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: September 30, 2001
------------------
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 October 31, 2001
Common Stock, $1 Par Value 9,038,729
----------------------------
First Community Bancshares, Inc.
FORM 10-Q
For the quarter ended September 30, 2001
INDEX
PART I. FINANCIAL INFORMATION REFERENCE
---------
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 2001 and
December 31, 2000 3
Consolidated Statements of Income for the Three and
Nine Month Periods Ended September 30, 2001 and 2000 4
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 2001 and 2000 5
Consolidated Statements of Changes in Stockholders'
Equity for the Nine Months Ended September 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
2
PART I. ITEM 1. FINANCIAL STATEMENTS
FIRST COMMUNITY BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in Thousands, Except Share Data) (Unaudited)
- --------------------------------------------------------------------------------
September 30 December 31
2001 2000
Assets (Unaudited) (Note 1)
------------------ ------------------
Cash and due from banks $ 35,275 $ 38,457
Interest-bearing balances-FHLB 15,018 11,786
Securities available for sale (amortized cost of $257,269
September 30, 2001; $210,126, December 31, 2000) 261,409 207,562
Investment securities held to maturity (fair value of $44,312
September 30, 2001; $78,030, December 31, 2000) 42,001 75,736
Loans held for sale 40,759 11,570
Loans, net of unearned income 862,689 811,256
Less reserve for loan losses 12,889 12,303
------------ ------------
Net loans 849,800 798,953
Premises and equipment 19,452 18,786
Other real estate owned 2,595 2,406
Interest receivable 8,746 9,261
Other assets 18,199 19,299
Intangible assets 22,521 24,201
------------ ------------
Total Assets $ 1,315,775 $ 1,218,017
============ ============
Liabilities
Deposits:
Noninterest-bearing $ 140,754 $ 128,584
Interest-bearing 812,933 771,319
------------ ------------
Total Deposits 953,687 899,903
Interest, taxes and other liabilities 15,760 13,238
Securities sold under agreements to repurchase 66,126 46,179
FHLB borrowings and other indebtedness 147,730 138,015
------------ ------------
Total Liabilities 1,183,303 1,097,335
------------ ------------
Stockholders' Equity
Common stock, $1 par value; 15,000,000 shares authorized ; 9,052,113 issued in
2001 and 2000; 9,038,729 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 85,910 78,097
Treasury stock, at cost (276) (202)
Accumulated other comprehensive income (loss) 2,484 (1,538)
------------ ------------
Total Stockholders' Equity 132,472 120,682
------------ ------------
Total Liabilities and Stockholders' Equity $ 1,315,775 $ 1,218,017
============ ============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
3
FIRST COMMUNITY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in Thousands Except Share and Per Share Data) (Unaudited)
- --------------------------------------------------------------------------------
NINE MONTHS THREE MONTHS
Ended ENDED
September 30 SEPTEMBER 30
2001 2000 2001 2000
------------ ------------ ------------ ------------
Interest Income:
Interest and fees on loans $ 56,729 $ 50,043 $ 18,991 $ 17,369
Interest on securities available for sale 10,199 9,732 3,660 3,229
Interest on investment securities 1,752 3,134 570 1,024
Interest on federal funds sold and deposits 746 167 169 10
---------- ---------- ---------- ----------
Total interest income 69,426 63,076 23,390 21,632
---------- ---------- ---------- ----------
Interest Expense:
Interest on deposits 24,586 22,200 7,879 7,697
Interest on borrowings 7,862 6,099 2,701 2,335
---------- ---------- ---------- ----------
Total interest expense 32,448 28,299 10,580 10,032
---------- ---------- ---------- ----------
Net interest income 36,978 34,777 12,810 11,600
Provision for loan losses 3,014 2,722 1,282 842
---------- ---------- ---------- ----------
Net interest income after provision for loan losses 33,964 32,055 11,528 10,758
---------- ---------- ---------- ----------
Noninterest Income:
Fiduciary income 1,380 1,314 470 382
Service charges on deposit accounts 4,325 2,748 1,517 952
Other service charges, commissions and fees 1,008 976 332 326
Mortgage banking income 7,067 3,412 2,778 1,192
Other operating income 730 644 236 202
Gain (loss) on sale of securities 197 -- 153 --
---------- ---------- ---------- ----------
Total noninterest income 14,707 9,094 5,486 3,054
---------- ---------- ---------- ----------
Noninterest Expense:
Salaries and employee benefits 14,904 11,951 5,239 3,901
Occupancy expense of bank premises 2,005 1,885 668 635
Furniture and equipment expense 1,362 1,376 403 398
Goodwill amortization 1,687 1,586 568 534
Other operating expense 8,326 6,548 2,825 2,223
---------- ---------- ---------- ----------
Total noninterest expense 28,284 23,346 9,703 7,691
---------- ---------- ---------- ----------
Income before income taxes 20,387 17,803 7,311 6,121
Income tax expense 6,322 5,511 2,311 1,836
---------- ---------- ---------- ----------
Net Income $ 14,065 $ 12,292 $ 5,000 $ 4,285
========== ========== ========== ==========
Basic earnings per common share $ 1.56 $ 1.42 $ 0.56 $ 0.50
========== ========== ========== ==========
Diluted earnings per common share $ 1.55 $ 1.42 $ 0.55 $ 0.50
========== ========== ========== ==========
Weighted average basic shares outstanding 9,041,611 8,676,081 9,039,565 8,647,153
========== ========== ========== ==========
Weighted average diluted shares outstanding 9,070,252 8,676,081 9,094,134 8,647,153
========== ========== ========== ==========
4
FIRST COMMUNITY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS) (UNAUDITED)
- --------------------------------------------------------------------------------
NINE MONTHS ENDED
SEPTEMBER 30
2001 2000
------------------ -------------------
Operating Activities
Cash flows from operating activities:
Net income $ 14,064 $ 12,292
Adjustments to reconcile net income to net cash (used in) provided by
operating activities:
Provision for loan losses 3,014 2,722
Depreciation of premises and equipment 1,108 1,047
Amortization of intangible assets 1,607 1,618
Net investment amortization and accretion 203 181
Net gain on the sale of assets (4,928) (2,102)
Mortgage loans originated for sale (385,858) (72,968)
Proceeds from sale of mortgage loans 361,197 72,024
Increase in interest receivable 515 242
Decrease in other assets (1,580) (1,546)
Increase (Decrease) in other liabilities 2,928 498
Other, net 6 (392)
------------ ------------
Net cash (used in) provided by operating activities (7,724) 13,616
------------ ------------
Investing Activities
Cash flows from investing activities:
Proceeds from sales of securities available for sale 18,883 1,650
Proceeds from maturities and calls of securities available for sale 82,986 12,481
Proceeds from maturities and calls of investment securities 1,478 2,478
Purchase of securities available for sale (116,764) (4,193)
Net increase in loans made to customers (53,703) (58,933)
Purchase of bank-owned life insurance -- (4,100)
Purchase of premises and equipment (1,946) (652)
Sales of equipment 13 35
------------ ------------
Net cash used in investing activities (69,053) (51,234)
------------ ------------
Financing Activities
Cash flows from financing activities:
Net increase (decrease) in demand and savings deposits 20,601 (11,728)
Net increase in time deposits 33,266 16,772
Net increase in short-term debt 29,674 33,483
Repayment of long-term debt (12) (15)
Acquisition of treasury stock (451) (2,284)
Dividends paid (6,251) (5,897)
------------ ------------
Net cash provided by financing activities 76,827 30,331
------------ ------------
Cash and Cash Equivalents
Net increase (decrease) in cash and cash equivalents 50 (7,287)
Cash and cash equivalents at beginning of year 50,243 37,797
------------ ------------
Cash and cash equivalents at end of year $ 50,293 $ 30,510
============ ============
See Notes to Consolidated Financial Statements.
5
FIRST COMMUNITY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE INFORMATION), (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 -- -- 12,292 -- -- -- 12,292
Other comprehensive income:
Unrealized holding losses on
securities available for
sale, net of tax -- -- -- -- -- 1,346 1,346
---------
Comprehensive income -- -- -- -- -- -- 13,638
Common dividends declared
($.68 per share) -- -- (5,896) -- -- -- (5,896)
Purchase 116,063 treasury
shares at $19.68
per share -- -- -- (2,284) -- -- (2,284)
Allocation of ESOP shares (96) 722 626
--------- --------- --------- --------- ---------- --------- ---------
Balance September 30, 2000 $ 8,992 $ 34,168 $ 75,768 $ (5,229) $ -- $ (4,127) $ 109,572
========= ========= ========= ========= ========== ========= =========
Balance January 1, 2001 $ 9,052 $ 35,273 $ 78,097 $ (202) $ -- $ (1,538) $ 120,682
Comprehensive income:
Net income -- -- 14,065 -- -- -- 14,065
Other comprehensive income:
Unrealized holding gains on
securities available for
sale, net of tax -- -- -- -- -- 4,022 4,022
---------
Comprehensive income -- -- -- -- -- -- 18,087
Common dividends declared
($0.69 per share) -- -- (6,252) -- -- -- (6,252)
Purchase 21,436 treasury
shares at $21.08 per share -- -- -- (452) -- -- (452)
Treasury share distribution
to ESOP 29 378 -- 407
--------- --------- --------- --------- ---------- --------- ---------
Balance September 30, 2001 $ 9,052 $ 35,302 $ 85,910 $ (276) $ -- $ 2,484 $ 132,472
========= ========= ========= ========= ========== ========= =========
See Notes to Consolidated Financial Statements.
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. UNAUDITED FINANCIAL STATEMENTS
The unaudited consolidated balance sheet as of September 30, 2001 and the
unaudited consolidated statements of income, cash flows and changes in
stockholders' equity for the three and nine month periods ended September 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 September 30, 2001 and its
results of operations, cash flows, and changes in stockholders' equity for the
three and nine month periods ended September 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.
7
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:
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2001 2000 2001 2000
---------- ---------- ---------- ----------
(AMOUNTS IN THOUSANDS)
OTHER COMPREHENSIVE INCOME:
Holding gains arising during the period $ 6,901 $ 2,244 $ 3,215 $ 2,725
Tax expense (2,761) (898) (1,286) (1,090)
---------- ---------- ---------- ----------
Holding gains arising during the period, net of tax 4,140 1,346 1,929 1,635
Reclassification adjustment for gains realized in net
income, net of tax (197) -- (153) --
Tax expense of reclassification 79 -- 61 --
---------- ---------- ---------- ----------
Other comprehensive income 4,022 1,346 1,837 1,635
Beginning accumulated other comprehensive (loss) income (1,538) (5,473) 647 (5,762)
---------- ---------- ---------- ----------
Ending accumulated other comprehensive income (loss) $ 2,484 $ (4,127) $ 2,484 $ (4,127)
========== ========== ========== ==========
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 delivered. 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 nine months and three months ended September 30, 2001 for
each of the segments is included below. Due to the fact that the largest portion
of 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.
NINE MONTHS ENDED SEPTEMBER 30, 2001
(AMOUNTS IN THOUSANDS)
COMMUNITY MORTGAGE
BANKING BANKING PARENT ELIMINATIONS TOTAL
---------- ---------- ---------- ------------ ----------
Net interest income $ 36,357 $ 193 $ 230 $ 198 $ 36,978
Provision for loan losses 3,014 -- -- -- 3,014
---------- ---------- ---------- ---------- ----------
Net interest income after provision
for loan losses 33,343 193 230 198 33,964
Other income 7,745 7,066 26 (130) 14,707
Other expenses 22,042 5,746 428 68 28,284
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes 19,046 1,513 (172) -- 20,387
Income tax expense (benefit) 5,882 491 (51) -- 6,322
---------- ---------- ---------- ---------- ----------
Net income $ 13,164 $ 1,022 $ (121) $ -- $ 14,065
========== ========== ========== ========== ==========
Average assets year to date $1,253,189 $ 41,831 $ 126,721 $ (162,003) $1,259,738
========== ========== ========== ========== ==========
8
THREE MONTHS ENDED SEPTEMBER 30, 2001
(AMOUNTS IN THOUSANDS)
COMMUNITY MORTGAGE
BANKING BANKING PARENT ELIMINATIONS TOTAL
---------- ---------- ---------- ------------ ----------
Net interest income $ 12,505 $ 170 $ 76 $ 59 $ 12,810
Provision for loan losses 1,282 -- -- -- 1,282
---------- ---------- ---------- ---------- ----------
Net interest income after provision
for loan losses 11,223 170 76 59 11,528
Other income 2,701 2,777 32 (24) 5,486
Other expenses 7,395 2,162 111 35 9,703
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes 6,529 785 (3) -- 7,311
Income tax expense (benefit) 2,046 266 (1) -- 2,311
---------- ---------- ---------- ---------- ----------
Net income $ 4,483 $ 519 $ (2) $ -- $ 5,000
========== ========== ========== ========== ==========
Average assets quarter to date $1,267,987 $ 47,193 $ 129,906 $ (150,035) $1,295,051
========== ========== ========== ========== ==========
NOTE 6. RECENT ACCOUNTING DEVELOPMENTS
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. Implementation of Statement 141 is
not expected to have a material effect on our financial position or results of
operations.
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. During 2002,
the Company will perform the required impairment tests of goodwill and
indefinite lived intangible assets in accordance with the new standard.
Including the estimated benefit of the elimination of goodwill amortization, net
income and basic and diluted earnings per share would be $5.6 million, or $0.62
basic and $0.61 diluted earnings per share for the quarter ended September 30,
2001, and $15.8 million, or $1.75 and $1.74 basic and diluted earnings per
share, respectively, for the nine months ended September 30, 2001. Since
management has not completed an impairment analysis, the impact cannot currently
be quantified.
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.
In October 2001, the FASB issued a final Statement on asset impairment
(Statement 144), Accounting for the Impairment or Disposal of Long-Lived Assets
that is applicable to financial statements issued for fiscal years beginning
after December 15, 2001 (January 2002 for calendar year-end companies). The
FASB's new rules on asset impairment supersede FASB Statement No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-lived Assets to
Be Disposed Of, and provide a single accounting model for long-lived assets to
be disposed of. Implementation of Statement 144 is not expected to have a
material effect on our financial position or results of operations.
9
NOTE 7. EARNINGS PER SHARE
The Company's basic and diluted earnings per share were $0.56 and $0.55 and
$1.56 and $1.55 for the three and nine months ending September 30, 2001,
respectively. Additionally, both basic and diluted earnings per share were $0.50
and $1.42 per share, respectively, for the corresponding three and nine month
periods of the prior year. The Company currently reflects 54,569 and 28,641
dilutive option shares, respectively, in its quarter to date and year to date
weighted average shares calculation. There were no dilutive shares attributable
to the stock option plan in the prior year for the corresponding quarter and
year to date share calculations.
10
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 September 30, 2001 and the related
consolidated statements of income for the three and nine month periods ended
September 30, 2001 and 2000 and the consolidated statements of cash flows and
changes in stockholders' equity for the nine month periods ended September 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
October 10, 2001
11
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 $1.32 billion at September 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 34 full-service banking
locations in West Virginia, Virginia and North Carolina as well as 11 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.
12
RESULTS OF OPERATIONS
Net income for the third quarter of 2001 totaled $5.0 million, a $715,000 or
16.28% increase over net earnings of $4.3 million reported for the corresponding
third quarter of 2000. Net income for the third quarter of the current year
resulted in basic and diluted earnings per share of $0.56 and $0.55, a 12% and
10% increase, respectively, compared to the corresponding period in the prior
year. Year to date net income for the first nine months of 2001 was $14.1
million with basic and diluted earnings per share of $1.56 and $1.55, compared
to $12.3 million, or $1.42 for both basic and diluted earnings per share for the
nine months ended September 30, 2000. The improvement in earnings for 2001 is
primarily a result of continued growth in the loan portfolio, which resulted in
a $6.7 million increase in loan interest income, a $5.6 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 income produced from the large increase in loan volume
and an increase in interest-bearing deposits with banks were partially offset by
declining yields on both loans held for sale and investment and interest-bearing
deposits with banks as well as slight increases in funding costs resulting in a
38 basis point decline in net interest margin to 4.56% for the nine months ended
September 30, 2001. Additionally, salaries and employee benefits and other
operating costs also increased due to the increased volume of loans originated
by UFM as well as the nine month impact of Citizens Southern Bank acquired in
the fourth quarter of 2000.
NET INTEREST INCOME
The Company's tax equivalent net interest margin at September 30, 2001 of 4.56%
decreased by only 1 basis point from the June 30, 2001 margin of 4.57% but
reflected a 38 basis point decrease over the 4.94% reported for the
corresponding nine months of 2000. The overall yield on average earning assets
decreased 13 and 39 basis points, to 8.31% at September 30, 2001 when compared
to the June 30, 2001 and September 30, 2000 yields of 8.44%, and 8.70%,
respectively. The cost of interest-bearing liabilities decreased by 14 basis
points in the third quarter of 2001 to 4.39% on September 30, 2001 because of
the lower interest rate environment while increasing 6 basis points over the
4.33% reported for September 30, 2000 as a result of deposit gathering campaigns
undertaken by the Bank during the latter part of 2000 and continuing in the
first quarter of 2001 and increased costs of short-term borrowings.
Net interest income, the largest contributor to earnings, was $37 million for
the first nine months of 2001 compared with $34.8 million for the corresponding
period in 2000, a 6.32% increase. Tax equivalent net interest income totaled
$39.6 million for the first nine months of 2001, an increase of $2.3 million
from the $37.3 million reported in the first nine months of 2000. Along with a
rate environment conducive to lower interest rate mortgage financing, the
effective utilization of sales management, strong customer relationship
building, and increased marketing efforts contributed to substantial increases
in average loans held for investment and average loans held for sale. While the
average loan balance held for investment increased $103 million for the first
nine months of 2001 compared to the same period of 2000, the overall tax
equivalent loan yield decreased 36 basis points from the prior year. The average
balance of loans held for sale increased $35.8 million, with an 18 basis points
decrease in yield compared to the first nine months of 2000.
The tax equivalent yield on securities available for sale decreased 9 basis
points to 6.70% in the first nine months of 2001 compared to 6.79% for the nine
months ended September 30, 2000 while the average balance increased $30 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 Statement 133 (FAS 133) and the sale and purchase of various
securities in the first and third quarters of 2001. These items were offset by
increases in prepayments and calls in 2001 (particularly in the first quarter)
experienced as a result of the declining rate environment. The tax-equivalent
yield on investment securities (held to maturity) increased 7 basis points from
September 2000 to 2001. Additionally, the average investment portfolio decreased
in the first half of 2001 by $35.4 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 2001. The yield on
interest-bearing balances with banks also declined in proportion to declining
yields in overnight and short-term instruments decreasing 211 basis points to
4.28% while the average balance increased $20 million.
The overall cost of funding decreased by 14 basis points to 4.39% in the third
quarter of 2001 due to lower deposit and repurchase agreement costs but still
remained 6 basis points higher than the September 30, 2000 cost of funds of
4.33%. Average short-term and FHLB borrowings increased by $43.1 million by
September 2001 compared to September 2000 while the rate paid increased 5 basis
points to 5.34%. The rate paid on long-term debt decreased slightly by only 1
basis point. For the same nine month periods, the cost of interest-bearing
demand and savings deposits decreased 58 and 74 basis points, respectively, with
interest-bearing demand average balances increasing $10.8 million while savings
decreased $6.2 million. Alternately, the cost of time deposits increased 25
basis points from 5.27% in 2000 to 5.52% in 2001 with the average balance
13
growing $68 million. Average noninterest-bearing demand deposits increased $13.7
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.
14
AVERAGE BALANCE SHEETS AND
NET INTEREST INCOME ANALYSIS
- --------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS)
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2001 SEPTEMBER 30, 2000
AVERAGE INTEREST YIELD/RATE AVERAGE INTEREST YIELD/RATE
BALANCE (1) (2) (2) BALANCE (1) (2) (2)
----------- ----------- -------- ----------- ----------- ---------
Earning Assets:
Loans Held for Sale $ 39,250 $ 2,110 7.19% $ 3,480 $ 192 7.37%
Loans (3):
Taxable 824,809 54,250 8.79% 720,727 49,426 9.16%
Tax-Exempt 7,295 569 10.43% 8,162 655 10.72%
----------- ----------- -------- ----------- ----------- ---------
Total 832,104 54,819 8.81% 728,889 50,081 9.17%
Reserve for Loan Losses (12,656) (11,993)
----------- ----------- ----------- -----------
Net Total 819,448 54,819 716,896 50,081
Securities Available For Sale:
Taxable 158,415 7,327 6.18% 171,870 8,430 6.55%
Tax-Exempt 76,878 4,464 7.76% 33,375 2,004 8.02%
----------- ----------- -------- ----------- ----------- ---------
Total 235,293 11,791 6.70% 205,245 10,434 6.79%
Investment Securities:
Taxable 2,623 140 7.14% 4,724 246 6.96%
Tax-Exempt 39,752 2,435 8.19% 73,046 4,443 8.12%
----------- ----------- -------- ----------- ----------- ---------
Total 42,375 2,575 8.12% 77,770 4,689 8.05%
Interest Bearing Deposits 23,316 746 4.28% 3,196 153 6.39%
----------- ----------- ----------- -----------
Total Earning Assets 1,159,682 72,041 8.31% 1,006,587 65,549 8.70%
----------- ----------- ----------- -----------
Other Assets 100,056 100,988
----------- -----------
Total $ 1,259,738 $ 1,107,575
=========== ===========
Interest-Bearing Liabilities:
Demand Deposits $ 141,029 1,723 1.63% $ 130,276 2,155 2.21%
Savings Deposits 130,534 1,369 1.40% 136,762 2,191 2.14%
Time Deposits 520,762 21,493 5.52% 452,775 17,859 5.27%
Short-term Borrowings 185,488 7,408 5.34% 142,414 5,637 5.29%
Long-term Borrowings 10,173 454 5.97% 10,209 457 5.98%
----------- ----------- -------- ----------- ----------- ---------
Total Interest-bearing Liabilities 987,986 32,447 4.39% 872,436 28,299 4.33%
Demand Deposits 129,459 115,768
Other Liabilities 15,091 13,281
Stockholders' Equity 127,202 106,090
----------- -----------
Total $ 1,259,738 $ 1,107,575
=========== ===========
Net Interest Income 39,594 37,250
=========== ===========
Net Interest Rate Spread (3) 3.91% 4.37%
========= =========
Net Interest Margin 4.56% 4.94%
========= =========
(1) Interest amounts represent taxable equivalent results for the first nine
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.
15
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
$$1,282,000 and $3,014,000 were made during the three and nine month periods
ended September 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 nine and three month
periods ended September 30, 2001 and September 30, 2000 is as follows:
FOR THE NINE MONTHS ENDED FOR THE THREE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
2001 2000 2001 2000
---------- ---------- ---------- ----------
(AMOUNTS IN THOUSANDS) (AMOUNTS IN THOUSANDS)
Beginning balance $ 12,303 $ 11,900 $ 12,688 $ 11,828
Provision 3,014 2,722 1,282 842
Charge-offs (3,099) (3,434) (1,193) (1,033)
Recoveries 671 684 112 235
---------- ---------- ---------- ----------
Ending Balance $ 12,889 $ 11,872 $ 12,889 $ 11,872
========== ========== ========== ==========
The allowance for loan losses totaled approximately $12.9 million, $12.3
million, and $11.9 million at September 30, 2001, December 31, and September 30,
2000, respectively, resulting in reserve to loans held for investment ratios of
1.50%, 1.52% and 1.56% at the respective dates.
Net charge-offs for the three and nine months of 2001 were $1.1 million and $2.4
million compared with $798,000 and $2.8 million for the corresponding periods in
2000. Expressed as a percentage of average loans held for investment, net
charge-offs were .13% and .29% for the three and nine month periods ended
September 30, 2001 and .11% and .38% for the corresponding periods ended
September 30, 2000. As of September 30, 2001, the reserve as a percentage of
non-performing assets was 137.5% 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 within
the markets and industry segments. 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 $5.6 million, or 61.72% from $9.1 million for the nine months
ended September 30, 2000 to $14.7 million for the corresponding period in 2001.
The largest portion of this increase resulted from the mortgage brokerage
operations of UFM, which added approximately $7.1 million of mortgage banking
income in 2001 versus $3.4 million for the comparable nine-month period in 2000.
When comparing the nine months of 2001 to the
16
first nine months of 2000 exclusive of UFM, non-interest income increased $2
million. This increase was largely due to a $1.6 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 which when combined, added an additional $400,000 in
revenues. Increases were noted in other service charges commissions and fees and
other operating income as well as an increase in fiduciary earnings that
correspond to the increased management fees recorded. Also, the nine months of
2001 reflects $197,000 in gains on the sale of securities while none were
reported as of September 2000.
The same components contributed to the $2.4 million, or 79.63% increase in total
noninterest income for the third quarter of 2001 when compared to the
corresponding three-month period in 2000. The majority of this increase was a
$1.2 million increase in mortgage banking income, a $565,000 increase in service
charges on deposit accounts, and increases in other service charges commissions
and fees, other operating income, and trust revenue, respectively, and a
$153,000 increase in gain on sale of securities.
NON-INTEREST EXPENSE
Noninterest expense totaled $28.3 million in the first nine months of 2001,
increasing $4.9 million over the corresponding period in 2000. This increase is
primarily attributable to a $3 million increase in salaries and benefits and a
$1.8 million dollar increase in other operating expense. The $3 million increase
in salaries was largely the result of a $1.3 million 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 $457,000 increase due to the acquisition of
Citizens Southern in the fourth quarter of 2000, and a general increase in
salaries expense 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 $1.8 million in the nine month period ended
September 2001 compared to September 2000 with increased other operating costs
associated with UFM (including underwriting fees) of approximately $693,000
being the largest component of the change. Other components of the increase in
other operating expenses were a $271,000 increase in advertising expenses for
2001, increased other service fees of $195,000, a $253,000 increase in other
real estate expenses due to a reversal of expenses in 2000, and increased other
losses and charge offs of $212,000 which largely related to the settlement of
trust department litigation.
In addition to increases in salaries and benefits and other operating expenses,
occupancy and furniture fixtures expense increased by $106,000. Excluding
Citizens Southern expenses of $131,000, occupancy and furniture fixtures expense
decreased by $25,000. Goodwill increased by approximately $101,000 because of
the Citizens Southern acquisition.
Noninterest expense for the three months ended September 30, 2001 totaled $9.7
million, a $2.1 million dollar increase over the $7.7 million for September 30,
2000. As in the year to date discussion, the majority of the increase was a $1.3
million increase in salaries and employee benefits and a $602,000 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 $670,000 and other operating
costs of UFM increasing $288,000 over 2000. Also, goodwill amortization
increased due to the Citizens acquisition by $34,000 and occupancy was up
because of UFM and the Citizens acquisition by $38,000 when comparing the
quarter ended September 30, 2001 to September 30, 2000.
FINANCIAL POSITION
SECURITIES
Investment securities, which are purchased with the intent to hold until
maturity, totaled $42 million at September 30, 2001, a decrease of $33.7 million
from December 31, 2000. This 44% 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 105.5% and 103.0% of book value at
September 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 nine months of 2001.
17
Securities available for sale were $261.4 million at September 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 and
additional securities investments to achieve higher yields with excess cash
reserves. The quarter-end balance continues to reflect maturities and calls, and
larger pay-downs triggered by the declining rate environment, as well as the
sale of approximately $10.7 million in securities and the purchase of
approximately $123 million during the first nine months 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 $2.5 million gain at September 30, 2001 due to market increases in
the first nine months of 2001.
18
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 $51.4 million from $811.3 million at December 31, 2000 to $862.7
million at September 30, 2001. Loans originated by the Company's mortgage
brokerage division, UFM, and held for sale increased $29.2 million. The loan to
deposit ratio was 90.5% at September 30, 2001 and 90.1% at December 31, 2000.
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 $103 million when
comparing the first nine 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 $35.8 million in the first
nine months of 2001 compared to 2000 as a direct result of increased mortgage
activity at UFM.
The loan portfolio of loans held for investment continues to be diversified
among loan types and industry segments. Commercial and commercial real estate
loans represent the largest segment of the portfolio, comprising $338.6 million
or 39.5% of total loans at September 30, 2001 compared to $297.9 million or
36.72% at December 31, 2000. Residential real estate loans increased slightly to
$314.4 or 36.44% at September 30, 2001 compared to $305.3 million or 37.63% at
December 31, 2000. Loans to individuals increased to $135 million or 15.65% at
September 30, 2001 from $134.3 million or 16.56% at December 31, 2000.
Construction loans grew slightly to $73.4 million at September 30, 2001 or 8.51%
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)
SEPTEMBER 30, 2001 DECEMBER 31, 2000
--------------------------- ---------------------------
AMOUNT PERCENT AMOUNT PERCENT
---------- ---------- ---------- ----------
Commercial and Agricultural $ 90,313 10.47% $ 75,317 9.28%
Commercial Real Estate 248,237 28.78% 222,571 27.44%
Residential Real Estate 314,389 36.44% 305,302 37.63%
Construction 73,405 8.51% 73,087 9.01%
Consumer 135,037 15.65% 134,330 16.56%
Other 1,308 0.15% 649 0.08%
---------- ---------- ---------- ----------
Total $ 862,689 100.00% $ 811,256 100.00%
========== ========== ========== ==========
19
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 $9.4 million at September
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) SEPTEMBER 30 JUNE 30 MARCH 31 DECEMBER 31 SEPTEMBER 30
2001 2001 2001 2000 2000
-------- -------- -------- -------- --------
Nonaccrual $ 5,361 $ 5,167 $ 5,192 $ 5,397 $ 5,939
Ninety Days Past Due 1,418 1,442 1,393 1,208 1,182
Other Real Estate Owned $ 2,595 $ 2,614 $ 2,591 2,406 2,780
-------- -------- -------- -------- --------
9,374 9,223 9,176 $ 9,011 $ 9,901
======== ======== ======== ======== ========
Restructured loans
performing in accordance
with modified terms $ 443 $ 445 $ 446 $ 437 $ 448
======== ======== ======== ======== ========
Non-accrual loans decreased $36,000 from December 2000 and $578,000 from
September 30, 2000, while ninety day past due loans increased $210,000 and
$236,000 over December 31, 2000 and September 30, 2000. Other real estate owned
also increased by $189,000 over December and decreased $185,000 from September
2000. Included in the ninety days past due category are two loans with FmHA and
SBA guaranteed balances comprising $702,000 of the total 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 changes in other real
estate owned are due to the foreclosure and disposition of properties and no
individually significant changes were noted. 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 $132.5 million at September 30, 2001
increasing $11.8 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 September 30, 2001, the Company's
total risk adjusted capital-to-asset ratio was 13.08%. The Company's leverage
ratio at September 30, 2001 was 8.48% 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 ($50.3 million), investment securities available for
sale ($261.4 million) and Federal Home Loan Bank credit availability of
approximately $117.0 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.
20
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 a greater asset sensitive position. 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 nine 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 nine months of 2001 have lead to an increase in the banks overall
liquidity position as reflected in the level of cash reserves of approximately
$50.3 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 purchasers 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.
21
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 September 17, 2001, announcing the
Company's reinstitution of its Stock Repurchase Program.
A report on Form 8-K was filed on October 17, 2001, announcing the
Company's quarterly earnings and depicting certain financial
information as of September 30, 2001 and December 31, 2000 and
comparative income statements for the three-month periods ending
September 30, 2001 and 2000, respectively, compared to previously
reported financial information for the preceding four quarters.
22
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 14, 2001
/s/ John M. Mendez
- ------------------------------
John M. Mendez
President & Chief Executive Officer
(Duly Authorized Officer)
DATE: November 14, 2001
/s/ Kenneth P. Mulkey
- ------------------------------
Kenneth P. Mulkey
Acting Chief Financial Officer
(Principal Accounting Officer)
23