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FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended: June 30, 2001
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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 Number: 0-19297
First Community Bancshares, Inc.
(Exact name of registrant as specified in its charter)
Nevada 55-0694814
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
One Community Place, Bluefield, Virginia 24605
(Address of principal executive offices) (Zip Code)
(540) 326-9000
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 of 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes _X_ No__
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at July 31, 2001
Common Stock, $1 Par Value 9,038,729
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First Community Bancshares, Inc.
FORM 10-Q
For the quarter ended June 30, 2001
INDEX
PART I. FINANCIAL INFORMATION REFERENCE
---------
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2001 and
December 31, 2000 3
Consolidated Statements of Income for the Three and
Six Month Periods Ended June 30, 2001 and 2000 4
Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 2001 and 2000 5
Consolidated Statements of Changes in Stockholders'
Equity for the Six Months Ended June 30,
2001 and 2000 6
Notes to Consolidated Financial Statements 7-10
Independent Accountants' Review Report 11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12-20
Item 3. Quantitative and Qualitative Disclosures about 21
Market Risk
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Changes in Securities and Use of Proceeds 22
Item 3. Defaults Upon Senior Securities 22
Item 4. Submission of Matters to a Vote of 22
Security Holders
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22
SIGNATURES 23
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PART I. ITEM 1. FINANCIAL STATEMENTS
FIRST COMMUNITY BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA) (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------
JUNE 30 DECEMBER 31
2001 2000
(UNAUDITED) (NOTE 1)
----------- -----------
Assets
Cash and due from banks $ 29,296 $ 38,457
Interest-bearing balances-FHLB 13,441 11,786
Securities available for sale (amortized cost of $253,290
June 30, 2001; $210,126, December 31, 2000) 254,368 207,562
Investment securities held to maturity (fair value of $43,968
June 30, 2001; $78,030, December 31, 2000) 42,114 75,736
Loans held for sale 34,303 11,570
Loans, net of unearned income 845,390 811,256
Less reserve for loan losses 12,688 12,303
----------- -----------
Net loans 832,702 798,953
Premises and equipment 19,412 18,786
Other real estate owned 2,614 2,406
Interest receivable 8,464 9,261
Other assets 18,327 19,299
Intangible assets 23,089 24,201
----------- -----------
Total Assets $ 1,278,130 $ 1,218,017
=========== ===========
Liabilities
Deposits:
Noninterest-bearing $ 130,245 $ 128,584
Interest-bearing 798,217 771,319
----------- -----------
Total Deposits 928,462 899,903
Interest, taxes and other liabilities 13,909 13,238
Securities sold under agreements to repurchase 60,447 46,179
FHLB borrowings and other indebtedness 147,521 138,015
----------- -----------
Total Liabilities 1,150,339 1,097,335
----------- -----------
Stockholders' Equity
Common stock, $1 par value; 15,000,000 shares authorized;
9,052,113 issued in 2001 and 2000; 9,042,385 and
9,040,370 shares outstanding in 2001 and 2000, respectively 9,052 9,052
Additional paid-in capital 35,302 35,273
Retained earnings 82,991 78,097
Treasury stock, at cost (201) (202)
Accumulated other comprehensive income (loss) 647 (1,538)
----------- -----------
Total Stockholders' Equity 127,791 120,682
----------- -----------
Total Liabilities and Stockholders' Equity $ 1,278,130 $ 1,218,017
=========== ===========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
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FIRST COMMUNITY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA) (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------------
SIX MONTHS THREE MONTHS
ENDED ENDED
JUNE 30 JUNE 30
2001 2000 2001 2000
----------- ----------- ----------- -----------
Interest Income:
Interest and fees on loans $ 37,738 $ 32,674 $ 18,998 $ 16,679
Interest on securities available for sale 6,539 6,503 3,085 3,243
Interest on investment securities 1,182 2,110 573 1,049
Interest on federal funds sold and deposits 577 157 479 98
----------- ----------- ----------- -----------
Total interest income 46,036 41,444 23,135 21,069
----------- ----------- ----------- -----------
Interest Expense:
Interest on deposits 16,707 14,503 8,296 7,342
Interest on borrowings 5,161 3,764 2,586 2,020
----------- ----------- ----------- -----------
Total interest expense 21,868 18,267 10,882 9,362
----------- ----------- ----------- -----------
Net interest income 24,168 23,177 12,253 11,707
Provision for loan losses 1,732 1,880 985 1,218
----------- ----------- ----------- -----------
Net interest income after provision for loan losses 22,436 21,297 11,268 10,489
----------- ----------- ----------- -----------
Noninterest Income:
Fiduciary income 910 932 501 432
Service charges on deposit accounts 2,808 1,796 1,503 984
Other service charges, commissions and fees 676 650 199 301
Mortgage banking income 4,289 2,220 2,544 1,322
Other operating income 494 442 263 237
Gain (loss) on sale of securities 44 -- (7) --
----------- ----------- ----------- -----------
Total noninterest income 9,221 6,040 5,003 3,276
----------- ----------- ----------- -----------
Noninterest Expense:
Salaries and employee benefits 9,665 8,050 4,994 4,003
Occupancy expense of bank premises 1,337 1,250 675 610
Furniture and equipment expense 959 978 496 500
Goodwill amortization 1,119 1,052 563 526
Other operating expense 5,501 4,325 2,900 1,840
----------- ----------- ----------- -----------
Total noninterest expense 18,581 15,655 9,628 7,479
----------- ----------- ----------- -----------
Income before income taxes 13,076 11,682 6,643 6,286
Income tax expense 4,011 3,675 2,034 1,957
----------- ----------- ----------- -----------
Net Income $ 9,065 $ 8,007 $ 4,609 $ 4,329
=========== =========== =========== ===========
Basic and diluted earnings per common share $ 1.00 $ 0.92 $ 0.51 $ 0.50
=========== =========== =========== ===========
Weighted average basic shares outstanding 9,042,651 8,690,704 9,043,976 8,665,993
=========== =========== =========== ===========
Weighted average diluted shares outstanding 9,058,328 8,690,704 9,069,546 8,665,993
=========== =========== =========== ===========
See Notes to Consolidated Financial Statements.
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FIRST COMMUNITY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------
Six Months Ended
June 30
2001 2000
--------- ---------
Operating Activities
Cash flows from operating activities:
Net income $ 9,065 $ 8,007
Adjustments to reconcile net income to net cash (used in) provided by
operating activities:
Provision for loan losses 1,732 1,880
Depreciation of premises and equipment 743 698
Amortization of intangible assets 1,065 1,073
Net investment amortization and accretion 95 125
Net gain on the sale of assets (2,486) (1,376)
Mortgage loans originated for sale (254,155) (48,036)
Proceeds from sale of mortgage loans 233,933 46,592
Decrease (Increase) in interest receivable 797 (159)
Increase in other assets (482) (1,766)
Increase (Decrease) in other liabilities 1,077 (1,112)
Other, net (6) (270)
--------- ---------
Net cash (used in) provided by operating activities (8,622) 5,656
--------- ---------
Investing Activities
Cash flows from investing activities:
Proceeds from sales of securities available for sale 7,471 1,650
Proceeds from maturities and calls of securities available for sale 56,221 9,843
Proceeds from maturities and calls of investment securities 1,357 1,579
Purchase of securities available for sale (74,645) (2,767)
Net increase in loans made to customers (35,652) (36,775)
Purchase of bank-owned life insurance -- (4,100)
Purchase of premises and equipment (1,478) (393)
Sales of equipment -- 2
--------- ---------
Net cash used in investing activities (46,726) (30,961)
--------- ---------
Financing Activities
Cash flows from financing activities:
Net increase (decrease) in demand and savings deposits 2,434 (3,813)
Net increase in time deposits 26,181 3,183
Net increase in short-term debt 23,782 26,508
Repayment of long-term debt (8) (11)
Acquisition of treasury stock (377) (1,769)
Dividends paid (4,170) (3,911)
--------- ---------
Net cash provided by financing activities 47,842 20,187
--------- ---------
Cash and Cash Equivalents
Net decreases in cash and cash equivalents (7,506) (5,118)
Cash and cash equivalents at beginning of year 50,243 37,797
--------- ---------
Cash and cash equivalents at end of year $ 42,737 $ 32,679
========= =========
See Notes to Consolidated Financial Statements.
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FIRST COMMUNITY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- -----------------------------------------------------------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE IN FORMATION), (UNAUDITED)
ACCUMULATED
ADDITIONAL UNALLOCATED OTHER
COMMON PAID-IN RETAINED TREASURY ESOP COMPREHENSIVE
STOCK CAPITAL EARNINGS STOCK SHARES (LOSS) INCOME TOTAL
----- ------- -------- ----- ------ ------------- -----
BALANCE JANUARY 1, 2000 $8,992 $34,264 $69,372 $(2,945) $(722) $(5,473) $103,488
Comprehensive income:
Net income -- -- 8,007 -- -- -- 8,007
Other comprehensive income:
Unrealized holding losses on
securities available for sale,
net of tax -- -- -- -- -- (289) (289)
--------
Comprehensive income -- -- -- -- -- -- 7,718
Common dividends declared
($.45 per share) -- -- (3,911) -- -- -- (3,911)
Purchase 89,362 treasury shares at
$19.80 per share -- -- -- (1,769) -- -- (1,769)
Allocation of ESOP shares (96) 722 626
------ ------- ------- ------- ----- ------- --------
Balance June 30, 2000 $8,992 $34,168 $73,468 $(4,714) $ -- $(5,762) $106,152
====== ======= ======= ======= ===== ======= ========
Balance January 1, 2001 $9,052 $35,273 $78,097 $ (202) $ -- $(1,538) $120,682
Comprehensive income:
Net income -- -- 9,065 -- -- -- 9,065
Other comprehensive income:
Unrealized holding gains on
securities available for sale,
net of tax -- -- -- -- -- 2,185 2,185
--------
Comprehensive income -- -- -- -- -- -- 11,250
Common dividends declared
($0.46 per share) -- -- (4,171) -- -- -- (4,171)
Purchase 17,780 treasury shares at
$21.19 per share -- -- -- (377) -- -- (377)
Treasury share distribution to ESOP 29 378 -- 407
------ ------- ------- ------- ----- ------- --------
Balance June 30, 2001 $9,052 $35,302 $82,991 $ (201) $ -- $ 647 $127,791
====== ======= ======= ======= ===== ======= ========
See Notes to Consolidated Financial Statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. UNAUDITED FINANCIAL STATEMENTS
The unaudited consolidated balance sheet as of June 30, 2001 and the unaudited
consolidated statements of income, cash flows and changes in stockholders'
equity for the three and six month periods ended June 30, 2001 and 2000 have
been prepared by the management of First Community Bancshares, Inc. (FCBI, the
"Company"). In the opinion of management, all adjustments (including normal
recurring accruals) necessary to present fairly the financial position of FCBI
and subsidiaries at June 30, 2001 and its results of operations, cash flows, and
changes in stockholders' equity for the three and six month periods ended June
30, 2001 and 2000 have been made. These results are not necessarily indicative
of the results of consolidated operations for the full calendar year.
The consolidated balance sheet as of December 31, 2000 has been extracted from
audited financial statements included in the Company's 2000 Annual Report to
Stockholders. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States have been omitted. These financial statements
should be read in conjunction with the financial statements and notes thereto
included in the 2000 Annual Report of FCBI.
NOTE 2. BORROWINGS
Structured term borrowings from the Federal Home Loan Bank (FHLB) of Atlanta of
$125 million in convertible and callable advances are presently being used as
funding vehicles. The structured term borrowings have varying maturities from
two to ten years; however; these advances are callable in quarterly increments
after a predefined lockout period. Contractual maturities are $25 million in
2002 and $100 million in 2010. The Company has additional fixed term borrowings
from the FHLB of $20 million that are included in FHLB borrowings and other
indebtedness. The fixed term borrowings have various maturities including $10.0
million in December 2002, $8.0 million in 2003 and another $2.0 million in 2008.
NOTE 3. COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company is currently a defendant in
various legal actions and asserted claims most of which involve lending and
collection activities in the normal course of business. While the Company and
legal counsel are unable to assess the ultimate outcome of each of these matters
with certainty, they are of the belief that the resolution of these actions
should not have a material adverse affect on the financial position of the
Company.
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NOTE 4. OTHER COMPREHENSIVE INCOME
The Company currently has one component of other comprehensive income, which
includes unrealized gains and losses on securities available for sale and is
detailed as follows:
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
2001 2000 2001 2000
---- ---- ---- ----
(AMOUNTS IN THOUSANDS)
OTHER COMPREHENSIVE INCOME:
Holding gains (losses) arising during the period $ 3,686 $ (483) $(589) $ (77)
Tax (expense) benefit (1,475) 194 233 31
------- ------- ----- -------
Holding gains (losses) arising during the period, net of tax 2,211 (289) (356) (46)
Reclassification adjustment for (gains) losses realized in net
income, net of tax (44) -- 7 --
Tax expense of reclassification 18 -- (2) --
------- ------- ----- -------
Other comprehensive income (loss) 2,185 (289) (351) (46)
Beginning accumulated other comprehensive (loss) income (1,538) (5,473) 998 (5,716)
------- ------- ----- -------
Ending accumulated other comprehensive income (loss) $ 647 $(5,762) $ 647 $(5,762)
======= ======= ===== =======
NOTE 5. SEGMENT INFORMATION
The Company operates two business segments: community banking and mortgage
banking. These segments are primarily identified by the products or services
offered and the channels through which they are offered. The community banking
segment consists of the Company's full-service banks that offer customers
traditional banking products and services through various delivery channels. The
mortgage banking segment consists of mortgage brokerage facilities that
originate, acquire, and sell mortgage products. The accounting policies for each
of the business segments are the same as those of the Company.
Information for the six months and three months ended June 30, 2001 for each of
the segments is included below. Because the mortgage banking segment was not
fully operational until the third quarter of 2000, information for the mortgage
banking segment was not material for the comparative period in 2000 and the
consolidated financial information for the comparable period in 2000, as
reported, is reflective of the community banking segment.
SIX MONTHS ENDED JUNE 30, 2001
(AMOUNTS IN THOUSANDS)
COMMUNITY MORTGAGE
BANKING BANKING PARENT ELIMINATIONS TOTAL
------- ------- ------ ------------ -----
Net interest income $ 23,852 $ 23 $ 154 $ 139 $ 24,168
Provision for loan losses 1,732 -- -- -- 1,732
---------- ------- -------- --------- ----------
Net interest income after provision
for loan losses 22,120 23 154 139 22,436
Other income 5,044 4,289 (6) (106) 9,221
Other expenses 14,647 3,584 317 33 18,581
---------- ------- -------- --------- ----------
Income (loss) before income taxes 12,517 728 (169) -- 13,076
Income tax expense (benefit) 3,836 225 (50) -- 4,011
---------- ------- -------- --------- ----------
Net income $ 8,681 $ 503 $ (119) $ -- $ 9,065
========== ======= ======== ========= ==========
Average assets year to date $1,245,665 $39,106 $125,103 $(168,086) $1,241,788
========== ======= ======== ========= ==========
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THREE MONTHS ENDED JUNE 30, 2001
(AMOUNTS IN THOUSANDS)
COMMUNITY MORTGAGE
BANKING BANKING PARENT ELIMINATIONS TOTAL
------- ------- ------ ------------ -----
Net interest income $ 12,060 $ 57 $ 78 $ 58 $ 12,253
Provision for loan losses 985 -- -- -- 985
---------- ------- -------- --------- ----------
Net interest income after provision
for loan losses 11,075 57 78 58 11,268
Other income 2,571 2,544 (6) (106) 5,003
Other expenses 7,372 2,066 238 (48) 9,628
---------- ------- -------- --------- ----------
Income (loss) before income taxes 6,274 535 (166) -- 6,643
Income tax expense (benefit) 1,915 165 (46) -- 2,034
---------- ------- -------- --------- ----------
Net income $ 4,359 $ 370 $ (120) $ -- $ 4,609
========== ======= ======== ========= ==========
Average assets year to date $1,263,104 $47,537 $125,103 $(175,576) $1,260,168
========== ======= ======== ========= ==========
NOTE 6. RECENT ACCOUNTING DEVELOPMENTS
In September 2000, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" ("SFAS No. 140"). SFAS No. 140 replaces SFAS No.
125 "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" ("SFAS No. 125"), issued in June 1996. It
revises the standards for accounting for securitizations and other transfers of
financial assets and collateral and requires certain disclosures, but it carries
over most of SFAS No. 125's provisions without reconsideration.
SFAS No. 140 is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after March 31, 2001. SFAS No. 140
specifies the accounting for recognition and reclassification of collateral and
for disclosures relating to securitization transactions and collateral for
fiscal years ending after December 15, 2000. SFAS No. 140 is to be applied
prospectively with certain exceptions. Implementation of SFAS No. 140 is not
expected to have a material effect on our financial position or results of
operations.
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
Accounting for Derivative Instruments and Hedging Activities, as amended. The
Statement requires the Company to recognize all derivatives on the balance sheet
at fair value. SFAS No. 133 also specifies new methods of accounting for hedging
transactions, prescribes the items and transactions that may be hedged, and
specifies detailed criteria to be met to qualify for hedge accounting.
Derivatives that are not hedges must be adjusted to fair value through income.
If the derivative is a hedge, depending upon the nature of the hedge, changes in
the fair value of derivatives are either offset against the changes in the fair
value of assets, liabilities or firm commitments through earnings or recognized
in other comprehensive income until the hedged item is recognized in earnings.
The Company adopted SFAS No. 133 on January 1, 2001. Because of the limited use
of derivatives on January 1, 2001, the adoption did not have a material impact
on the Company's financial statements. UFM is currently using investments
commonly referred to as "forward" transactions or derivatives to balance the
risk inherent in interest rate lock commitments made to potential borrowers
which meet the current definition of a derivative in accordance with SFAS No.
133. The pipeline of loans is hedged to offset unusual fluctuations in the cash
flows derived upon settlement of the loans with secondary market purchases and,
consequently, to achieve a desired margin upon delivery. The hedge transactions
are used for risk mitigation and are not for trading purposes. Since the hedge
transactions of UFM are currently considered free standing, independent
instruments and do not presently satisfy the criteria of FAS 133 for special
hedge accounting treatment, they are recorded at fair value and change in fair
value is reflected as adjustments to income. The wholesale mortgage pipeline of
loans is hedged to compensate for unusual fluctuations in the cash flows derived
upon settlement of the loans with the secondary market purchasers and
consequently to achieve a desired margin upon delivery. Additionally, hedge
transactions are used as a management tool to mitigate risk and not for trading
purposes.
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In July 2001, the Financial Accounting Standards Board (FASB) issued Statement
141, Business Combinations, and Statement 142, Goodwill and Other Intangible
Assets. Statement 141 requires that all business combinations be accounted for
under the purchase method. Use of the pooling-of-interests method is no longer
permitted. Statement 141 requires that the purchase method be used for business
combinations initiated after June 30, 2001.
Statement 142 requires that goodwill no longer be amortized to earnings, but
instead be reviewed for impairment. This change provides investors with greater
transparency regarding the economic value of goodwill and its impact on
earnings. The amortization of goodwill ceases upon adoption of the Statement,
which for most companies, including FCBI, will be January 1, 2002.
At the end of June 2001, the FASB Board also voted to issue Statement 143,
Accounting for Asset Retirement Obligations, effective for fiscal years
beginning after June 15, 2002 with earlier application encouraged. The standard
requires entities to record the fair value of a liability for an asset
retirement obligation in the period in which it is incurred. When the liability
is initially recorded, the entity capitalizes a cost by increasing the carrying
amount of the related long-lived asset. Over time, the liability is accreted to
it present value each period, and the capitalized cost is depreciated over the
useful life of the related asset. Upon settlement of the liability, the entity
either settles the obligation for its recorded amount or incurs a gain or loss
upon settlement. This new standard is not expected to have a significant impact
on FCBI's financial statements.
NOTE 7. EARNINGS PER SHARE
The Company's basic and diluted earnings per share were $0.51 and $1.00 for the
three and six months ending June 30, 2001, respectively. Additionally, basic and
diluted earnings per share were $0.50 and $0.92 per share, respectively, for the
corresponding three and six month periods represented in the prior year. The
current impact of the dilutive shares attributable to the Company's stock option
plan is immaterial; however, the Company currently reflects 15,677 and 25,570
dilutive option shares, respectively, in its year to date and quarter to date
weighted average shares calculation. There were no dilutive shares attributable
to the stock option plan in the prior year for the corresponding year and
quarter to date share calculations.
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INDEPENDENT ACCOUNTANTS' REVIEW REPORT
The Audit Committee of the Board of Directors
First Community Bancshares, Inc.
We have reviewed the accompanying consolidated balance sheet of First Community
Bancshares, Inc. (First Community) as of June 30, 2001 and the related
consolidated statements of income for the three and six month periods ended June
30, 2001 and 2000 and the consolidated statements of cash flows and changes in
stockholders' equity for the six month periods ended June 30, 2001 and 2000.
These consolidated financial statements are the responsibility of the Company's
management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data, and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with auditing standards generally accepted in the United States,
which will be performed for the full year with the objective of expressing an
opinion regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying consolidated financial statements referred to above
for them to be in conformity with accounting principles generally accepted in
the United States.
We have previously audited, in accordance with auditing standards generally
accepted in the United States, the consolidated balance sheet of First Community
Bancshares, Inc. and subsidiaries as of December 31, 2000, and the related
consolidated statements of income, stockholders' equity and cash flows for the
year then ended (not presented herein); and in our report dated January 26,
2001, we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
consolidated balance sheet as of December 31, 2000, is fairly stated, in all
material respects, in relation to the consolidated balance sheet from which it
has been derived.
/s/ Ernst & Young LLP
Charleston, West Virginia
August 10, 2001
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FIRST COMMUNITY BANCSHARES, INC.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis is provided to address information about
the Company's financial condition and results of operations, which is not
otherwise apparent from the consolidated financial statements included in this
report. This discussion and analysis should be read in conjunction with the 2000
Annual Report to Shareholders and the other financial information included in
this report.
First Community is a multi-state holding company headquartered in Bluefield,
Virginia. With total assets of $1.28 billion at June 30, 2001, First Community
through its community banking subsidiary, First Community Bank, N. A. ("FCBNA"),
provides financial, mortgage brokerage and origination and trust services to
individuals and commercial customers through 33 full-service banking locations
in West Virginia, Virginia and North Carolina as well as ten mortgage brokerage
facilities operated by United First Mortgage, Inc. ("UFM".) UFM is a wholly
owned subsidiary of FCBNA.
FORWARD LOOKING STATEMENTS
First Community Bancshares, Inc. (the "Corporation", "FCBI", or "First
Community") may from time to time make written or oral "forward-looking
statements", including statements contained in the Corporation's filings with
the Securities and Exchange Commission (including this Quarterly Report on Form
10-Q and the Exhibits hereto and thereto), in its reports to stockholders and in
other communications by the Corporation, which are made in good faith by the
Corporation pursuant to the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995.
These forward-looking statements include, among others, statements with respect
to the Corporation's beliefs, plans, objectives, goals, guidelines,
expectations, anticipations, estimates and intentions that are subject to
significant risks and uncertainties and are subject to change based on various
factors (many of which are beyond the Corporation's control). The words "may",
"could", "should", "would", "believe", "anticipate", "estimate", "expect",
"intend", "plan" and similar expressions are intended to identify
forward-looking statements. The following factors, among others, could cause the
Corporation's financial performance to differ materially from that expressed in
such forward-looking statements: the strength of the United States economy in
general and the strength of the local economies in which the Corporation
conducts operations; the effects of, and changes in, trade, monetary and fiscal
policies and laws, including interest rate policies of the Board of Governors of
the Federal Reserve System; inflation, interest rate, market and monetary
fluctuations; the timely development of competitive new products and services of
the Corporation and the acceptance of these products and services by new and
existing customers; the willingness of customers to substitute competitors'
products and services for the Corporation's products and services and vice
versa; the impact of changes in financial services' laws and regulations
(including laws concerning taxes, banking, securities and insurance);
technological changes; the effect of acquisitions, including, without
limitation, the failure to achieve the expected revenue growth and/or expense
savings from such acquisitions; the growth and profitability of the
Corporation's noninterest or fee income being less than expected; unanticipated
regulatory or judicial proceedings; changes in consumer spending and saving
habits; and the success of the Corporation at managing the risks involved in the
foregoing.
The Corporation cautions that the foregoing list of important factors is not
exclusive. The Corporation does not undertake to update any forward-looking
statement, whether written or oral, that may be made from time to time by or on
behalf of the Corporation.
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RESULTS OF OPERATIONS
Net income for the second quarter of 2001 totaled $4.6 million, a $280,000 or
6.47% increase over net earnings of $4.3 million reported for the corresponding
second quarter of 2000. Net income for the second quarter of the current year
resulted in basic and diluted earnings per share of $0.51 a 2.00% increase
compared to the corresponding period in the prior year. Year to date net income
for the first six months of 2001 was $9.1 million with basic and diluted
earnings per share of $1.00 compared to $8.0 million, or $0.92 basic and diluted
earnings per share for the six months ended June 30, 2000. The improvement in
earnings for 2001 is primarily a result of a $5.1 million increase in loan
interest income due to continued growth in the loan portfolio, a $3.2 million
increase in non-interest income which was largely attributable to the mortgage
origination operations of UFM as well as new fee revenues from the Company's
restructured deposit product set. The impact of increased loan volume and a
slightly higher yield on the investment security portfolio were partially offset
by slight decreases in the yield of loans held for investment, the yield on the
available for sale security portfolio and higher funding costs resulting in a 42
basis point decline in net interest margin to 4.57% for the six months ended
June 30, 2001. In addition, there was a decrease of $148,000 in the provision
for loan losses during the first half of 2001 compared to 2000. The increases in
interest income and noninterest income noted were partially offset by additional
salaries and benefits and other operating costs.
The effective income tax rate was slightly lower in the first quarter of 2001,
(30.67% vs. 31.46%) as a result of tax planning strategies implemented in the
latter part of 2000.
NET INTEREST INCOME
The Company's tax equivalent net interest margin of 4.57% for the first half of
2001 reflects a decrease of 4 basis points compared to the March 31, 2001 margin
of 4.61%; a 29 basis point decrease over the tax equivalent net interest margin
of December 31, 2000 of 4.86%; and a 42 basis point decrease over the 4.99%
margin on June 30, 2000. The overall yield on average earning assets decreased
15, 27 and 22 basis points, to 8.44% at June 30, 2001 when compared to the March
31,2001, December 31, 2000 and June 30, 2000 yields of 8.59%, 8.71% and 8.66%,
respectively. The cost of interest-bearing liabilities decreased by 11 basis
points in the second quarter of 2001 to 4.53% on June 30, 2001, but still
reflects a 10 and 30 basis point increase over the 4.43% at December 31, 2000
and the 4.23% at June 30, 2000 due to competitive pricing pressure on deposits
and increased costs of short-term borrowings.
Net interest income, the largest contributor to earnings was $24.2 million for
the first six months of 2001 compared with $23.2 million for the corresponding
period in 2000, a 4.28% increase. Tax equivalent net interest income totaled
$25.8 million for the first six months of 2001, an increase of $1.0 million from
the $24.8 million reported in the first six months of 2000. The effective
utilization of sales management, strong customer relationship building, and
increased marketing efforts contributed to the largest components of net
interest income growth, which were substantial increases in average loans held
for investment and average loans held for sale. While the average loan balance
held for investment increased $104 million, the overall tax equivalent loan
yield decreased 19 basis points from the prior year. The average balance of
loans held for sale increased $33 million, with an 8 basis points increase in
yield over the first six months of 2000.
The tax equivalent yield on securities available for sale decreased 4 basis
points to 6.76% in the first six months of 2001 compared to 6.80% for the six
months ended June 30, 2000 while the average balance increased $18 million for
the period. This increase is the result of several factors including the
addition of $4.1 million in securities as a result of the acquisition of
Citizens Southern Bank in the fourth quarter of 2000, reclassification of held
to maturity securities to available for sale in January 2001 of approximately
$32 million in conjunction with the implementation of Financial Accounting
Standards Board (FASB) Statement 133, the sale of approximately $7.4 million in
securities available for sale in the first quarter 2001, and increases in
prepayments and calls experienced (particularly in the first quarter) as a
result of the declining rate environment in the first half of 2001. The
tax-equivalent yield on investment securities (held to maturity) increased 10
basis points from June 2000 to 2001. Additionally, the average investment
portfolio decreased in the first half of 2001 by $35.8 million due to the
aforementioned reclassification, several maturities and, again, an increased
number of calls and principal pay-downs resulting from increased prepayment
incentives created by the declining rate environment experienced in the first
half of 2001. The yield on interest-bearing balances with banks decreased 177
basis points to 4.55% while the average balance increased $21 million.
The overall cost of funding decreased by 11 basis points in the second quarter
of 2001 due to lower deposit and repurchase agreement costs but still remained
10 and 30 basis points higher than the December 31, and June 30, 2000 cost of
funds of 4.43% and 4.23%, respectively. Average short-term and FHLB borrowings
increased by $42.4 million for the first six months of 2001 while the rate paid
increased 39 basis points to 5.46%. The rate paid on long-term debt decreased
slightly by 2 basis points. For the same six month periods, the cost of
interest-bearing demand and savings deposits decreased 38 and 59 basis
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points, respectively, with interest-bearing demand average balances increasing
$8.1 million while savings decreased $7.8 million. Alternately, the cost of time
deposits increased 49 basis points from 5.17% in 2000 to 5.66% in 2001 with the
average balance growing $63.4 million. Average noninterest-bearing demand
deposits increased $11.8 million. Additional funding needed to facilitate loan
growth is currently being provided through increased deposit levels and
maturities and prepayments realized in both the loan and investment portfolios.
The usage of FHLB credit programs continues to be a significant component of the
Company's overall liquidity and funding strategy.
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AVERAGE BALANCE SHEETS AND
NET INTEREST INCOME ANALYSIS
- ---------------------------------------------------------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS)
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2001 JUNE 30, 2000
AVERAGE INTEREST YIELD/RATE AVERAGE INTEREST YIELD/RATE
BALANCE (1) (2) (2) BALANCE (1) (2) (2)
------- ------- --- ------- ------- ---
Earning Assets:
Loans Held for Sale $ 36,464 $ 1,347 7.45% $ 3,082 $ 113 7.37%
Loans (3):
Taxable 816,535 36,125 8.92% 712,124 32,275 9.11%
Tax-Exempt 7,509 410 11.01% 8,320 440 10.64%
---------- ------- ----- ---------- ------- -----
Total 824,044 36,535 8.94% 720,444 32,715 9.13%
Reserve for Loan Losses (12,513) (12,000)
---------- ------- ---------- -------
Net Total 811,531 36,535 708,444 32,715
Securities Available For Sale:
Taxable 152,765 4,768 6.29% 172,892 5,634 6.55%
Tax-Exempt 71,615 2,759 7.77% 33,150 1,337 8.11%
---------- ------- ----- ---------- ------- -----
Total 224,380 7,527 6.76% 206,042 6,971 6.80%
Investment Securities:
Taxable 2,786 103 7.46% 4,964 176 7.13%
Tax-Exempt 39,747 1,624 8.24% 73,346 2,975 8.16%
---------- ------- ----- ---------- ------- -----
Total 42,533 1,727 8.19% 78,310 3,151 8.09%
Interest Bearing Deposits 25,577 577 4.55% 4,549 143 6.32%
Fed Funds Sold -- -- 0.00% -- -- 0.00%
---------- ------- ----- ---------- ------- -----
Total Earning Assets 1,140,485 47,713 8.44% 1,000,427 43,093 8.66%
---------- ------- -------
Other Assets 101,303 100,779
---------- ---------
Total $1,241,788 $1,101,206
========== ==========
Interest-Bearing Liabilities:
Demand Deposits $ 139,302 1,256 1.82% $ 131,154 1,436 2.20%
Savings Deposits 130,472 999 1.54% 138,227 1,465 2.13%
Time Deposits 515,094 14,452 5.66% 451,651 11,605 5.17%
Short-term Borrowings 179,486 4,860 5.46% 137,038 3,457 5.07%
Long-term Borrowings 10,175 301 5.97% 10,211 304 5.99%
---------- ------- ----- ---------- ------- -----
Total Interest-bearing Liabilities 974,529 21,868 4.53% 868,281 18,267 4.23%
Demand Deposits 127,053 115,293
Other Liabilities 14,649 12,753
Stockholders' Equity 125,557 104,879
---------- ----------
Total $1,241,788 $1,101,206
========== ==========
Net Interest Income 25,845 24,826
======= =======
Net Interest Rate Spread (3) 3.91% 4.43%
===== =====
Net Interest Margin 4.57% 4.99%
===== =====
(1) Interest amounts represent taxable equivalent results for the first six
months of 2001 and 2000.
(2) Fully Taxable Equivalent-Using the Federal statutory rate of 35%.
(3) Nonaccrual loans are included in average balances outstanding with no
related interest income.
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PROVISION AND ALLOWANCE FOR LOAN LOSSES
To maintain a balance in the allowance for loan losses sufficient to absorb
known and estimable loan losses, charges to the provision for loan loss totaling
$985,000 and $1,732,000 were made during the three and six month periods ended
June 30, 2001.
The Company consistently applies a monthly review process to evaluate loans for
changes in credit risk. This process serves as the primary means by which the
Company evaluates the adequacy of loan loss allowances. The total loan loss
allowance is divided into two categories which apply to: i) specifically
identified loan relationships which are on non-accrual status, ninety days past
due or more and loans with elements of credit weakness and ii) formula reserves.
Specific reserves are targeted to cover loan relationships, which are identified
with significant cash flow weakness and for which a collateral deficiency may be
present. The reserves established under the specific identification method are
judged based upon the borrower's estimated cash flow or projected liquidation
value of related collateral.
Formula reserves, based on historical loss experience, are available to cover
the homogeneous loans not individually evaluated. The formula reserve is
developed and evaluated against loans in general by specific category
(commercial, mortgage, and consumer). To determine the amount of reserve needed
for each loan category, an estimated loss percentage is developed based upon
historical loss percentages. The calculated percentage is used to determine the
estimated reserve excluding any relationships specifically identified and
individually evaluated. While allocations are made to specific loans and
classifications within the various categories of loans, the reserve is available
for all loan losses.
First Community's allowance for loan loss activity for the six and three month
periods ended June 30, 2001 and June 30, 2000 is as follows:
FOR THE SIX MONTHS ENDED FOR THE THREE MONTHS ENDED
JUNE 30 JUNE 30
2001 2000 2001 2000
--------- -------- -------- --------
(AMOUNTS IN THOUSANDS) (AMOUNTS IN THOUSANDS)
Beginning balance $ 12,303 $ 11,900 $ 12,408 $ 11,851
Provision 1,732 1,880 985 1,218
Charge-offs (1,906) (2,401) (1,045) (1,491)
Recoveries 559 449 340 250
-------- -------- -------- --------
Ending Balance $ 12,688 $ 11,828 $ 12,688 $ 11,828
======== ======== ======== ========
The allowance for loan losses totaled approximately $12.7 million, $12.3
million, and $11.8 million at June 30, 2001, December 31, and June 30, 2000,
respectively, resulting in reserve to loans held for investment ratios of 1.50%,
1.52% and 1.46% at the respective dates.
Net charge-offs for the three and six months of 2001 were $705,000 and $1.3
million compared with $1.2 million and $2.0 million for the corresponding
periods in 2000. Expressed as a percentage of average loans, net charge-offs
were .08% and .16% for the three and six month periods ended June 30, 2001 and
.16% and .27% for the corresponding periods ended June 30, 2000. As of June 30,
2001, the reserve as a percentage of non-performing assets was 137.6% compared
to 136.5% at December 31, 2000.
Management continually evaluates the adequacy of the allowance for loan losses
and makes specific adjustments to it based on the results of risk analysis in
the credit review process, the recommendation of regulatory agencies, and other
factors, such as loan loss experience and prevailing economic conditions.
Management considers the level of reserves adequate based on the current risk
profile in the loan portfolio.
NON-INTEREST INCOME
Non-interest income consists of all revenues, which are not included in interest
and fee income related to earning assets. Total noninterest income increased
approximately $3.2 million, or 52.7% from $6.0 million for the six months ended
June 30, 2000 to $9.2 million for the corresponding period in 2001. The largest
portion of this increase resulted from the mortgage brokerage operations of UFM,
which added approximately $4.3 million of mortgage banking income in 2001 versus
$2.2 million for the comparable six-month period in 2000. When comparing the
first half of
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2001 to the first half of 2000 exclusive of UFM, non-interest income increased
$1.1 million. This increase was almost entirely due to a $1.0 increase in
service charges on deposit accounts, primarily the result of a new
customer-sensitive overdraft program implemented in the fourth quarter of 2000
that allows well-managed customer deposit accounts greater flexibility in
managing overdrafts and, in turn, has achieved higher levels of overdraft charge
income to the Company with minimal charge-offs of overdrawn accounts. The
remainder of the increase was due to several components, two of which were other
service charges commissions and fees and other operating income increasing
$26,000 and $52,000, respectively. Fiduciary earnings correspond to the asset
management fees recorded and have declined from the prior year by $22,000 as a
direct result of a reduction in new estate and trust management activity in the
current year. Also the first half of 2001 reflects $44,000 in gains on the sale
of securities while none were reported as of June 2000.
Total noninterest income for the second quarter of 2001 when compared to the
corresponding three-month period in 2000 followed the same trend as the six
month period, reflecting an increase of $1.7 million, or 52.7% over the prior
year period. The majority of this increase was a $1.2 million increase in
mortgage banking income and an approximate $520,000 increase in service charges
on deposit accounts.
NON-INTEREST EXPENSE
Noninterest expense totaled $18.6 million in the first six months of 2001,
increasing $2.9 million over the corresponding period in 2000. This increase is
primarily attributable to a $1.6 million increase in salaries and benefits and a
$1.2 million dollar increase in other operating expense. The $1.6 million
increase in salaries was the result of a $297,000 increase due to the
acquisition of Citizens Southern in the latter half of 2000, a $664,000 increase
in the salaries and benefits of the mortgage brokerage company (because of the
implementation of a wholesale origination operation and larger commissions paid
as a result of increased loan origination), a general increase in salaries
expense of approximately $400,000 due to an increase in the number of personnel
and rising personnel costs to support new infrastructure and growth within the
Company. Other operating expenses increased $1.2 million in the six month period
ended June 2001 compared to June 2000 with increased other operating costs
associated with UFM (including underwriting fees) of approximately $400,000
being the largest component of the change. Additional increases in other
operating expenses included a $150,000 increase in advertising expenses for
2001, increased legal expenses of $115,000 and increased courier and ATM fees of
$140,000. In addition to increases in salaries and benefits and other operating
expenses, occupancy and furniture fixtures expense increased by $68,000.
Excluding UFM expenses, which were $62,000, and Citizens Southern of $82,000,
occupancy and furniture fixtures expense decreased by $76,000. Goodwill
increased by approximately $67,000 because of the Citizens acquisition.
Noninterest expense for the three months ended June 30, 2001 totaled $9.6
million, a $2.1 million dollar increase over the $7.5 million in June 30, 2000.
As in the year to date discussion, the majority of the increase was a $991,000
increase in salaries and employee benefits and a $1.1 million dollar increase in
other operating expenses. Again, the majority of these increases were due to the
additional loan origination activity of UFM in 2001 compared to 2000 with UFM
salaries and commissions increasing $664,000 and other operating costs of UFM
increasing $406,000 over 2000. Also, goodwill increased due to the Citizens
acquisition by $37,000 and occupancy was up because of UFM and the Citizens
acquisition by $65,000 when comparing the quarter ended June 30, 2001 to June
30, 2000.
FINANCIAL POSITION
SECURITIES
Investment securities, which are purchased with the intent to hold until
maturity, totaled $42.1 million at June 30, 2001, a decrease of $33.6 million
from December 31, 2000. This 44.4% decrease is almost exclusively the net result
of a one-time transfer of held-to-maturity securities to the available for sale
category in conjunction with the implementation of FAS 133. The market value of
investment securities held to maturity was 104.4% and 103.0% of book value at
June 30, 2001 and December 31, 2000, respectively. The market value of fixed
rate debt securities reacts inversely to changing interest rates; consequently,
recent trends in interest rates have had a positive effect on the underlying
market value since December 31, 2000 due to a general decline in market offering
rates and prices for similar securities as a result of the declining rate
environment experienced throughout the first half of 2001.
Securities available for sale were $254.4 million at June 30, 2001 compared to
$207.6 million at December 31, 2000. This change reflected the reclassification
of held to maturity securities to available for sale, certain maturities and
calls, and
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larger pay-downs triggered by the declining rate environment, as well as
the sale of approximately $7.4 million in securities during the first half of
2001. The cash flow from these investments is currently being reinvested into
the higher yielding loans while excess funds are being sold to the FHLB.
Securities available for sale are recorded at their estimated fair market value.
The unrealized gain or loss, which is the difference between amortized cost and
market value, net of related deferred taxes, is recognized in the Stockholders'
Equity section of the balance sheet as either accumulated other comprehensive
income or loss. The unrealized loss after taxes of $1.5 million at December 31,
2000, can be compared to a $647,000 gain at June 30, 2001 due to market
increases in the first six months of 2001.
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LOANS
The Company's lending strategy stresses quality growth, diversified by product,
geography, and industry. All loans made by the Company are subject to a common
credit underwriting structure. Loans are also subject to a quarterly and annual
review process based on the loan size and type. Loans held for investment
increased $34.1 million from $811.3 million at December 31, 2000 to $845.4
million at June 30, 2001. Loans originated by the Company's mortgage brokerage
division, UFM and held for sale increased $22.7 million. The loan to deposit
ratio increased from 90.1% at December 31, 2000 to 91.1% at June 30, 2001.
Considering the increase in loans held for sale along with the increase in the
loan to deposit ratio, the Company has increased its dependency on wholesale
funding made available through the FHLB. Average loans held for investment
increased approximately $104 million when comparing the first six months of 2000
and 2001, due primarily to extensive sales and marketing efforts as well as the
acquisition of Citizens Southern Bank, Inc. in the fourth quarter of 2000 which
added an additional $48 million in loans. Also, average loans held for sale
increased $33 million in the first six months of 2001 compared to 2000 as a
direct result of increased mortgage activity at UFM.
The loan portfolio continues to be diversified among loan types and industry
segments. Commercial and commercial real estate loans represent the largest
segment of the portfolio, comprising $330.9 million or 39.15% of total loans at
June 30, 2001 compared to $297.9 million or 36.72% at December 31, 2000.
Residential real estate loans remained relatively the same at $305.4 or 36.12%
at June 30, 2001 compared to $305.3 million or 37.63% at December 31, 2000.
Loans to individuals increased to $134.8 million or 15.94% at June 30, 2001 from
$134.3 million or 16.56% at December 31, 2000. Construction loans grew slightly
to $73.7 million at June 30, 2001 or 8.72% from $73.1 million at December 31,
2000 or 9.01%. Growth in the construction loan segment includes multifamily
residential properties and other commercial real estate development properties.
A portion of these loans will move into the commercial real estate portfolio as
the projects are completed.
LOAN PORTFOLIO OVERVIEW
(AMOUNTS IN THOUSANDS)
JUNE 30, 2001 DECEMBER 31, 2000
---------------------- ----------------------
AMOUNT PERCENT AMOUNT PERCENT
-------- ------- -------- -------
Commercial and Agricultural $ 93,101 11.01% $ 75,317 9.28%
Commercial Real Estate 237,775 28.14% 222,571 27.44%
Residential Real Estate 305,358 36.12% 305,302 37.63%
Construction 73,716 8.72% 73,087 9.01%
Consumer 134,780 15.94% 134,330 16.56%
Other 660 0.08% 649 0.08%
-------- ------ -------- ------
Total $845,390 100.00% $811,256 100.00%
======== ====== ======== ======
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NON-PERFORMING ASSETS
Non-performing assets are comprised of loans on non-accrual status, loans
contractually past due 90 days or more and still accruing interest and other
real estate owned (OREO). Non-performing assets were $9.2 million at June 30,
2001 and $9.0 at December 31, 2000, or 1.1% of total loans (excluding loans held
for sale) and OREO for both periods. The following schedule details
nonperforming assets by category at the close of each of the last five quarters:
(IN THOUSANDS OF DOLLARS) JUNE 30 MARCH 31 DECEMBER 31 SEPTEMBER 30 JUNE 30
2001 2001 2000 2000 2000
------ ------ ------ ------ ------
Nonaccrual $5,167 $5,192 $5,397 $5,939 $5,359
Ninety Days Past Due 1,442 1,393 1,208 1,182 1,323
Other Real Estate Owned $2,614 $2,591 2,406 2,780 2,463
------ ------ ------ ------ ------
9,223 9,176 $9,011 $9,901 $9,145
====== ====== ====== ====== ======
Restructured loans
performing in accordance
with modified terms $ 445 $ 446 $ 437 $ 448 $ 448
====== ====== ====== ====== ======
Non-accrual loans decreased $230,000 during the first six months of 2001 while
ninety day past due loans increased during the first half of the year by
$234,000. Other real estate owned also increased by $208,000. Included in the
ninety days past due category are two loans with FmHA and SBA guarantees
comprising $958,000 of the balance in that category of non-performing loans.
Ongoing activity within the classification and categories of non-performing
loans continues to include collections on delinquencies, foreclosures and
movements into or out of the non-performing classification as a result of
changing customer business conditions. The increase in other real estate owned
is due to the foreclosure and disposition of several properties with the largest
foreclosure having a balance of approximately $145,000. The parcels of other
real estate owned are generally carried at the lesser of their estimated fair
market value or cost.
STOCKHOLDERS' EQUITY
Total stockholders' equity reached $127.8 million at June 30, 2001 increasing
$7.1 million over the $120.7 million reported at December 31, 2000. The Federal
Reserve's risk based capital guidelines and leverage ratio measure capital
adequacy of banking institutions. Risk-based capital guidelines weight balance
sheet assets and off-balance sheet commitments based on inherent risks
associated with the respective asset types. At June 30, 2001, the Company's
total risk adjusted capital-to-asset ratio was 12.93%. The Company's leverage
ratio at June 30, 2001 was 8.42% compared with 8.37% at December 31, 2000. Both
the risk adjusted capital-to-asset ratio and the leverage ratio exceed the
current well-capitalized levels prescribed for bank holding companies of 10% and
5%, respectively.
LIQUIDITY
The Company maintains a significant level of liquidity in the form of cash and
cash equivalent balances ($42.7 million), investment securities available for
sale ($254.4 million) and Federal Home Loan Bank credit availability of
approximately $109.4 million. Cash and cash equivalents as well as advances from
the Federal Home Loan Bank are immediately available for satisfaction of deposit
withdrawals, customer credit needs and operations of the Company. Investment
securities available for sale represent a secondary level of liquidity available
for conversion to liquid funds in the event of extraordinary needs.
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PART I. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk (IRR) and Asset/Liability Management
While the Company continues to strive to decrease its dependency on net interest
income, the Bank's profitability is dependent to a large extent upon its ability
to manage its margin. The Bank, like other financial institutions, is subject to
interest rate risk to the degree that its interest-earning assets reprice
differently than its interest-bearing liabilities. The Bank manages its mix of
assets and liabilities with the goals of limiting its exposure to interest rate
risk, ensuring adequate liquidity, and coordinating its sources and uses of
funds. Specific strategies for management of IRR have included shortening the
amortized maturity of fixed-rate loans and increasing the volume of adjustable
rate loans to reduce the average maturity of the Bank's interest-earning assets.
The Bank seeks to control its IRR exposure to insulate net interest income and
net earnings from fluctuations in the general level of interest rates. To
measure its exposure to IRR, the bank performs quarterly simulations using
financial models which project net interest income through a range of possible
interest rate environments including rising, declining, most likely, and flat
rate scenarios. The results of these simulations indicate the existence and
severity of IRR in each of those rate environments based upon the current
balance sheet position and assumptions as to changes in the volume and mix of
interest-earning assets and interest-paying liabilities and management's
estimate of yields attainable in those future rate environments and rates which
will be paid on various deposit instruments and borrowings.
Changes to the Company's risk profile since December 31, 2000 reflect a change
in the balance sheet toward an asset sensitive position and a general decline in
the duration of equity. The shift in the balance sheet is the result of an
increase in the level of prepayments and calls within the bank's portfolio
assets of loans and securities occurring during the first six months of the
current year. The substantial level of prepayments and calls as well as the
success of a deposit funding campaign instituted in the first half of 2001 have
lead to an increase in the banks overall liquidity position as reflected in the
level of cash reserves of approximately $42.7 million. In addition, the mortgage
operations of UFM began using investments commonly referred to as "forward"
transactions or derivatives to balance the risk inherent in interest rate lock
commitments (also deemed to be derivatives) made to potential borrowers. The
pipeline of loans is hedged to circumvent unusual fluctuations in the cash flows
derived upon settlement of the loans with secondary market purchases and,
consequently, to achieve a desired margin upon delivery. The hedge transactions
are used for risk mitigation and are not for trading purposes.
The earnings sensitivity measurements completed on a quarterly basis indicate
that the performance criteria, against which sensitivity is measured, are
currently within the Company's defined policy limits. A more complete discussion
of the overall interest rate risk is included in the Company's annual report for
December 31, 2000.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
(a) The Company is currently a defendant in various legal actions and
asserted claims most of which involve lending and collection activities
in the normal course of business. While the Company and legal counsel
are unable to assess the ultimate outcome of each of these matters with
certainty, they are of the belief that the resolution of these actions
should not have a material adverse affect on the financial position of
the Company.
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Item 2. Changes in Securities and Use of Proceeds
(a) N/A
(b) N/A
(c) N/A
(d) N/A
Item 3. Defaults Upon Senior Securities
(a) N/A
(b) N/A
Item 4. Submission of Matters to a Vote of Security Holders
(a) N/A
(b) N/A
(c) N/A
(d) N/A
Item 5. Other Information
(a) N/A
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 3 - Articles of Incorporation and amendments previously
filed
Exhibit 15 - Letter regarding unaudited interim financial
information
(b) Reports on Form 8-K
A report on Form 8-K was filed on July 20, 2001, announcing
the Company's quarterly earnings and depicting certain
financial information as of June 30, 2001 and December 31,
2000 and comparative income statements for the three-month
periods ending June 30, 2001 and 2000, respectively, compared
to previously reported financial information for the preceding
four quarters.
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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: August 14, 2001
/s/ JOHN M. MENDEZ
- ------------------------------
John M. Mendez
President & Chief Executive Officer
(Duly Authorized Officer)
DATE: August 14, 2001
/s/ KENNETH P. MULKEY
- ------------------------------
Kenneth P. Mulkey
Acting Chief Financial Officer
(Principal Accounting Officer)
23