FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
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 August 9, 1999: 1,019,853
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
Page No.
--------
Forward Looking Statement....................................................3
Part I. Financial Information:
Item 1. Financial Statements:
Consolidated Condensed Balance Sheet.......................4
Consolidated Condensed Statement of Income.................5
Consolidated Condensed Statement of Comprehensive Income ..6
Consolidated Condensed Statement of Stockholders' Equity...7
Consolidated Condensed Statement of Cash Flows.............8
Notes to Consolidated Condensed Financial Statements.......9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................10
Item 3. Quantitative and Qualitative Disclosures About Market Risk.....13
Part II. Other Information:
Item 1. Legal Proceedings..............................................16
Item 2. Changes In Securities..........................................16
Item 3. Defaults Upon Senior Securities................................16
Item 4. Submission of Matters to a Vote of Security Holders...........16
Item 5. Other Information..............................................16
Item 6. Exhibits and Reports on Form 8-K...............................16
Signatures..................................................................17
2
FORWARD LOOKING STATEMENT
This Quarterly Report on Form 10-Q ("Form 10-Q") contains statements which
constitute forward looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements appear in a number of
places in this Form 10-Q and include statements regarding the intent, belief,
outlook, estimate or expectations of the Company (as defined below), its
directors or its officers primarily with respect to future events and the future
financial performance of the Company. Readers of this Form 10-Q are cautioned
that any such forward looking statements are not guarantees of future events or
performance and involve risks and uncertainties, and that actual results may
differ materially from those in the forward looking statements as a result of
various factors. The accompanying information contained in this Form 10-Q
identifies important factors that could cause such differences. These factors
include changes in interest rates; loss of deposits and loan demand to other
financial institutions; substantial changes in financial markets; changes in
real estate values and the real estate market; or regulatory changes.
3
Item 1. Financial Statements
- ------- --------------------
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Condensed Balance Sheet
(Unaudited)
June 30, December 31,
1999 1998
------------------------------
Assets
Cash and due from banks $ 1,387,246 $ 1,185,790
Short-term interest-bearing deposits 17,388,507 13,106,281
------------------------------
Cash and cash equivalents 18,775,753 14,292,071
Investment securities
Available for sale 12,456,505 7,047,098
Held to maturity 837,247 1,032,525
------------------------------
Total investment securities 13,293,752 8,079,623
Loans 100,930,354 94,319,271
Allowance for loan losses 1,045,786 955,099
------------------------------
Net Loans 99,884,568 93,364,172
Premises and equipment 3,438,579 3,333,331
Federal Home Loan Bank of Indianapolis stock, at cost 777,800 777,800
Interest receivable 1,008,412 928,953
Other assets 736,315 495,643
------------------------------
Total assets $ 137,915,179 $ 121,271,593
==============================
Liabilities
Deposits
Noninterest-bearing $ 8,674,869 $ 7,976,350
Interest-bearing 111,985,330 98,216,774
------------------------------
Total deposits 120,660,199 106,193,124
Federal Home Loan Bank of Indianapolis advances 5,753,457 4,753,457
Other borrowings 2,203,775 1,381,933
Interest payable 266,545 258,867
Other liabilities 253,348 198,107
------------------------------
Total liabilities 129,137,324 112,785,488
------------------------------
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 - 1,021,287 and 1,011,412 shares 6,967,489 6,869,426
Retained earnings and contributed capital 1,921,916 1,597,830
Accumulated other comprehensive income (loss) (111,550) 18,849
------------------------------
Total stockholders' equity 8,777,855 8,486,105
------------------------------
Total liabilities and stockholders' equity $ 137,915,179 $ 121,271,593
==============================
See notes to consolidated condensed financial statements.
4
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Condensed Statement of Income
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------------------------
1999 1998 1999 1998
-------------------------------------------------
Interest Income
Loans, including fees $2,117,343 $1,879,631 $4,234,492 $3,680,570
Investment securities
Taxable 62,372 75,013 103,674 132,608
Tax exempt 92,269 19,443 160,857 37,045
Interest-bearing time deposits 129,325 112,308 211,703 213,462
Dividends 15,513 15,513 32,315 32,182
-------------------------------------------------
Total interest income 2,416,822 2,101,908 4,743,041 4,095,867
-------------------------------------------------
Interest Expense
Deposits 1,226,219 1,091,937 2,351,125 2,128,026
FHLB advances 80,821 44,913 157,032 87,295
Other borrowings 39,490 66,887
-------------------------------------------------
Total interest expense 1,346,530 1,136,850 2,575,044 2,215,321
-------------------------------------------------
Net Interest Income 1,070,292 965,058 2,167,997 1,880,546
Provision for loan losses 75,000 69,000 150,000 129,000
-------------------------------------------------
Net Interest Income After Provision for Loan Losses 995,292 896,058 2,017,997 1,751,546
-------------------------------------------------
Other Income
Trust fees 21,575 6,058 25,315 28,653
Service charges on deposit accounts 80,287 76,328 155,455 148,956
Other operating income 9,723 11,073 25,945 20,076
-------------------------------------------------
Total other income 111,585 93,459 206,715 197,685
-------------------------------------------------
Other Expenses
Salaries and employee benefits 399,093 344,073 780,215 651,932
Premises and equipment 93,879 79,189 183,703 155,459
Advertising 44,320 36,942 85,062 63,237
Data processing fees 82,646 63,749 163,735 128,871
Deposit insurance expense 15,334 13,369 29,343 25,877
Printing and office supplies 31,125 28,633 59,825 56,200
Legal and professional fees 72,960 40,369 112,626 63,934
Telephone expense 22,895 16,711 46,524 33,560
Other operating expense 112,407 103,785 246,247 194,615
-------------------------------------------------
Total other expenses 874,659 726,820 1,707,280 1,373,685
-------------------------------------------------
Income Before Income Tax 232,218 262,697 517,432 575,546
Income tax expense 51,818 83,005 132,047 187,860
-------------------------------------------------
Net Income $ 180,400 $ 179,692 385,385 $ 387,686
=================================================
Basic earnings per share $ .18 $ .18 $ .38 $ .39
Diluted earnings per share
.17 .18 .37 .39
See notes to consolidated condensed financial statements.
5
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Condensed Statement of Comprehensive Income
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------------------------
1999 1998 1999 1998
-------------------------------------------------
Net Income $ 180,400 $ 179,692 $ 385,385 $ 387,686
Other comprehensive income, net of tax
Unrealized losses on securities available
Unrealized holding losses arising during
the period, net of tax benefit of $74,547,
$701, $85,527 and $4,592 (113,657) (1,069) (130,399) (7,001)
-------------------------------------------------
Comprehensive income $ 66,743 $ 178,623 $ 254,986 $ 380,685
=================================================
6
FIRST COMMUNITY BANCSHARES, INC AND SUBSIDIARIES
Consolidated Condensed Statement of Stockholders' Equity
(Unaudited)
Retained
Common Stock Earnings Accumulated
------------------------ and Other
Shares Contributed Comprehensive
Outstanding Amount Capital Income Total
-----------------------------------------------------------------------
Balances, January 1, 1999 1,011,412 $ 6,869,426 $ 1,597,830 $ 18,849 $ 8,486,105
Net income for the period 385,385 385,385
Unrealized losses on securities (130,399) (130,399)
Cash dividend ($.06 per share) (61,299) (61,299)
Purchase of stock (721) (6,129) (6,129)
Rights exercised, net of cost
of $1,768 10,596 104,192 104,192
-----------------------------------------------------------------------
Balances, June 30, 1999 1,021,287 $ 6,967,489 $ 1,921,916 $ (111,550) $ 8,777,855
=======================================================================
See notes to consolidated condensed financial statements.
7
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Condensed Statement of Cash Flows
(Unaudited)
Six Months Ended
June 30,
----------------------------
1999 1998
----------------------------
Operating Activities
Net income $ 385,385 $ 387,686
Adjustments to reconcile net income to net cash provided by
operating activities
Provision for loan losses 150,000 129,000
Depreciation and amortization 94,777 67,212
Investment securities amortization 31,674 699
Gain on sale of foreclosed real estate (7,241)
Gain on sale of fixed assets 2,318
Net change in:
Interest receivable (79,459) (56,027)
Interest payable 7,678 83,726
Other assets (155,144) (69,506)
Other liabilities 24,602 (117,434)
----------------------------
Net cash provided by operating activities 454,590 425,356
----------------------------
Investing Activities
Purchases of securities available for sale (6,146,730) (1,414,479)
Proceeds from maturities of securities available for sale 490,000 70,000
Purchases of securities held to maturity (225,000)
Proceeds from paydowns and maturities of securities held to maturity 420,000 540,000
Net change in loans (6,735,655) (7,052,170)
Proceeds from sale of foreclosed real estate 72,500 56,636
Purchases of property and equipment (202,343) (475,546)
----------------------------
Net cash used by investing activities (12,327,228) (8,275,559)
----------------------------
Financing Activities
Net change in
Noninterest-bearing, NOW and savings deposits 3,752,477 752,392
Certificates of Deposit 10,714,598 4,307,723
Proceeds from borrowings 1,830,000
Repayment of borrowings (8,158)
Purchase of stock (6,129)
Cash dividends (30,660)
Rights exercised, net of costs 104,192
----------------------------
Net cash provided by financing activities 16,356,320 5,060,115
----------------------------
Net Change in Cash and Cash Equivalents 4,483,682 (2,790,088)
Cash and Cash Equivalents, Beginning of Period 14,292,071 11,231,228
----------------------------
Cash and Cash Equivalents, End of Period $ 18,775,753 $ 8,441,140
============================
Supplemental cash flow disclosures
Interest paid $ 2,567,366 $ 2,131,595
Income tax paid 246,570 135,550
Dividend payable 30,639
See notes to consolidated condensed financial statements
8
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
June 30, 1999
(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, 1998, Annual Report on Form 10-K. All significant intercompany accounts and
transactions have been eliminated in consolidation.
The interim consolidated financial statements have been prepared in accordance
with instructions to Form 10-Q, and therefore do not include all information and
footnotes necessary for a fair presentation of financial position, results of
operations and cash flows in conformity with generally accepted accounting
principles.
The interim consolidated financial statements at June 30, 1999, and for the six
and three months ended June 30, 1999 and 1998, have not been audited by
independent accountants, but reflect, in the opinion of management, all
adjustments (which include only normal recurring adjustments) necessary to
present fairly the financial position, results of operations and cash flows for
such periods.
Note 2: Earnings Per Share
- --------------------------
Three Months Ended Three Months Ended
June 30, 1999 June 30, 1998
------------------ ------------------
Weighted Weighted
Average Per Share Average Per Share
Income Shares Amount Income Shares Amount
------ -------- --------- ------ -------- ---------
Basic earnings per share
Income available to common
shareholders $ 180,400 1,021,850 $ .18 $ 179,692 989,848 $ .18
======= =======
Effect of dilutive stock options 7,160 13,867
Effect of convertible debt 10,568 80,455
--------------------- -------------------
Diluted earnings per share
Income available to common
shareholders and assumed
conversions $ 190,968 1,109,465 $ .17 $ 179,692 1,003,715 $ .18
=============================== =============================
9
Six Months Ended Six Months Ended
June 30, 1999 June 30, 1998
------------------ ------------------
Weighted Weighted
Average Per Share Average Per Share
Income Shares Amount Income Shares Amount
------ -------- --------- ------ -------- ---------
Basic earnings per share
Income available to common
shareholders $ 385,385 1,020,862 $ .38 $ 387,686 989,848 $ .39
======= =======
Effect of dilutive stock options 10,530 14,182
Effect of convertible debt 13,836 40,227
--------------------- -------------------
Diluted earnings per share
Income available to common
shareholders and assumed
conversions $ 399,221 1,071,619 $ .37$ 387,686 1,004,030 $ .39
=============================== =============================
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. First Community Real Estate Management, Inc. is also a wholly-owned
subsidiary and its purpose is to purchase and lease back to the Bank properties
currently owned by the Bank thereby allowing the Bank to redeploy its capital to
other uses. FCREMI borrowed $800,000 at an interest rate of 1.125% under prime,
(as defined in the loan agreement) adjustable every 5 years for a term of 30
years with payments due in monthly installments, from another financial
institution in order to purchase the land and 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. On December 18, 1998, FCREMI borrowed $416,000 at an interest
rate of 7.25% (per annum) with payments due in monthly installments through
November 2003 and a final balloon payment due in December 2003, from another
financial institution in order to purchase the land and building of the Bank's
Greenwood branch office at 298 State Road 135 North in Greenwood, Indiana. The
Bank makes monthly lease payments to FCREM as lessee of these locations. These
lease payments are in an amount sufficient to service the debt. 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.
Results of Operations
- ---------------------
The Company had net income of $385,000 and $388,000 for the six months, and
$180,000 and $180,000 for the three months ending June 30, 1999 and 1998,
respectively. Net interest income was $2.2 million and $1.9 million for the six
months, and $1.1 and $965,000 for the three months ending June 30, 1999 and
1998, respectively.
10
Net income decreased $3,000 for the six months ended June 30, 1999, when
compared to the same periods in 1998 and was approximately the same for the
three months ended June 30, 1999 and 1998, due primarily to general increases in
other expenses offset by an increase in net interest income. These increases in
net interest income resulted primarily from increases in interest income on
loans and tax exempt investment securities offset by an increase in interest
expense. These increases in interest income and expense resulted primarily from
increases in the volume of these interest-earning assets and interest-bearing
liabilities. The increase in other expenses was a result of the overall growth
of the Bank. Income taxes decreased $56,000 and $31,000 for the six and three
months ended June 30, 1999, respectively, when compared to the same periods in
1998, because of increases in the Company's tax exempt securities portfolio.
Balance Sheet
- -------------
Loans and Deposits The Bank had an increase in net loans outstanding from $93.4
million on December 31, 1998 to $99.9 million on June 30, 1999. Deposits
increased from $106.2 million on December 31, 1998 to $120.7 million on June 30,
1999.
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 areas serviced; and
(iii) 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.
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 June 30, 1999, the Bank had $998,000 of loans classified as substandard,
none as doubtful and none as loss. The allowance for loan losses was $1.0
million or 1.0% of net loans receivable at June 30, 1999 compared to $955,000 or
1.0% of net loans receivable at December 31, 1998. A portion of classified loans
are non-accrual loans. First Community had non-accrual loans totaling $359,000
at June 30, 1999 compared to $17,000 at December 31, 1998.
Liquidity and Capital Resources
- -------------------------------
Liquidity refers to the ability of a financial institution to generate
sufficient cash to fund current loan demand, meet savings deposit withdrawals
and pay operating expenses. The primary sources of liquidity are cash,
interest-bearing deposits in other financial institutions, marketable
securities, loan repayments, increased deposits and total institutional
borrowing capacity.
Cash and interest-bearing deposits, when combined with investments, have
remained a relatively constant percent of total assets, while increasing in
dollar volume. Management's goal is to maintain approximately twenty percent
(20%) to twenty-five percent (25%) of total assets in cash, interest-bearing
deposits and investments in order to satisfy the Company's need for liquidity
and other short-term obligations.
Management believes that it has adequate liquidity for the Company's short- and
long-term needs. Short-term liquidity needs resulting from normal
deposit/withdrawal functions are provided by the Company retaining a portion of
cash generated from operations in a Federal Home Loan Bank ("FHLB") daily
investment account. This account acts as a short-term liquidity source while
providing interest income to the Company. Long-term liquidity and other
liquidity needs are provided by the ability of the Company to borrow from the
FHLB. The
11
balance of its FHLB advances was $5.8 million and $4.8 million at June 30, 1999
and December 31, 1998, 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 were exercisable until March 30, 1999 and the warrants will not become
exercisable until September 15, 1999. Rights for 16,740 shares were exercised
generating net proceeds to the Company, after deducting the expenses of the
offering, of $133,000. The purpose of the rights offering was to raise
additional capital for the Bank to support additional growth and for general
corporate purposes.
In addition, on October 30, 1998, the Company commenced the offer and sale of up
to $1 million in unsecured convertible notes, all of which were sold. The notes
are 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 $11.00 per share. The net proceeds from this offering were
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.
At June 30, 1999, the Bank had core capital of approximately 7.6% and risk-based
capital in excess of 10.2%. The regulatory core and 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).
Year 2000 Compliance
- --------------------
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
December 31, 1998, the Company had completed inventory of all hardware and
software systems and had made all mission critical classifications. The Company
has
12
implemented both an employee awareness program and a 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 was informed by its primary service provider that all reprogramming
efforts were completed at December 31, 1998 and the Company has completed
testing, which revealed no material problems.
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
not be material in 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 ultimately be required
to purchase replacement computer systems, programs and equipment. If the Company
were to incur substantial expenses to make its current systems, program and
equipment Year 2000 compliant, its financial position and results of operation
could be adversely impacted. Amounts expensed in 1999 and 1998 were immaterial.
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.
At June 30, 1999, the Company's one-year cumulative interest-rate gap as a
percent of total assets was a negative 20.9%. 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 risks relate primarily to collection and to the fact that such
loans often are secured
13
by rapidly depreciating assets. The Company's ratio of non-performing assets to
total assets was .26% at June 30, 1999 and .45% at December 31, 1998.
The primary goal in the management of liabilities has been to extend the
maturities and improve the stability of deposit accounts. Management has
attempted to combine a policy for controlled growth with a strong, loyal
customer base to control interest expense.
The following schedule illustrates the interest-rate sensitivity of
interest-earning assets and interest-bearing liabilities at June 30, 1999.
Mortgages which have adjustable or renegotiable interest rates are shown as
subject to change every one to three years based upon the contracted-for
adjustment period. This schedule does not reflect the effects of possible
prepayments on enforcement of due-on-sale clauses.
At June 30, 1999 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 $ 11,597 $ 4,904 $ 7,865 $ 24,366
Fixed rate mortgages 4,251 2,541 2,526 $ 14,670 23,988
Commercial loans 11,965 3,221 1,706 581 17,473
Consumer loans 12,612 12,522 5,658 897 31,689
Tax-exempt loans and leases 3,282 3,282
Investments 1,552 2,630 3,087 6,025 13,294
FHLB stock 779 779
Interest-bearing deposits 17,389 17,389
-----------------------------------------------------------
Total interest-earning assets 60,145 25,818 20,842 25,455 132,260
-----------------------------------------------------------
Interest-bearing liabilities:
Fixed maturity deposits 43,954 18,671 3,400 1,094 67,119
Other deposits 44,860 44,860
FHLB advances 156 1,760 3,837 5,753
Other Borrowings 18 40 1,146 1,000 2,204
-----------------------------------------------------------
Total interest-bearing liabilities 88,988 20,471 8,383 2,094 119,936
-----------------------------------------------------------
Excess (deficiency) of interest-earning (28,843) 5,347 12,459 23,361 12,324
assets over interest-bearing liabilities
Cumulative excess (deficiency) of (28,843) (23,496) (11,037) 12,324
interest-earning assets over
interest-bearing liabilities
Cumulative ratio at June 30, 1999 as a (20.91)% (17.04)% (8.00)% 8.94%
percent of total assets
14
The following table provides information about the Company's significant
financial instruments at June 30, 1999 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 June 30,
-------------------------------------------------------------------------------------
2000 2001 2002 2003 2004 Thereafter Total Fair Value
--------------------------------------------------------------------------------------
Assets
- ------
Investment securities
available for sale
Fixed rate $ 1,337 $ 1,595 $ 894 $ 1,706 $ 1,108 $ 5,817 $12,457 $12,457
Average interest rate 9.35% 6.79% 6.04% 5.75% 5.77% 6.10% 6.46%
Investment securities held to
maturity
Fixed rate 215 122 19 20 253 208 837 822
Average interest rate 6.52% 6.59% 5.23% 5.36% 6.96% 6.26% 6.54%
Loans
Fixed rate 16,775 9,781 7,902 5,627 3,654 19,431 63,169 63,493
Average interest rate 8.66% 9.03% 8.77% 8.57% 8.41% 7.78% 8.44%
Variable rate 10,449 3,263 1,670 1,184 1,244 19,818 37,629 37,827
Average interest rate 9.11% 9.14% 8.93% 8.59% 8.59% 8.04% 8.51%
Liabilities
- -----------
Deposits
NOW, Money Market and
Savings Deposits
Variable rate 44,860 44,860 44,860
Average interest rate 3.32% 3.32%
Certificates of Deposit
Fixed rate 43,954 18,015 656 1,900 1,500 1,094 67,119 67,279
Average interest rate 5.37% 5.35% 5.83% 6.03% 5.70% 6.40% 5.41%
FHLB advances
Fixed rate 156 638 1,122 2,603 1,234 5,753 5,677
Average interest rate 6.01% 6.05% 5.34% 5.55% 5.49% 5.69%
Other borrowings
Fixed rate 10 11 11 12 367 1,000 1,411 1,392
Average interest rate 7.25% 7.25% 7.25% 7.25% 7.25% 7.00% 7.07%
Variable rate 8 9 9 10 757 793 788
Average interest rate 7.38% 7.38% 7.38% 7.38% 7.38% 7.38%
15
Part II - Other Information
Item 1. Legal Proceedings.
- ------- ------------------
None.
Item 2. Changes in Securities.
- ------- ----------------------
On May 19, 1999, Albert R. Jackson, Jr., Eugene N. Morris,
Frank D. Neese, Roy Martin Umbarger and Merril M. Wesemann
were each granted an option to purchase 1,000 shares of common
stock of the Company at a purchase price of $8.00 per share.
These options vested at the time of grant and expire May 19,
2009. The options were granted 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.
- ------- ----------------------------------------------------
On May 19, 1999, the Company held its annual meeting of the
shareholders. A total of 949,916 shares were represented in
person or by proxy at the meeting. Frank D. Neese was elected
to the Board of Directors for a three-year term expiring in
2002. 926,734 shares were voted in favor of the election of
the nominee, 22,709 shares were voted against the nominee and
there were 473 abstentions or broker non-votes. Roy Martin
Umbarger was elected to the Board of Directors for a
three-year term expiring in 2002. 938,426 shares were voted in
favor of the election of the nominee, 10,630 shares were voted
against the nominee and there were 860 abstentions or broker
non-votes. Continuing Directors include Merrill M. Wesemann
and Albert R. Jackson, III whose terms expire in 2000 and
Albert R. Jackson, Jr. and Eugene W. Morris, whose terms
expire in 2001.
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 June 30, 1999.
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST COMMUNITY BANCSHARES, INC.
Date: August 16, 1999 By: /s/ Albert R. Jackson, III
--------------- ---------------------------
Albert R. Jackson, III
Chief Executive Officer and
Director
Date: August 16, 1999 By: /s/ Linda J. Janesik
--------------- ---------------------------
Linda J. Janesik,
Chief Financial Officer
17