SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File 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)
210 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 12, 1998: 1,005,268
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 Changes
in 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..................... 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk... 15
Part II. Other Information:
Item 1. Legal Proceedings............................................. 18
Item 2. Changes In Securities......................................... 18
Item 3. Defaults Upon Senior Securities............................... 18
Item 4. Submission of Matters to a Vote of Security Holders........... 18
Item 5. Other Information............................................. 18
Item 6. Exhibits and Reports on Form 8-K.............................. 18
Signatures................................................................. 19
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 Registrant (as defined below), its
directors or its officers primarily with respect to future events and the future
financial performance of the Registrant. 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
Part I. Financial Information
-------
Item 1. Financial Statements
- ------- --------------------
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Condensed Balance Sheet
(Unaudited)
September 30, December 31,
1998 1997
--------------------------------------
ASSETS
Cash and due from banks $ 1,512,237 $ 933,574
Short-term interest-bearing deposits 5,517,480 10,297,654
--------------------------------------
Cash and cash equivalents 7,029,717 11,231,228
Investment securities
Available for sale 5,590,355 2,771,058
Held to maturity 1,032,736 1,708,679
--------------------------------------
Total investment securities 6,623,091 4,479,737
Loans 88,205,903 80,000,575
Allowance for loan losses (982,834) (848,085)
--------------------------------------
Net Loans 87,223,069 79,152,490
Premises and equipment 2,744,381 1,944,779
Federal Home Loan Bank of Indianapolis stock, at cost 777,800 777,800
Foreclosed real estate 90,000 78,636
Interest receivable 861,440 700,079
Other assets 514,760 374,965
--------------------------------------
Total assets $ 105,864,258 $ 98,739,714
======================================
LIABILITIES
Deposits
Noninterest-bearing $ 7,207,106 $ 7,623,814
Interest-bearing 86,289,057 80,071,501
--------------------------------------
Total deposits 93,496,163 87,695,315
Federal Home Loan Bank of Indianapolis advances 2,833,613 2,929,789
Other borrowings 798,966
Interest payable 265,815 250,617
Other liabilities 231,783 313,987
--------------------------------------
Total liabilities 97,626,340 91,189,708
--------------------------------------
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 - 1,005,268 and 989,848 shares 6,841,027 6,722,251
Retained earnings and contributed capital 1,362,991 794,796
Accumulated other comprehensive income 33,900 32,959
--------------------------------------
Total stockholders' equity 8,237,918 7,550,006
--------------------------------------
Total liabilities and stockholders' equity $ 105,864,258 $ 98,739,714
======================================
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,
---------------------------------------------------------------------
1998 1997 1998 1997
---------------------------------------------------------------------
Interest Income:
Loans, including fees $ 1,951,845 $ 1,777,802 $ 5,632,415 $ 4,959,194
Investment securities
Taxable 60,951 47,297 193,559 132,474
Tax exempt 55,776 25,928 92,821 84,378
Interest-bearing time deposits 66,678 52,515 280,140 173,625
Dividends 15,743 16,174 47,925 47,645
---------------------------------------------------------------------
Total interest income 2,150,993 1,919,716 6,246,860 5,397,316
---------------------------------------------------------------------
Interest Expense:
Deposits 1,095,113 963,204 3,223,139 2,687,556
FHLB advances 43,943 20,189 131,238 92,232
Other borrowings 12,363 12,363
---------------------------------------------------------------------
Total interest expense 1,151,419 983,393 3,366,740 2,779,788
---------------------------------------------------------------------
Net Interest Income 999,574 936,323 2,880,120 2,617,528
Provision for loan losses (75,000) (69,000) (204,000) (180,000)
---------------------------------------------------------------------
Net Interest Income After Provision for Loan Losses 924,574 867,323 2,676,120 2,437,528
---------------------------------------------------------------------
Other Income
Trust fees 2,407 6,715 31,060 24,491
Service charges on deposit accounts 76,679 56,984 225,635 168,730
Other operating income 4,789 23,906 24,865 34,263
---------------------------------------------------------------------
Total other income 83,875 87,605 281,560 227,484
---------------------------------------------------------------------
Other Expenses
Salaries and employee benefits 365,774 307,468 1,017,706 894,002
Premises and equipment 80,030 79,911 235,489 220,361
Advertising 30,360 36,290 93,597 96,807
Data processing fees 78,284 79,822 207,155 191,493
Deposit insurance expense 13,349 11,475 39,226 33,002
Printing and office supplies 23,379 23,276 79,579 58,842
Legal and professional fees 32,461 17,492 96,395 97,536
Telephone expense 17,844 18,003 51,404 52,334
Other operating expense 110,764 71,780 305,379 226,747
---------------------------------------------------------------------
Total other expenses 752,245 645,517 2,125,930 1,871,124
---------------------------------------------------------------------
Income Before Income Tax 256,204 309,411 831,750 793,888
Income tax expense 75,695 104,185 263,555 266,156
---------------------------------------------------------------------
Net Income $ 180,509 $ 205,226 $ 568,195 $ 527,732
=====================================================================
Basic earnings per share $ .18 $ .21 $ .57 $ .53
Diluted earnings per share .18 .20 .57 .53
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,
-------------------------------------------------------------------
1998 1997 1998 1997
-------------------------------------------------------------------
Net Income $ 180,509 $ 205,226 $ 568,195 $ 527,732
Other comprehensive income, net of tax
Holding gains on securities available for sale,
net of tax of $5,209, $10,841, $617, and $17,330 7,943 16,529 941 26,422
-------------------------------------------------------------------
Comprehensive income $ 188,452 $ 221,755 $ 569,136 $ 554,154
===================================================================
See notes to consolidated condensed financial statements.
6
FIRST COMMUNITY BANCSHARES, INC AND SUBSIDIARIES
Consolidated Condensed Statement of Changes in Stockholders' Equity
For the Nine Months Ended September 30, 1998
(Unaudited)
Retained
Common Stock Earnings Accumulated
--------------------------------- and Other
Shares Contributed Comprehensive
Outstanding Amount Capital Income Total
------------------------------------------------------------------------------------------
BALANCES, JANUARY 1, 1998 989,848 $6,722,251 $ 794,796 $ 32,959 $7,550,006
Net income for the period 568,195 568,195
Holding gains on securities
available for sale 941 941
Exercise of stock options 15,420 85,427 85,427
Tax benefit of stock options
exercised 33,349 33,349
------------------------------------------------------------------------------------------
BALANCES, SEPTEMBER 30, 1998 1,005,268 $6,841,027 $ 1,362,991 $ 33,900 $8,237,918
==========================================================================================
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,
-------------------------------------
1998 1997
-------------------------------------
Operating Activities:
Net income $ 568,195 $ 527,732
Adjustments to reconcile net income to net cash provided (used) by
operating activities:
Provision for loan losses 204,000 180,000
Depreciation and amortization 110,758 101,396
Investment securities amortization 10,021 3,913
Net change in:
Interest receivable (161,361) (98,104)
Interest payable 15,198 33,505
Other assets (140,414) (1,519)
Other liabilities (48,855) 242,267
-------------------------------------
Net cash provided by operating activities 557,542 989,190
-------------------------------------
Investing Activities:
Proceeds from maturities of securities available for sale 420,000 615,000
Proceeds from paydowns and maturities of securities held to maturity 675,000 583,248
Purchases of securities available for sale (3,246,815) (500,000)
Net changes in loans (8,356,826) (11,777,435)
Proceeds from sale of foreclosed real estate 70,883 123,167
Purchases of property and equipment (910,360) (257,913)
-------------------------------------
Net cash used by investing activities (11,348,118) (11,213,933)
-------------------------------------
Financing Activities:
Net change in:
Noninterest-bearing, NOW and savings deposits 2,306,367 1,273,526
Certificates of Deposit 3,494,481 9,327,993
Repayment of FHLB advances (96,176) (1,108,144)
Proceeds from other borrowings 800,000
Repayment of other borrowings (1,034)
Stock options exercised 85,427
Cash dividends (94,282)
-------------------------------------
Net cash provided by financing activities 6,589,065 9,399,093
-------------------------------------
Net Decrease in Cash and Cash equivalents (4,201,511) (825,650)
Cash and Cash equivalents, Beginning of period 11,231,228 7,034,571
-------------------------------------
Cash and Cash equivalents, End of period $ 7,029,717 $ 6,208,921
=====================================
Supplemental cash flow disclosures:
Interest paid $ 3,351,542 $ 2,746,283
Income taxes paid 81,470 139,904
See notes to consolidated condensed financial statements.
8
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
September 30, 1998
(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 was incorporated on May 26, 1998
to hold and manage the real estate used by the Company and the Bank and
commenced operation in July 1998. A summary of significant accounting policies
is set forth in Note 1 of Notes to Financial Statements included in the December
31, 1997, Annual Report to Shareholders. All significant intercompany accounts
and transactions have been eliminated in consolidation.
The interim consolidated financial statements have been prepared in accordance
with instructions to Form 10-Q, and therefore do not include all information and
footnotes necessary for a fair presentation of financial position, results of
operations and cash flows in conformity with generally accepted accounting
principles.
The interim consolidated financial statements at September 30, 1998, and for the
nine months ended September 30, 1998 and 1997, 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, 1998 September 30, 1997
------------------ ------------------
Weighted Weighted
Average Per Share Average Per Share
Income Shares Amount Income Shares Amount
---------- --------- ----------- ---------- ---------- -----------
Basic earnings per share
Income available to
common shareholders $ 180,509 991,524 $ .18 $ 205,226 989,848 $ .21
======== ==========
Effect of dilutive stock options 13,365 13,803
------------------------------- ----------------------------
Diluted earnings per share
Income available to common
shareholders and assumed
conversions $ 180,509 1,004,889 $ .18 $205,226 1,003,651 $ .20
========================================= =========================================
9
Nine Months Ended Nine Months Ended
September 30, 1998 September 30, 1997
------------------ ------------------
Weighted Weighted
Average Per Share Average Per Share
Income Shares Amount Income Shares Amount
---------- --------- ----------- ---------- ---------- -----------
Basic earnings per share
Income available to
common shareholders $ 568,195 990,413 $ .57 $ 527,732 989,848 $ .53
======== ==========
Effect of dilutive stock options 13,910 13,803
------------------------------- ----------------------------
Diluted earnings per share
Income available to common
shareholders and assumed
conversions $ 568,195 1,004,323 $ .57 $ 527,732 1,003,651 $ .53
========================================= =========================================
Note 3: Changes in Methods of Accounting
- ----------------------------------------
During 1997, the Financial Accounting Standards Board ("FASB") issued
Statement No. 130, Reporting Comprehensive Income, establishing standards for
the reporting of comprehensive income and its components in financial
statements. Statement No. 130 is applicable to all entities that provide a
full set of financial statements. Enterprises that have no items of other
comprehensive income in any period presented are excluded from the scope of
this Statement.
Statement No. 130 is effective for interim and annual periods beginning after
December 15, 1997. The Company has adopted Statement No. 130 during the first
fiscal quarter of 1998. See the Consolidated Condensed Statement of
Comprehensive Income on page 6.
Note 4: Debt, Rights and Warrants Offerings
- -------------------------------------------
On July 15, 1998 the Board of Directors approved the issuance and sale of the
following securities:
- Rights to shareholders to purchase one (1) share for every ten
(10) shares owned as of October 29, 1998, the record date, subject
to a minimum offer and purchase of one hundred (100) shares of
common stock, at a purchase price of $11.00 per share. The rights
will be exercisable for a ninety (90) day period expiring on
January 29, 1999 following their issuance and subject to the
minimum purchase requirement, will be freely transferable;
- Warrants to shareholders to purchase one (1) share for every ten
(10) shares owned on October 29, 1998, the record date, subject to
a minimum offer and purchase of one hundred (100) shares of Common
Stock, with an exercise price of $11.00 per share. The warrants
will be exercisable for a ninety (90) day period commencing on
September 15, 1999 and expiring on December 13, 1999 and subject
to the minimum purchase requirement, will be freely transferable;
and
- The offer and sale of up to $1 million in aggregate principal
amount of unsecured convertible notes. The notes will be due
December 31, 2008, bear interest at the rate of 7% per annum
payable quarterly commencing December 31, 1998, and, at the option
of the holder, will be convertible to common stock of the Company
at a conversion rate of
10
$12.10 per share. The notes will be sold in denominations of
$10,000 and, subject to a minimum purchase requirement of one (1)
note, may initially be offered to existing shareholders.
The Company commenced such offers on October 30, 1998.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
- -----------------------------------------------------------------------------
Results of Operations
- ---------------------
Net income increased from $528,000 to $568,000 for the nine months, and
decreased from $205,000 to $181,000 for the three months ending September 30,
1997 and 1998, respectively. Basic earnings per share decreased from $.21 to
$.18 for the three month period, and increased from $.53 to $.57 for the nine
month period ended September 30, 1997 and 1998, respectively. Net interest
income increased from $2.6 million to $2.9 million for the nine months, and from
$936,000 to $1.0 million for the three months, ended September 30, 1997 and
1998, respectively.
The increase in net income for the nine month period was primarily due to the
increase in net interest income offset by general increases in other expense.
The decrease in net income for the three month period was primarily due to
general increases in other expense, which includes increased salary and employee
benefit expenses as a result of hiring additional employees because of our
growth including the opening of an additional branch facility in North Vernon,
Indiana. The increase in net interest income for both periods was primarily due
to increases in income on loans and short-term interest-bearing time deposits
offset by an increase in interest expense on deposits. These increases in
interest income and expense resulted primarily from increases in the volume of
these interest-earning assets and interest-bearing liabilities as discussed
below. Income from service charges on deposit accounts increased from $169,000
to $226,000 for the nine months, and from $57,000 to $77,000 for the three
months, ended September 30, 1997 and 1998, respectively. This increase was
primarily due to an increase in the number of deposit accounts. The increases in
other expenses were a direct result of the overall growth of the Bank. Income
taxes decreased $3,000 for the nine months ended September 30, 1998, when
compared to the same period in 1997, because of an increase in the Company's tax
exempt securities portfolio.
Balance Sheet
- -------------
Loans and Deposits The Bank had an increase in net loans outstanding from $79.2
million at December 31, 1997 to $87.2 million at September 30, 1998. Deposits
increased from $87.7 million at December 31, 1997 to $93.5 million at September
30, 1998.
These increases in loans and deposits can be attributed to several factors, none
of which can be singled out as the predominant reason for the growth, but each
of which is believed to have contributed to these increases. These factors
include: (i) increased population in the geographic areas serviced; (ii)
increased per-household disposable income in the geographic area serviced; (iii)
movement of the home office of one of the locally owned banks away from the city
in which the Company is located; and (iv) the acquisition of certain local
financial institutions by larger national and regional banks and the preference
of certain individuals in the service area for dealing with a locally owned
institution.
On May 26, 1998, the Company formed a new subsidiary, First Community Real
Estate Management, Inc. ("FCREMI") whose purpose is to purchase and lease back
to the Bank properties currently owned by the Bank thereby allowing the Bank to
expand its branching network. To that end, on July 15, 1998, FCREMI borrowed
$800,000 at a rate of 1.125% under prime, adjustable every 5 years for a term of
30 years, from another financial institution in order to purchase the land and
11
building of the Bank's Bargersville branch office at 210 E. Harriman Ave. in
Bargersville, Indiana and the land and building of its Banta Street office at
597 Banta Street in Franklin, Indiana. The Bank makes monthly lease payments to
FCREMI as lessee of these locations. These lease payments are sufficient to
service the debt.
Classification of Assets, Allowance for Loan Losses, and Nonperforming Loans 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, 1998, the Bank had $1.5 million of loans classified as
substandard, none as doubtful and none as loss. The allowance for loan losses
was $983,000 or 1.1 % of net loans receivable at September 30, 1998 compared to
$848,000 or 1.1% of net loans receivable at December 31, 1997. A portion of
classified loans are non-accrual loans. First Community had non-accrual loans
totaling $145,000 at September 30, 1998 compared to $204,000 at December 31,
1997.
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.
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 $2.9 million at September 30, 1998
and December 31, 1997, respectively.
At September 30, 1998, the Bank had core capital of approximately 7.8% and
risk-based capital in excess of 8.0%. The regulatory core and risk-based capital
requirements are 4.0% and 8.0% respectively.
On October 30, 1998, the Company issued rights and warrants to shareholders to
purchase one share of common stock of the Company for every ten shares owned as
of October 29, 1998, subject to a minimum offer and purchase of 100 shares. The
rights are exercisable until January 29, 1999 and the warrants will not become
exercisable until September 15, 1999. The net proceeds to the Company from the
sale of the stock, after deducting the expenses, is expected to be $1.4 million
if all of the rights are exercised. The purpose of the rights offering is to
raise additional capital of $1.2 million for the Bank to support additional
growth and $200,000 for general corporate purposes.
In addition, on October 30, 1998, the Company commenced the offer and sale up to
$1 million in unsecured convertible notes. The notes will be due December 31,
2008, bear interest at the rate of 7% per annum and, at the option of the
holder, are convertible to common stock of the Company at the conversion price
of $12.10 per share. The net proceeds of this offering will be used to provide
capital to FCREM to acquire and lease branch facilities to the Bank and to
provide additional capital to the Bank to support asset growth.
12
Accounting Matters
- ------------------
The Financial Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards ("SFAS") No. 131, Disclosures About Segments of an
Enterprise and Related Information, which supersedes SFAS No. 14, Financial
Reporting for Segments of a Business Enterprise in June 1997. It establishes
standards for the way that public enterprises report information about operating
segments in annual financial statements and requires reporting of selected
information about operating segments in interim financial statements issued to
the public. It also establishes standards for disclosures regarding products and
services, geographic areas and major customers. SFAS No. 131 defines operating
segments as components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision-maker in deciding how to allocate resources and in assessing
performance.
This standard is effective for financial statement periods beginning after
December 15, 1997, and requires comparative information for earlier years to be
restated. Due to recent issuance of this standard, management has been unable to
fully evaluate the impact, if any, it may have on the Company's future financial
statement disclosures.
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 the Company.
The address is (http://www.sec.gov).
Year 2000
- ---------
The Company's lending and deposit activities, like those of most financial
institutions, depend significantly upon computer systems. The Company is
addressing the potential problems associated with the possibility that the
computers which control its systems, facilities and infrastructure may not be
programmed to read four-digit date codes. This could cause some computer
applications to be unable to recognize the change from the year 1999 to the year
2000, which could cause computer systems to generate erroneous data or to fail.
Management recognizes the possibility of certain risks associated with Year 2000
and is continuing to evaluate appropriate courses of corrective action. As of
September 30, 1998, the Company has completed an inventory of all hardware and
software systems and has made all mission critical classifications. The Company
has implemented both an employee awareness program and a
13
customer awareness program aimed at educating people about the efforts being
made by the Company as well as bank regulators regarding the Year 2000 issue.
The Company's data processing is performed primarily by a third party servicer.
The Company has been informed that its primary service provider anticipates that
all reprogramming efforts will be completed by December 31, 1998, allowing the
Company adequate time for testing. The Company expects to complete testing by
March 31, 1999.
The Company also uses software and hardware which are covered under maintenance
agreements with third party vendors. Consequently the Company is dependent on
these vendors to conduct its business. The Company has contacted each vendor to
request time tables for Year 2000 compliance and the expected costs, if any, to
be passed along to the Company. Most of the Company's vendors have provided
responses as to where they stand regarding Year 2000 readiness. Those who have
not responded to the Company's status requests are being contacted again.
Depending on the responses received from the third party vendors, the Company
will make decisions as to whether to continue those relationships or to search
for new providers of those services.
In addition to possible expenses related to the Company's own systems and those
of its service providers, the Company could be affected by the Year 2000
problems affecting any of its depositors or borrowers. Such problems could
include delayed loan payments due to Year 2000 problems affecting the borrower.
Selected borrowers have been sent questionnaires to assess their readiness. The
Company is still in the process of collecting that information.
At this time, it is estimated that costs associated with Year 2000 issues will
be approximately $15,000 to $25,000 from 1998 through 1999. Although management
believes it is taking the necessary steps to address the Year 2000 compliance
issue, no assurances can be given that some problems will not occur or that the
Company will not incur significant additional expenses in future periods. In the
event that the Company is ultimately required to purchase replacement computer
systems, program and equipment, or to incur substantial expenses to make its
current systems, programs and equipment Year 2000 compliant, its financial
position and results of operation could be adversely impacted. Amounts expensed
in fiscal 1997 were immaterial.
14
Item 3. Quantitative and Qualitative Disclosures About Market Risk
- ------- ----------------------------------------------------------
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.
The Company's one-year cumulative interest-rate gap as a percent of total assets
was a negative 24.05% at September 30, 1998. 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 1.2% at September 30, 1998 and .42% at
December 31, 1997.
The primary goal in the management of liabilities is to increase core deposit
relationships and therefore 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, 1998.
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.
15
At September 30, 1998 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 $13,735 $ 4,194 $ 4,466 $22,395
Fixed rate mortgages 4,807 2,184 2,178 $11,366 20,535
Commercial loans 12,185 1,741 1,201 241 15,368
Consumer loans 10,640 10,939 4,264 570 26,413
Tax-exempt loans and leases 17 3,478 3,495
Investments 1,422 1,597 1,412 2,192 6,623
FHLB stock 778 778
Interest-bearing deposits 5,517 5,517
-----------------------------------------------------------------------------
Total interest-earning assets 49,084 20,672 13,521 17,847 101,124
-----------------------------------------------------------------------------
Interest-bearing liabilities:
Fixed maturity deposits 43,319 9,040 2,855 27 55,241
Other deposits 31,048 31,048
FHLB advances 166 776 1,892 2,834
Other borrowings 8 17 20 754 799
-----------------------------------------------------------------------------
Total interest-bearing 74,541 9,833 4,767 781 89,922
liabilities
-----------------------------------------------------------------------------
Excess (deficiency) of interest-earning
assets over interest-bearing liabilities $(25,457) $ 10,839 $8,754 $ 17,066 $ 11,202
========= ======== ====== ======== ========
Cumulative excess (deficiency) of
interest-earning assets over
interest-bearing liabilities $(25,457) $(14,618) $ (5,864) $ 11,202
Cumulative ratio at September 30, 1998
as a percent of total assets (24.05)% (13.81)% (5.54)% 10.58%
16
The following table provides information about the Registrant's significant
financial instruments at September 30, 1998 that are sensitive to changes in
interest rates. The table presents principal cash flows and related weighted
average interest rates (on a tax equivalent basis) by expected maturity dates.
Maturing in years ending September 30,
-------------------------------------------------------------------------------------------
1999 2000 2001 2002 2003 Thereafter Total Fair Value
-------------------------------------------------------------------------------------------
(Dollars in 000's)
Assets
Investment securities
available for sale
Fixed rate $ 966 $ 574 $ 738 $ 814 $ 598 $ 1,900 $5,590 $ 5,590
Average interest rate 10.24% 8.63% 5.60% 6.05% 6.73% 7.36% 7.51%
Investment securities held
to maturity
Fixed rate $ 456 $ 180 $ 105 $ 292 $1,033 $1,060
Average interest rate 5.57% 6.72% 6.87% 7.18% 6.36%
Loans
Fixed rate $16,008 $8,012 $ 6,552 $ 4,653 $ 2,515 $15,653 $53,393 $54,173
Average interest rate 9.48% 9.21% 8.97% 8.74% 8.47% 7.87% 8.79%
Variable rate $10,110 $2,225 $ 2,657 $ 1,015 $ 1,048 $17,758 $34,813 $35,140
Average interest rate 9.96% 9.76% 9.73% 9.43% 9.39% 8.75% 9.28%
Liabilities
Deposits
NOW, SNOW and Savings
Deposits
Variable rate $31,048 $31,048 $31,048
Average interest rate 3.82% 3.82%
Certificates of Deposit
Fixed rate $43,319 $ 6,274 $ 1,957 $ 540 $ 3,314 $ 27 $55,241 $55,408
Average interest rate 5.69% 5.96% 5.94% 6.15% 5.97% 6.10% 5.75%
FHLB Advances
Fixed rate $ 166 $ 147 $ 629 $ 114 $ 1,778 $ 2,834 $ 2,878
Average interest rate 6.02% 6.02% 6.05% 6.02% 5.78% 5.88%
Other Borrowings
Variable rate $ 8 $ 8 $ 9 $ 10 $ 10 $ 754 $ 799 $ 799
Average interest rate 7.38% 7.38% 7.38% 7.38% 7.38% 7.38% 7.38%
17
Part II - Other Information
Item 1. Legal Proceedings.
- ------- ------------------
None.
Item 2. Changes in Securities and Use of Proceeds.
- ------- ------------------------------------------
On September 21, 1998, Walter Umbarger exercised his option
to purchase 15,420 shares of common stock of the Company at
$5.54 per share. Mr. Umbarger is a former director of the
Company. The shares were issued in reliance upon Section 4(2)
of the Securities Act of 1933.
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) Exhibit 27 Financial Data Schedule.
(b) No reports were filed on Form 8-K during the quarter
ended September 30, 1998.
18
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.
November 16, 1998 By: /s/ Albert R. Jackson III
-----------------------------
Albert R. Jackson III
Chief Executive Officer
November 16, 1998 By: /s/ Linda J. Janesik
-----------------------------
Linda J. Janesik
Chief Financial Officer
19