FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 November 1, 1999: 1,015,057
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................................................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
2
FORWARD LOOKING STATEMENT
This Quarterly Report on Form 10-Q ("Form 10-Q") contains statements which
constitute forward looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements appear in a number of
places in this Form 10-Q and include statements regarding the intent, belief,
outlook, estimate or expectations of the Company (as defined below), its
directors or its officers primarily with respect to future events and the future
financial performance of the Company. Readers of this Form 10-Q are cautioned
that any such forward looking statements are not guarantees of future events or
performance and involve risks and uncertainties, and that actual results may
differ materially from those in the forward looking statements as a result of
various factors. The accompanying information contained in this Form 10-Q
identifies important factors that could cause such differences. These factors
include changes in interest rates; loss of deposits and loan demand to other
financial institutions; substantial changes in financial markets; changes in
real estate values and the real estate market; or regulatory changes.
3
Item 1. Financial Statements
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Condensed Balance Sheet
(Unaudited)
September 30, December 31,
1999 1998
------------ ------------
Assets
Cash and due from banks $ 2,276,896 $ 1,185,790
Short-term interest-bearing deposits 12,764,114 13,106,281
------------ ------------
Cash and cash equivalents 15,041,010 14,292,071
Investment securities
Available for sale 20,599,728 7,047,098
Held to maturity 802,342 1,032,525
------------ ------------
Total investment securities 21,402,070 8,079,623
Loans 106,437,546 94,319,271
Allowance for loan losses 1,052,537 955,099
------------ ------------
Net Loans 105,385,009 93,364,172
Premises and equipment 3,775,613 3,333,331
Federal Home Loan Bank of Indianapolis stock, at cost 777,800 777,800
Interest receivable 1,003,030 928,953
Other assets 1,723,155 495,643
------------ ------------
Total assets $149,107,687 $121,271,593
============ ============
Liabilities
Deposits
Noninterest-bearing $ 9,373,239 $ 7,976,350
Interest-bearing 121,522,122 98,216,774
------------ ------------
Total deposits 130,895,361 106,193,124
Federal Home Loan Bank of Indianapolis advances 5,668,014 4,753,457
Other borrowings 2,621,679 1,381,933
Interest payable 330,507 258,867
Other liabilities 613,913 198,107
------------ ------------
Total liabilities 140,129,474 112,785,488
------------ ------------
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 - 1,015,057 and 1,011,412 shares 6,913,199 6,869,426
Retained earnings and contributed capital 2,088,401 1,597,830
Accumulated other comprehensive income (loss) (23,387) 18,849
------------ ------------
Total stockholders' equity 8,978,213 8,486,105
------------ ------------
Total liabilities and stockholders' equity $149,107,687 $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 Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
Interest Income
Loans, including fees $ 2,256,752 $ 1,951,845 $ 6,491,244 $ 5,632,415
Investment securities
Taxable 101,042 60,951 204,716 193,559
Tax exempt 118,302 55,776 279,159 92,821
Interest-bearing time deposits 171,046 66,678 382,749 280,140
Dividends 15,684 15,743 47,999 47,925
----------- ----------- ----------- -----------
Total interest income 2,662,826 2,150,993 7,405,867 6,246,860
=========== =========== =========== ===========
Interest Expense
Deposits 1,366,061 1,095,113 3,717,186 3,223,139
FHLB advances 81,465 43,943 238,497 131,238
Other borrowings 44,180 12,363 111,067 12,363
----------- ----------- ----------- -----------
Total interest expense 1,491,706 1,151,419 4,066,750 3,366,740
=========== =========== =========== ===========
Net Interest Income 1,171,120 999,574 3,339,117 2,880,120
Provision for loan losses (75,000) (75,000) (225,000) (204,000)
----------- ----------- ----------- -----------
Net Interest Income After Provision for Loan Losses 1,096,120 924,574 3,114,117 2,676,120
=========== =========== =========== ===========
Other Income
Trust fees 3,728 2,407 29,043 31,060
Service charges on deposit accounts 89,899 76,679 245,354 225,635
Other operating income 12,213 4,789 38,158 24,865
----------- ----------- ----------- -----------
Total other income 105,840 83,875 312,555 281,560
=========== =========== =========== ===========
Other Expenses
Salaries and employee benefits 431,485 365,774 1,211,700 1,017,706
Premises and equipment 106,170 80,030 289,873 235,489
Advertising 42,310 30,360 127,372 93,597
Data processing fees 90,663 78,284 254,398 207,155
Deposit insurance expense 23,308 13,349 52,651 39,226
Printing and office supplies 47,472 23,379 107,297 79,579
Legal and professional fees 69,380 32,461 182,006 96,395
Telephone expense 23,160 17,844 69,684 51,404
Other operating expense 121,326 110,764 367,573 305,379
----------- ----------- ----------- -----------
Total other expenses 955,274 752,245 2,662,554 2,125,930
=========== =========== =========== ===========
Income Before Income Tax 246,686 256,204 764,118 831,750
Income tax expense 39,477 75,695 171,524 263,555
----------- ----------- ----------- -----------
Net Income $ 207,209 $ 180,509 $ 592,594 $ 568,195
=========== =========== =========== ===========
Basic earnings per share $ .20 $ .18 $ .58 $ .57
Diluted earnings per share .20 .18 .56 .57
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,
--------------------- ----------------------
1999 1998 1999 1998
--------- --------- --------- ---------
Net Income $ 207,209 $ 180,509 $ 592,594 $ 568,195
Other comprehensive income, net of tax
Unrealized losses on securities available
Unrealized holding gains (losses) arising
during the period, net of tax expense
(benefit) of $57,826, $5,210, $(27,703)
and $617 88,163 7,943 (42,236) 941
--------- --------- --------- ---------
Comprehensive income $ 295,372 $ 188,452 $ 550,358 $ 569,136
========= ========= ========= =========
See notes to consolidated condensed financial statements.
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 (Loss) Total
----------- ----------- ----------- ------------- -----------
Balances, January 1, 1999 1,011,412 $ 6,869,426 $ 1,597,830 $ 18,849 $ 8,486,105
Net income for the period 592,594 592,594
Unrealized losses on securities (42,236) (42,236)
Cash dividend ($.10 per share) (102,023) (102,023)
Purchase of stock (6,951) (60,419) (60,419)
Rights exercised, net of cost
of $1,768 10,596 104,192 104,192
----------- ----------- ----------- ----------- -----------
Balances, September 30, 1999 1,015,057 $ 6,913,199 $ 2,088,401 $ (23,387) $ 8,978,213
=========== =========== =========== =========== ===========
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,
----------------------------
1999 1998
----------------------------
Operating Activities
Net income $ 592,594 $ 568,195
Adjustments to reconcile net income to net cash provided by
operating activities
Provision for loan losses 225,000 204,000
Depreciation and amortization 146,732 110,758
Investment securities amortization 48,878 10,021
Loss on sale of fixed assets 2,318
Gain on sale of foreclosed real estate (7,241)
Net change in:
Interest receivable (74,077) (161,361)
Interest payable 71,640 15,198
Other assets (238,888) (140,414)
Other liabilities 375,084 (48,855)
------------ ------------
Net cash provide by operating activities 1,142,040 557,542
------------ ------------
Investing Activities
Purchases of securities available for sale (15,360,373) (3,246,815)
Purchases of securities held to maturity (225,000)
Proceeds from maturities of securities available for sale 1,689,110 420,000
Proceeds from paydowns and maturities of securities held to maturity 455,000 675,000
Net change in loans (12,322,018) (8,356,826)
Proceeds from sale of foreclosed real estate 72,500 70,883
Purchases of property and equipment (591,332) (910,360)
Premiums paid on life insurance (950,000)
------------ ------------
Net cash used by investing activities (27,232,113) (11,348,118)
------------ ------------
Financing Activities
Net change in
Noninterest-bearing, NOW and savings deposits 3,057,164 2,306,367
Certificates of Deposit 21,645,073 3,494,481
Proceeds from borrowings 2,252,800 800,000
Repayment of borrowings (98,497) (97,210)
Purchase of stock (60,419)
Cash dividends (61,301)
Rights exercised, net of costs 104,192 85,427
------------ ------------
Net cash provided by financing activities 26,839,012 6,589,065
------------ ------------
Net Change in Cash and Cash Equivalents 748,939 (4,201,511)
Cash and Cash Equivalents, Beginning of Period 14,292,071 11,231,228
------------ ------------
Cash and Cash Equivalents, End of Period $ 15,041,010 $ 7,029,717
============ ============
Supplemental cash flow disclosures
Interest paid $ 3,995,110 $ 3,351,542
Income tax paid 271,570 81,470
Dividend payable 40,722
See notes to consolidated condensed financial statements.
8
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
September 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 to Shareholders 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 September 30, 1999, and for the
nine and three months ended September 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
September 30, 1999 September 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 $207,209 1,019,085 $ .20 $180,509 991,524 $ .18
----- -----
Effect of dilutive stock options 6,663 13,365
Effect of convertible debt 10,568 90,910
-------- ---------- -------- -------
Diluted earnings per share
Income available to common
shareholders and assumed
conversions $217,777 1,116,658 $ .20 $180,509 1,004,889 $ .18
======== ========== ===== ======== =========== =====
Nine Months Ended Nine Months Ended
September 30, 1999 September 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 $592,594 1,020,263 $ .58 $568,195 990,413 $ .57
===== =====
Effect of dilutive stock options 7,083 13,910
Effect of convertible debt 24,404 68,724
--------- --------- -------- ---------
Diluted earnings per share
Income available to common
shareholders and assumed
conversions $616,998 1,096,070 $ .56 $568,195 1,004,323 $ .57
======== ========= ===== ======== ========= =====
9
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 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 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 a rate of 7.25% with payments due in
monthly installments through November 2003 with 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. On August 6, 1999, FCREMI borrowed $422,800 from another
financial institution at a rate of 7.50% with payments of principal and interest
due monthly for 5 years based on a 20 year amortization schedule. The balance is
due at the end of 5 years or may be renewed at a variable interest rate. These
loan proceeds were used to purchase the land and buildings of the Bank's North
Vernon branch offices at 21 Madison Avenue and 521 N. State Street, North
Vernon, Indiana. The Bank makes monthly lease payments to FCREMI as lessee of
these locations. These lease payments are in an amount sufficient to service the
debt. In addition, on June 26, 1999, the Company entered into an agreement with
another financial institution to assume a lease on a building located at 34 West
Jefferson Street, Franklin, Indiana. The Company currently uses this facility to
house its operations center. As a part of the assumption agreement, the Company
received an assumption fee of $275,000 in July 1999. The assumption fee will be
considered deferred income and amortized over the term of the lease. 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.
10
Results of Operations
- ---------------------
The Company had net income of $593,000 and $568,000 for the nine months, and
$207,000 and $181,000 for the three months ending September 30, 1999 and 1998,
respectively. Net interest income was $3.3 million and $2.9 million for the nine
months and $1.2 and $1.0 million for the three months ending September 30, 1999
and 1998, respectively.
Net income increased $25,000 and $26,000 for the nine and three months ended
September 30, 1999, when compared to the same periods in 1998, due primarily to
increases in net interest income offset by general increases in other expenses.
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 increases in other expenses were directly
a result of the overall growth of the Bank. Income taxes decreased $92,000 and
$36,000 for the nine and three months ended September 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 $105.4 million on September 30, 1999. Deposits
increased from $106.2 million on December 31, 1998 to $130.9 million on
September 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;
(iii) an increase in the number of branch offices; and (iv) 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 September 30, 1999, the Bank had $864,000 of loans classified as
substandard, none as doubtful and none as loss. The allowance for loan losses
was $1.1 million or 1.0% of net loans receivable at September 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 $324,000 at September 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
11
twenty percent (20%) to twenty-five percent (25%) of total assets in cash,
interest-bearing deposits and investments in order to satisfy the Company's need
for liquidity and other short-term obligations.
Management believes that it has adequate liquidity for the Company's short- and
long-term needs. Short-term liquidity needs resulting from normal
deposit/withdrawal functions are provided by the Company retaining a portion of
cash generated from operations in a Federal Home Loan Bank ("FHLB") daily
investment account. This account acts as a short-term liquidity source while
providing interest income to the Company. Long-term liquidity and other
liquidity needs are provided by the ability of the Company to borrow from the
FHLB. The balance of its FHLB advances was $5.7 million and $4.8 million at
September 30, 1999 and December 31, 1998, respectively. The approved credit line
for the Company was approximately $17 million at September 30, 1999.
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 are exercisable
from September 15 to December 13, 1999. The net proceeds to the Company from the
sale of stock upon exercise of the rights, after deducting the expenses, were
$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, of which all $1 million 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 of this offering
were used to provide capital to FCREMI to acquire and lease branch facilities to
the Bank and to provide additional capital to the Bank to support asset growth.
At September 30, 1999, the Bank had core capital of approximately 8.9% and
risk-based capital of approximately 9.9%. 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).
12
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
September 30, 1999, the Company had completed inventory of all hardware and
software systems and had made all mission critical classifications. The Company
has 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 has been 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 or fears 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 evaluating 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 incur significant
additional expenses in future periods. If the Company is ultimately required to
purchase replacement computer systems, programs and equipment, or 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 September 30, 1999, the Company's one-year cumulative interest-rate gap as a
percent of total assets was approximately a negative 23.0%. This negative
interest-rate gap represents substantial risk for the Company in
13
an environment of rising interest rates. A negative interest-rate gap means the
Company's earnings are vulnerable in periods of rising interest rates because
during such periods the interest expense paid on liabilities will generally
increase more rapidly than the interest income earned on assets. Conversely, in
a falling interest-rate environment, the total interest expense paid on
liabilities will generally decrease more rapidly than the interest income earned
on assets. A positive interest-rate gap would have the opposite effect.
Asset management goals have been directed toward obtaining a suitable balance of
asset quality, liquidity and diversification in order to stabilize and improve
earnings. The asset management strategy has concentrated on shortening the
maturity of its loan portfolio by increasing adjustable-rate loans and
short-term installment and commercial loans. However, increasing short-term
installment and commercial loans increases the overall risk of the loan
portfolio. Such risk relates primarily to collection and to the fact that such
loans often are secured by rapidly depreciating assets. The Company's ratio of
non-performing assets to total assets was .31% at September 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.
14
The following table provides information about the Company's significant
financial instruments that are sensitive to changes in interest rates at June
30, 1999, the date of the most recent information available. 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
Average interest rate 215 122 19 20 253 208 837 822
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
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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%
Except for the following items, management believes that the composition of the
Company's financial instruments at September 30, 1999 have not changed
significantly since June 30, 1999. From June 30, 1999 to September 30, 1999,
investment securities available for sale increased $8.1 million, or
approximately 65%. The majority of the increase is directly attributable to the
purchase of three U. S. agency securities totaling $6.9 million maturing in less
than one year. From June 30, 1999 to September 30, 1999, certificates of deposit
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increased $10.9 million, or approximately 16%. The majority of the increase is a
result of certificates of deposit specials associated with the opening of a new
branch office. The certificates of deposit issued in the third quarter have an
average term of less than one year and rates comparable to the average interest
rate of the certificates of deposit portfolio at June 30, 1999.
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Part II - Other Information
Item 1. Legal Proceedings.
- ------- ------------------
None.
Item 2. Changes in Securities.
- ------- ----------------------
Not applicable.
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 10.11 Deferred Director Fee Agreement by and
between First Community Bank & Trust and Frank D.
Neese dated October 29, 1999.
(b) Exhibit 10.12 Deferred Director Fee Agreement by and
between First Community Bank & Trust and Roy Martin
Umbarger dated October 29, 1999.
(c) Exhibit 10.13 First Amendment to the Deferred Fee
Agreement by and between First Community Bank & Trust
and Merrill M. Wesemann, M.D. dated October 29, 1999.
(d) Exhibit 27 Financial Data Schedule.
(e) No reports were filed on Form 8-K during the quarter
ended September 30, 1999.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
. FIRST COMMUNITY BANCSHARES, INC.
Date: November 15, 1999 By: /s/ Albert R. Jackson, III
------------------ ------------------------------
Albert R. Jackson, III
Chief Executive Officer and Director
Chief Financial Officer
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