528,891 (2,341,050)
------------------------------
Net Change in Cash and Cash Equivalents 1,912,276 (50,455)
Cash and Cash Equivalents, Beginning of Period 6,687,450 4,886,382
------------------------------
Cash and Cash Equivalents, End of Period $ 8,599,726 $ 4,835,927
==============================
Supplemental cash flow disclosures
Interest paid $ 3,099,746 $ 4,877,550
Held-to-maturity securities transferred to available-for-sale
securities 0 1,196,445
Income tax paid 410,900 0
Loans transferred to real estate owned 241,927 305,091
Loans to finance the sale of real estate owned 87,300 98,790
Dividend payable 52,246 41,717
See notes to consolidated condensed financial statements.
8
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Condensed Financial Statements
September 30, 2002
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, 2001, 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 financial statements at September 30, 2002, and for the
three and nine months ended September 30, 2002 and 2001, 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. The results of operations for the three and nine months ended
September 30, 2002 are not necessarily indicative of the results to be expected
for the full year. The consolidated condensed balance sheet of the Company as of
December 31, 2001 has been derived from the audited consolidated balance sheet
of the Company as of that date.
Note 2: Earnings Per Share
- --------------------------
Three Months Ended Three Months Ended
September 30, 2002 September 30, 2001
------------------ ------------------
Weighted Weighted
Average Per Share Average Per Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
Basic earnings per share
Income available to
common stockholders $ 420,360 1,044,926 $ .40 $ 272,873 1,042,154 $ .26
========= =========
Effect of dilutive stock options 609 505
Effect of convertible debt 10,568 90,910 10,568 90,910
--------------------------- ------------------------
Diluted earnings per share
Income available to common
stockholders and assumed
conversions $ 430,928 1,136,445 $ .38 $ 283,441 1,133,569 $ .25
===================================== ===================================
9
Nine Months Ended Nine Months Ended
September 30, 2002 September 30, 2001
------------------ ------------------
Weighted Weighted
Average Per Share Average Per Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
Basic earnings per share
Income available to common
stockholders $ 451,205 1,043,842 $ .43 $ 664,214 1,040,131 $ .64
========= =========
Effect of dilutive stock options 1,348 253
Effect of convertible debt 31,704 90,910 31,704 90,910
--------------------------- -------------------------
Diluted earnings per share
Income available to common
stockholders and assumed
conversions $482,909 1,136,100 $ .43 $ 695,918 1,132,294 $ .61
===================================== ===================================
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.
Critical Accounting Policies
- ----------------------------
The notes to the consolidated financial statements contain a summary of the
Company's significant accounting policies presented on pages F-7 through F-9 of
the Annual Report to Stockholders for the year ended December 31, 2001. Certain
of these policies are important to the portrayal of the Company's financial
condition, since they require management to make difficult, complex or
subjective judgements, some of which may relate to matters that are inherently
uncertain. At this time management believes that its critical accounting
policies include determining the allowance for loan losses.
The allowance for loan losses is a significant estimate that can and does change
based on management's assumptions about specific borrowers and current general
economic and business conditions, among other
10
factors. Management reviews the adequacy of the allowance for loan losses on at
least a quarterly basis. The evaluation by management includes consideration of
past loss experience, changes in the composition of the loan portfolio, the
current condition and amount of loans outstanding, identified problem loans and
the probability of collecting all amounts due.
The determination of the adequacy of the allowance for loan losses is based on
estimates that are particularly susceptible to significant changes in the
economic environment and market conditions. A worsening or protracted economic
decline would increase the likelihood of additional losses due to credit and
market risk and could create the need for additional loss reserves.
Financial Condition
- -------------------
Total assets increased $1.9 million, or 1.3%, to $149.3 million at September 30,
2002, from $147.4 million at December 31, 2001. Net loans increased from $126.1
million on December 31, 2001 to $127.1 million on September 30, 2002. Deposits
increased from $117.7 million on December 31, 2001 to $121.4 million on
September 30, 2002, an increase of 3.1%. FHLB advances decreased $2.0 million or
12.9% during the same time frame. Stockholders' equity was $10.5 million at
September 30, 2002 as compared to $10.2 million at December 31, 2001.
The Bank has experienced demand in both its commercial and installment sections
of the loan portfolio during the nine months ended September 30, 2002. The
increase in net loans of $1.0 million was primarily funded by deposit growth.
Management may 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.
Results of Operations Comparison of Three Months Ended September 30, 2002
and September 30, 2001
- -------------------------------------------------------------------------
The Company had a net income of $420,000 for the three months ended September
30, 2002 compared to net income of $273,000 for the three months ended September
30, 2001, an increase of $147,000 or 54%. This increase in net income is a
result of continued lowered interest rates and management's focus on increasing
non-interest income.
The Bank's net interest income increased from $1.5 million for the three months
ended September 30, 2001 to approximately $1.6 million for the three months
ended September 30, 2002, an increase of $71,000. This increase is primarily due
to the interest rate reductions that occurred during 2001 with interest rates
remaining at these lower levels throughout 2002. The Bank's deposits were able
to reprice in a higher proportion to the interest-earning assets, which repriced
during this same time frame.
The Company made a $60,000 provision for loan losses for the three months ended
September 30, 2002 compared to $119,000 for three months ended September 30,
2001, or a decrease of $59,000. The 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.
Management continued to focus on increasing non-interest income and holding
steady or reducing non-interest expenses during the quarter ended September 30,
2002. As a result of these efforts, non-interest income increased $185,000 or
63% from $296,000 for the three months ended September 30, 2001 to $481,000 for
the three months ended September 30, 2002. This increase was primarily due to:
11
o Increased service charges on deposit accounts of $41,000
o Increased realized gain on sale of loans of $52,000
o Increased other operating income of $76,000 for the three months ended
September 30, 2002.
The increase in service charges on deposit accounts is attributable 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 credit card merchant and interchange fees, and cash surrender
value increases on Company owned life insurance.
Non-interest expenses increased $80,000 during the quarter ended September 30,
2002, when compared to the quarter ended September 30, 2001. The increase
between periods was in primarily due to salaries and employee benefits expenses,
which increased to $649,000 at for the quarter ending September 30, 2002
compared to $601,000 for the same period ending September 30, 2001. Data
processing fees also increased to $188,000 for the three months ended September
30, 2002 from $168,000 for the three months ended September 30, 2001. These
increases are primarily related to servicing more demand deposit, savings
accounts, and loan accounts. Management has made a commitment to continue to
monitor all non-interest expenses to further reduce expenses when practicable.
Income taxes increased $87,000 for the three months ended September 30, 2002,
when compared to the same period in 2001 primarily due to an increase in pretax
income over the same period last year.
Results of Operations Comparison of Nine Months Ended September 30, 2002 and
September 30, 2001
- -----------------------------------------------------------------------------
The Company reported net income of $451,000 for the nine months ended September
30, 2002, a decrease of $213,000 or 32% from the $664,000 reported for the nine
months ended September 30, 2001. Net interest income increased, $398,000, to
$4.4 million for the nine months ended September 30, 2002, compared to $4.0
million for the nine months ended September 30, 2001. This represents a 10%
increase between the two periods.
The Company made a $922,000 provision for loan losses for the nine months ended
September 30, 2002 compared to a $222,000 provision for the nine months ended
September 30, 2001. An increased provision was taken during the second quarter
and allocated to the commercial loan portfolio, which was necessary primarily
due to continued weakness in the general economy of the Indianapolis metro area
and due to the charge off of two loans that were partially unreserved. The
Company believes that there is potential for recovery of these charged off
loans, but the recoveries may be over several quarters. 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 $336,000 or 41% for the nine months ended
September 30, 2002, 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 nine months ended September 30, 2002 compared to the
year ago period. This increased volume in deposit servicing, coupled with fee
structural changes, have increased service charges collected on deposit accounts
by $72,000. The Company also recognized gains on the sale of loans of $113,000
during the nine months ended September 30, 2002, compared to a gain on the sale
of loans of $12,000 during the nine months ended September 30, 2001. The
increase in other operating income is primarily attributable to increases in
credit card merchant and interchange fees, and cash surrender value of Company
owned life insurance polices.
Non-interest expenses were $4.0 million for the nine months ended September 30,
2002, compared to $3.7 million during the nine months ended September 30, 2001.
The Company has seen increases in salaries,
12
premises, data processing, printing and office supplies, legal, and other
expenses while experiencing decreases in advertising, FDIC insurance, and
telephone expenses during the comparable periods. The increased data processing
fees can be attributed to servicing more demand, savings, and loan accounts. The
primary increase in non-interest expense is in salaries and benefits expense,
which increased $191,000 to $2.0 million during the nine months ended September
30, 2002, compared to $1.8 million during the nine months ended September 30,
2001. Management is continuing to monitor all expense areas and implementing
systems or procedural changes when deemed beneficial to the Company.
Income taxes decreased $89,000 for the nine months ended September 30, 2002,
when compared to the same period in 2001, primarily due to a decrease in pretax
income caused by an increased loan loss provision recorded in the second quarter
of 2002.
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, 2002, the Bank had $4.4 million of loans classified as
substandard, none as doubtful and none as loss. The allowance for loan losses
was $1.3 million, or .98% of net loans receivable at September 30, 2002 compared
to $1.1 million or .88% of net loans receivable at December 31, 2001. A portion
of classified loans are non-accrual loans. First Community had non-accrual loans
totaling $1.8 million at September 30, 2002 compared to $1.6 million at December
31, 2001. All non-accrual loans are considered substandard.
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 September 30, 2002, the Company's one-year cumulative interest-rate gap as a
percent of total assets was a negative 4.9%. 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 1.79% at September 30, 2002 and 1.37%
at December 31, 2001.
13
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, 2002.
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.
At September 30, 2002 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 $ 12,810 $ 6,850 $ 5,944 $ 313 $ 25,917
Fixed rate mortgages 6,147 2,889 3,250 16,389 28,675
Commercial loans 23,242 4,680 2,663 1,030 31,615
Consumer loans 15,564 14,199 5,926 1,689 37,378
Tax-exempt loans and leases 17 626 947 1,029 2,619
Investments 681 481 1,160 1,119 3,441
FHLB stock 1,025 1,025
Interest-bearing deposits 1,949 1,949
--------------------------------------------------------------------
Total interest-earning assets 61,435 29,725 19,890 21,569 132,619
--------------------------------------------------------------------
Interest-bearing liabilities:
Fixed maturity deposits 35,577 11,217 7,070 2,610 56,474
Other deposits 31,671 12,866 5,371 1,531 51,439
FHLB advances 1,500 1,500 5,500 5,000 13,500
--------------------------------------------------------------------
Total interest-bearing liabilities 68,748 25,583 17,941 9,141 121,413
--------------------------------------------------------------------
Excess (deficiency) of interest-earning (7,313) 4,142 1,949 12,428 11,206
assets over interest-bearing liabilities
Cumulative excess (deficiency) of
interest-earning assets over
interest-bearing liabilities (7,313) (3,171) (1,222) 11,206
Cumulative ratio at September 30, 2002 as
a percent of total assets (4.90)% (2.13)% (.82)% 7.51%
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,
14
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 fifteen percent
(15%) to twenty percent (20%) 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 $13.5 million at September 30, 2002
and $15.5 million at December 31, 2001.
At September 30, 2002, the Bank had a tier 1 leverage ratio of approximately
7.36% and a total risk-based capital ratio of approximately 10.22%. 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 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.
Item 4. Controls and Procedures
- ------- -----------------------
(a) Evaluation of disclosure controls and procedures. The Company's chief
executive officer and chief financial officer, after evaluating the
effectiveness of the Company's disclosure controls and procedures (as defined in
Sections 13a-14(c) and 15d-14(c) of the Securities Exchange Act of 1934, as
amended), as of a date
15
(the "Evaluation Date") within 90 days before the filing date of this quarterly
report, has concluded that as of the Evaluation Date, the Company's disclosure
controls and procedures were adequate and are designed to ensure that material
information relating to the Company is timely gathered, analyzed and disclosed
to such officers within the Company, as appropriate, to allow timely decisions
regarding required disclosure in the Company's reports filed under the
Securities Exchange Act of 1934, as amended.
(b) Changes in internal controls. There have been no significant changes in the
Company's internal controls or in other factors that could significantly affect
the Company's internal controls subsequent to the Evaluation Date.
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, 2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST COMMUNITY BANCSHARES, INC.
Date: November 14, 2002 By: /s/ Albert R. Jackson III
----------------- --------------------------------
Albert R. Jackson III
Chief Executive Officer and Director
Date: November 14, 2002 By: /s/ Brian D. Heilers
----------------- --------------------------------
Brian D. Heilers
Vice President of Finance
16
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of First Community Bancshares, Inc. (the
"Company") on Form 10Q for the period ending June 30, 2002 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Albert
R. Jackson, III, Chief Executive Officer and Chief Financial Officer of the
Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company as of and for the periods stated therein.
By: /s/ Albert R. Jackson, III
---------------------------------------------------
Chief Executive Officer and Chief Financial Officer
November 14, 2002
CERTIFICATION OF PRINCIPAL EXECUTIVE AND FINANCIAL OFFICER
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Albert R. Jackson III, certify that:
1. I have reviewed this quarterly report on Form 10-Q of First Community
Bancshares, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report.
17
4. I am responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. I have disclosed, based on my most recent evaluation, to the registrant's
auditors and the audit committee of the registrant's board of directors (or
persons performing the equivalent functions):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. I have indicated in this quarterly report whether there were significant
changes in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
By: /s/ Albert R. Jackson, III
---------------------------------------------------
Chief Executive Officer and Chief Financial Officer
November 14, 2002
18