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 March 31, 2003
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
--- ---
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
--- ---
Outstanding Shares of Common Stock on May 1, 2003 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 Statement of Stockholders' Equity.....7
Consolidated Condensed Statements 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........................11
Item 3. Quantitative and Qualitative Disclosures about Market Risk.......16
Item 4. Controls and Procedures..........................................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 of Security Holders.............17
Item 5. Other Information................................................17
Item 6. Exhibits and Reports on Form 8-K.................................17
Signatures....................................................................18
Certification pursuant to the Sarbanes-Oxley Act of 2002......................19
Certification of Controls and Procedures......................................20
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 Sheets
March 31, December 31,
2003 2002
-------------------------------
(Unaudited)
Assets
Cash and due from banks $ 2,059,791 2,392,914
Short-term interest-bearing deposits 10,662,036 6,710,100
-------------------------------
Cash and cash equivalents 12,721,827 9,103,014
Investment securities available for sale 3,326,573 3,912,228
Mortgage loans held for sale 541,644 1,625,533
Loans 117,958,116 122,501,410
Allowance for loan losses (1,378,663) (1,494,697)
-------------------------------
Net loans 116,579,453 121,006,713
Premises and equipment 4,203,613 4,284,827
Federal Home Loan Bank of Indianapolis stock, at cost 1,025,000 1,025,000
Interest receivable 638,522 764,727
Cash value of life insurance 2,552,888 2,532,999
Other assets 1,196,663 1,385,274
-------------------------------
Total assets $ 142,786,183 $ 145,640,315
===============================
Liabilities
Deposits
Noninterest-bearing $ 12,715,206 $ 13,558,713
Interest-bearing 104,292,612 106,051,958
-------------------------------
Total deposits 117,007,818 119,610,671
Federal Home Loan Bank of Indianapolis advances 12,000,000 12,500,000
Other borrowings 1,755,933 1,761,999
Interest payable 184,729 192,325
Other liabilities 1,137,271 1,109,761
-------------------------------
Total liabilities 132,085,751 135,174,756
-------------------------------
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 shares 7,060,789 7,058,865
Retained earnings and contributed capital 3,586,815 3,356,465
Accumulated other comprehensive income 52,828 50,229
-------------------------------
Total stockholders' equity 10,700,432 10,465,559
-------------------------------
Total liabilities and stockholders' equity $ 142,786,183 $ 145,640,315
===============================
See notes to consolidated condensed financial statements.
4
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Income
(Unaudited)
Three Months Ended
March 31
------------------------
2003 2002
------------------------
Interest Income
Loans, including fees $2,045,219 $2,400,539
Investment securities
Taxable 20,704 9,262
Tax exempt 26,398 33,093
Interest-bearing time deposits 15,616 25,968
Dividends 14,730 16,598
------------------------
Total interest income 2,122,667 2,485,460
------------------------
Interest Expense
Deposits 522,740 826,992
FHLB advances 170,537 195,869
Other borrowings 31,667 46,262
------------------------
Total interest expense 724,944 1,069,123
------------------------
Net Interest Income 1,397,723 1,416,337
Provision for loan losses 23,000 71,500
------------------------
Net Interest Income After Provision for Loan Losses 1,374,723 1,344,837
------------------------
Other Income
Trust fees 18,154 19,765
Gain on sale of loans 124,854 38,806
Service charges on deposit accounts 185,840 170,870
Non-customer ATM fee income 53,235 34,763
Other operating income 61,046 68,949
------------------------
Total other income 443,129 333,153
------------------------
Other Expenses
Salaries and employee benefits 628,699 652,776
Premises and equipment 188,183 173,085
Advertising 19,272 24,904
Data processing fees 185,919 181,355
Deposit insurance expense 13,851 5,275
Printing and office supplies 45,097 42,623
Legal and professional fees 97,672 71,501
Telephone expense 26,518 29,060
Other operating expense 186,467 161,352
------------------------
Total other expenses 1,391,678 1,341,931
------------------------
Income Before Income Tax 426,174 336,059
Income tax expense 143,579 105,781
------------------------
Net Income $ 282,595 $ 230,278
========================
Basic earnings per share $ .27 $ .22
.27 .22
Diluted earnings per share .24 .21
Dividends per share .05 .10
See notes to consolidated condensed financial statements.
5
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Comprehensive Income
(Unaudited)
Three Months Ended
March 31,
---------------------------
2003 2002
---------------------------
Net Income $ 282,595 $ 230,278
Other comprehensive income, net of tax
Unrealized gains on securities available for sale
Unrealized holding gains arising during the period, 2,599 1,934
net of tax expense of $1,705 and $1,269
---------------------------
Comprehensive income $ 285,194 $ 232,212
===========================
See notes to consolidated condensed financial statements
6
FIRST COMMUNITY BANCSHARES, INC AND SUBSIDIARIES
Consolidated Condensed Statement of Stockholders' Equity
For the Three Months Ended March 31, 2003
(Unaudited)
Retained
Common Stock Earnings Accumulated
------------------------------- and Other
Shares Contributed Comprehensive
Outstanding Amount Capital Income Total
-----------------------------------------------------------------------------
Balances, January 1, 2003 1,044,926 $7,058,865 $3,356,465 $ 50,229 $10,465,559
Net income for the period 282,595 282,595
Unrealized gains on securities 2,599 2,599
Cash dividend ($.05 per share) (52,245) (52,245)
Tax benefit on stock options 1,924 1,924
exercised in 2002
-----------------------------------------------------------------------------
Balances, March 31, 2003 1,044,926 $7,060,789 $3,586,815 $ 52,828 $10,700,432
=============================================================================
See notes to consolidated condensed financial statements.
7
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Cash Flows
(Unaudited)
Three Months Ended
March 31,
-----------------------------
2003 2002
-----------------------------
Operating Activities
Net income $ 282,595 $ 230,278
Adjustments to reconcile net income to net cash provided by
operating activities
Provision for loan losses 23,000 71,500
Depreciation and amortization 84,307 85,748
Investment securities amortization 2,859 4,745
Net change in:
Mortgage loans held for sale 1,083,889 107,338
Cash value of life insurance (19,889) (22,335)
Interest receivable 126,205 (7,245)
Interest payable (7,596) (35,308)
Other adjustments 166,211 28,300
-----------------------------
Net cash provided by operating activities 1,741,581 463,021
-----------------------------
Investing Activities
Proceeds from maturities of securities available-for-sale 587,127 340,317
Net change in loans 4,350,160 2,430,673
Purchases of property and equipment (3,093) (2,023)
Other investing activity 104,202 0
-----------------------------
Net cash provided by investing activities 5,038,396 2,768,967
-----------------------------
Financing Activities
Net change in
Noninterest-bearing, NOW and savings deposits (2,511,020) 542,051
Certificates of Deposit (91,833) 2,893,191
Proceeds from borrowings 0 0
Repayment of borrowings (506,066) (2,008,222)
Dividends paid (52,245) (52,146)
-----------------------------
Net cash provided by (used in) financing activities (3,161,164) 1,374,874
-----------------------------
Net Change in Cash and Cash Equivalents 3,618,813 4,606,862
Cash and Cash Equivalents, Beginning of Period 9,103,014 6,687,450
-----------------------------
Cash and Cash Equivalents, End of Period $ 12,721,827 $ 11,294,312
=============================
Supplemental cash flow disclosures
Interest paid $ 732,540 $ 1,104,431
Income tax paid 0 155,000
Dividend payable 52,245 52,146
Loans to finance the sale of real estate owned 0 87,300
See notes to consolidated condensed financial statements.
8
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
March 31, 2003
(Unaudited)
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, 2002, 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 March 31, 2003, and for the
three months ended March 31, 2003 and 2002, 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 months ended March 31, 2003 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, 2002 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
March 31, 2003 March 31, 2002
-------------- --------------
Weighted Weighted
Average Per Share Average Per Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
Basic earnings per share
Income available to common
shareholders $282,595 1,044,926 $ .27 $230,278 1,042,926 $ .22
=============== ============
Effect of dilutive stock options 109,142 1,913
Effect of convertible debt 10,568 90,910 10,568 90,910
--------------------------- --------------------------
Diluted earnings per share
Income available to common
shareholders and assumed
conversions $293,163 1,244,978 $ .24 $240,846 1,135,749 $ .21
=========================================== =======================================
Note 3: Effect of Recent Accounting Pronouncements
- --------------------------------------------------
The Financial Accounting Standards Board ("FASB") adopted Statement of Financial
Accounting Standards ("SFAS") No. 148, Accounting for Stock-Based Compensation -
Transition and Disclosure. This Statement amends FASB Statement No. 123,
Accounting for Stock-Based Compensation. SFAS No. 148 provides alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, SFAS No. 148
amends the disclosure requirements of SFAS No.
9
123 to require more prominent and more frequent disclosures in financial
statements about the effects of stock-based compensation.
Under the provisions of SFAS No. 123, companies that adopted the fair value
based method were required to apply that method prospectively for new stock
option awards. This contributed to a "ramp-up" effect on stock-based
compensation expense in the first few years following adoption, which caused
concern for companies and investors because of the lack of consistency in
reported results. To address that concern, SFAS No. 148 provides two additional
methods of transition that reflect an entity's full complement of stock-based
compensation expense immediately upon adoption, thereby eliminating the ramp-up
effect.
SFAS No. 148 also improves the clarity and prominence of disclosures about the
proforma effects of using the fair value based method of accounting for
stock-based compensation for all companies - regardless of the accounting method
used - by requiring that the data be presented more prominently and in a more
user-friendly format in the footnotes to the financial statements. In addition,
SFAS No. 148 improves the timeliness of those disclosures by requiring that this
information be included in interim as well as annual financial statements. In
the past, companies were required to make proforma disclosures only in annual
financial statements.
The transition guidance and annual disclosure provisions of SFAS No. 148 are
effective for fiscal years ending after December 15, 2002, with earlier
application permitted in certain circumstances. The interim disclosure
provisions are effective for financial reports containing financial statements
for interim periods beginning after December 15, 2002. During the three months
ended March 31, 2003 and March 31, 2002, no stock options were granted by the
Company and previously granted options were vested at issuance.
The FASB has stated it intends to issue a new statement on accounting for
stock-based compensation and will require companies to expense stock options
using a fair value based method at date of grant. The date of implementation for
this proposed statement is not known.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others ("FIN 45"). FIN 45 will change current practice in the
accounting for and disclosure of guarantees. Guarantees meeting the
characteristics described in FIN 45 are required to be initially recorded at
fair value, which is different from the general current practice of recording a
liability only when a loss is probable and reasonably estimable, as those terms
are defined in FASB Statement No. 5, Accounting for Contingencies. FIN 45 also
requires a guarantor to make new disclosures for virtually all guarantees even
if the likelihood of the guarantor's having to make payments under the guarantee
is remote.
In general, FIN 45 applies to contracts or indemnification agreements that
contingently require the guarantor to make payments to the guaranteed party
based on changes in an underlying asset, liability, or an equity security of the
guaranteed party such as financial standby letters of credit.
Disclosure requirements of FIN 45 are effective for financial statements of
interim or annual periods ending after December 31, 2002. The initial
recognition and measurement provisions are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002, irrespective of the
guarantor's fiscal year-end. The guarantor's previous accounting for guarantees
issued prior to the date of FIN 45 initial applications should not be revised or
restated to reflect the provisions of FIN 45.
The Company adopted FIN 45 on January 1, 2003. The adoption of FIN 45 does not
currently have a material impact on the Company's consolidated financial
statements.
10
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 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 for 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.
On March 27, 2003, the Company executed a definitive agreement providing for the
merger of the Company with and into a wholly-owned subsidiary of MainSource
Financial Group, Inc. The agreement provides that the Company's stockholders
will receive $21 in cash for each share of common stock of the Company, and each
holder of options to purchase common stock in the Company will receive $21.00
per share less the exercise price of such option. The consummation of the merger
transaction is subject to various regulatory approvals and the approval of the
stockholders of the Company at a special meeting scheduled for May 28, 2003.
Assuming the stockholders vote in favor of the merger, the Company anticipates
that the merger transaction will close during the second quarter of 2003.
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, 2002. 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 judgments, some of which may relate to matters that are inherently
uncertain. Management has identified the determination of the allowance for loan
losses as a critical accounting policy.
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 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.
11
Financial Condition
- -------------------
Total assets decreased approximately $2.8 million, or 2.0%, to $142.8 million at
March 31, 2003, from $145.6 million at December 31, 2002. Net loans decreased
3.7% from $121.0 million on December 31, 2002 to $116.6 million on March 31,
2003. Deposits decreased 2.2% from $119.6 million on December 31, 2002 to $117.0
million on March 31, 2003. FHLB advances decreased $500,000 during the same time
period. Stockholders' equity was $10.7 million at March 31, 2003 as compared to
$10.5 million at December 31, 2002.
The decrease in net loans was a result of the continued weakness of the local
economy. The Bank experienced a significant increase in loan repayments coupled
with a weak demand for loans during the quarter ended March 31, 2003. The $4.4
million net decrease in loans and the $1.1 million decrease in loans held for
sale created added liquidity for the Bank.
The Bank's liquidity position will greatly influence management's decisions
relating to the mix of borrowing, deposits and investment securities. With the
increase in liquidity from the decreases in loans, cash and cash equivalents
increased $3.6 million for the three months ended March 31, 2003 compared to the
balance at December 31, 2002. The increase in cash and cash equivalents was
primarily invested in overnight time deposits at the Federal Home Loan Bank of
Indianapolis.
Results of Operations Comparison of Three Months Ended March 31, 2003 and
March 31, 2002
- -------------------------------------------------------------------------
The Company had net income of $283,000 during the three months ended March 31,
2003 as compared to $230,000 for the three months ended March 31, 2002. The
$53,000 increase in net income between the two periods represents a 23.0%
increase.
Net interest income was $1.4 million for both periods ended March 31, 2003 and
March 31, 2002. The Company is continuing to experience the effects of interest
rate reductions that occurred in 2002. The Bank's interest-earning assets were
able to reprice in proportion to the interest-bearing liabilities. The
interest-bearing liabilities experienced considerable repricing during the last
two quarters of 2002, which has continued into 2003. As a result, total interest
income decreased by approximately $363,000 when comparing the quarter ended
March 31, 2003 to the quarter ended March 31, 2002. Offsetting the decrease in
total interest income was a decrease in interest expense of $344,000.
The Company made a $23,000 provision for loan losses for the three months ended
March 31, 2003 compared to $72,000 for the three months ended March 31, 2002, or
a decrease of $49,000. This decrease was primarily due to the recoveries on
charged off loans totaling approximately $62,000 during the first quarter of
2003. 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 while managing
non-interest expenses during the quarter ended March 31, 2003. As a result of
these efforts, non-interest income increased $110,000 or 33.0% from $333,000 for
the three months ended March 31, 2002 to $443,000 for the three months ended
March 31, 2003. This increase was primarily due to:
o Increased gain on the sale of mortgage loans of $86,000;
o Increased service charges on deposit accounts of $15,000; and
o Increased non-customer ATM fee income of $19,000.
The increase in the gain on the sale of mortgage loans is due to the success of
the Bank's secondary market mortgage program. The increase in service charges on
deposit accounts is attributed to increased transaction
12
volumes and the Bank servicing more deposit accounts. The increase in
non-customer ATM fees is mainly due to the strategic placement of the Bank's
ATMs in convenient locations to our customers and non-customers as well.
Non-interest expenses increased $50,000 or 3.7% for the quarter ended March 31,
2003 compared to the same period in 2002. This increase was primarily composed
of increases in legal and professional fees and other operating expenses. Legal
and professional fees increased $26,000 for the quarter ended March 31, 2003
compared to the same period in 2002, primarily due to fees relating to the
upcoming merger and litigation arising from loan delinquencies. The increases in
other operating expenses were related to other real estate owned, repossessions
and ATM interchange fees. Miscellaneous expenses related to other real estate
owned and repossessions increased $10,000 during the three month period compared
the previous year. ATM interchange fees increased $6,000 due to an increase in
transaction volumes. Management has made a commitment to continue to monitor all
non-interest expenses to further reduce expenses when practicable.
Income taxes increased $38,000 for the three months ended March 31, 2003, when
compared to the same period in 2002. The Company's effective tax rate was 33.7%
during the quarter ended March 31, 2003 compared to 31.5% during the quarter
ended March 31, 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 March 31, 2003, the Bank had $3.8 million of loans classified as
substandard, none as doubtful and none as loss. The allowance for loan losses
was $1.4 million or 1.2% of loans receivable at March 31, 2003 compared to $1.5
million or 1.2% of loans receivable at December 31, 2002. A portion of
classified loans are non-accrual loans. The Bank had non-accrual loans totaling
$3.1 million at March 31, 2003 compared to $2.7 million and December 31, 2002.
All non-accrual loans are considered substandard.
Asset/Liability Management
- --------------------------
One of the actions undertaken by the Bank's management has been to adopt
asset/liability management policies in an attempt to reduce the susceptibility
of the Bank'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 March 31, 2003, the Bank's one-year cumulative interest-rate gap as a percent
of total assets was a negative 2.1%. This negative interest-rate gap represents
substantial risk for the Bank in an environment of rising interest rates. A
negative interest-rate gap means the Bank'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
13
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 2.42 % at March 31, 2003 and 2.44 % at December 31, 2002.
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 March 31, 2003.
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 loan
prepayments or enforcement of due-on-sale clauses.
14
At March 31, 2003 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 $ 16,572 $ 4,905 $ 5,812 $ 300 $ 27,589
Fixed rate mortgages 3,599 2,598 2,645 13,857 22,699
Commercial loans 16,232 6,663 2,448 5,410 30,753
Consumer loans 14,121 12,980 5,197 1,940 34,238
Tax-exempt loans and leases 37 612 1,213 705 2,567
Investments 230 876 1,407 814 3,327
FHLB stock 1,025 1,025
Interest-bearing deposits 10,660 10,660
-----------------------------------------------------
Total interest-earning assets 62,476 28,634 18,722 23,026 132,858
-----------------------------------------------------
Interest-bearing liabilities:
Fixed maturity deposits 32,440 7,550 6,926 4,400 51,316
Other deposits 32,018 13,900 5,425 1,596 52,939
FHLB advances 1,000 500 5,000 5,500 12,000
-----------------------------------------------------
Total interest-bearing liabilities 65,458 21,950 17,351 11,496 116,255
-----------------------------------------------------
Excess (deficiency) of interest-earning (2,982) 6,684 1,371 11,530 16,603
assets over interest-bearing liabilities
Cumulative excess (deficiency) of
interest-earning assets over
interest-bearing liabilities (2,982) 3,702 5,073 16,603
Cumulative ratio at March 31, 2003 as a
percent of total assets (2.1)% 2.6% 3.6% 11.6%
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 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
15
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 $12.0 million at
March 31, 2003 and $12.5 million at December 31, 2002.
At March 31, 2003, the Bank had a tier 1 leverage ratio of approximately 7.93%
and a total risk-based capital ratio of approximately 10.92%. 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
- ------- ----------------------------------------------------------
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 (the "Evaluation Date") within 90 days before the filing
date of this quarterly report, have 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
our internal controls subsequent to the Evaluation Date.
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) Exhibits
Exhibit 99.1 Certification of the Chief Executive
Officer and Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the first
quarter of 2003.
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: May 15, 2003 By: /s/ Albert R. Jackson III
------------ --------------------------------
Albert R. Jackson III
Chief Executive Officer,
Chief Financial Officer and Director
18
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.
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
May 15, 2003
19