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: March 31, 2002
--------------
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)
(276) 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 April 30, 2002
Common Stock, $1 Par Value 9,950,982
----------------------------
First Community Bancshares, Inc.
FORM 10-Q
For the quarter ended March 31, 2002
INDEX
PART I. FINANCIAL INFORMATION REFERENCE
---------
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 2002 and
December 31, 2001 3
Consolidated Statements of Income for the Three
Months Ended March 31, 2002 and 2001 4
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 2002 and 2001 5
Consolidated Statements of Changes in Stockholders'
Equity for the Three Months Ended March 31,
2002 and 2001 6
Notes to Consolidated Financial Statements 7-12
Independent Accountants' Review Report 13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14-21
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 21
Item 3. Defaults Upon Senior Securities 21
Item 4. Submission of Matters to a Vote of 21
Security Holders
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22
SIGNATURES 24
2
PART I. ITEM 1. FINANCIAL STATEMENTS
FIRST COMMUNITY BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in Thousands, Except Share Data)
- -------------------------------------------------------------------------------
March 31 December 31
2002 2001
Assets (Unaudited) (Note 1)
----------- -----------
Cash and due from banks $ 28,547 $ 47,566
Interest-bearing balances-FHLB 830 249
Securities available for sale (amortized cost of $369,142 at
March 31, 2002; $352,759 at December 31, 2001) 368,526 354,007
Securities held to maturity (fair value of $43,067 at
March 31, 2002; $43,393 at December 31, 2001) 41,446 41,884
Loans held for sale 47,596 65,532
Loans, net of unearned income 911,746 904,496
Less allowance for loan losses 14,271 13,952
----------- -----------
Net loans 897,475 890,544
Premises and equipment 21,927 21,713
Other real estate owned 2,538 3,029
Interest receivable 9,139 8,765
Other assets 23,459 18,468
Goodwill 25,055 25,350
Other intangible assets 1,070 1,128
----------- -----------
Total Assets $ 1,467,608 $ 1,478,235
=========== ===========
Liabilities
Deposits:
Noninterest-bearing $ 152,980 $ 161,346
Interest-bearing 929,226 916,914
----------- -----------
Total Deposits 1,082,206 1,078,260
Interest, taxes and other liabilities 16,135 15,852
Fed Funds Purchased 4,560 26,500
Securities sold under agreements to repurchase 79,238 79,262
FHLB borrowings and other indebtedness 149,467 145,320
----------- -----------
Total Liabilities 1,331,606 1,345,194
----------- -----------
Stockholders' Equity
Common stock, $1 par value; 15,000,000 shares authorized; 9,956,714 issued in
2002 and 9,955,425 issued in 2001; and 9,950,982 and 9,936,442
outstanding in 2002 and 2001, respectively 9,957 9,955
Additional paid-in capital 58,600 60,189
Retained earnings 67,981 62,566
Treasury stock, at cost (167) (424)
Accumulated other comprehensive (loss) income (369) 755
----------- -----------
Total Stockholders' Equity 136,002 133,041
----------- -----------
Total Liabilities and Stockholders' Equity $ 1,467,608 $ 1,478,235
=========== ===========
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)
- -------------------------------------------------------------------------------
Three Months
Ended
March 31
2002 2001
---------- ----------
Interest Income:
Interest and fees on loans held for investment $ 18,036 $ 18,129
Interest and fees on loans held for sale 844 611
Interest on securities-taxable 3,378 2,679
Interest on securities-nontaxable 1,742 1,384
Interest on federal funds sold and deposits in banks 43 98
---------- ----------
Total interest income 24,043 22,901
---------- ----------
Interest Expense:
Interest on deposits 6,993 8,411
Interest on borrowings 2,577 2,575
---------- ----------
Total interest expense 9,570 10,986
---------- ----------
Net interest income 14,473 11,915
Provision for loan losses 937 747
---------- ----------
Net interest income after provision for loan losses 13,536 11,168
---------- ----------
Noninterest Income:
Fiduciary income 343 409
Service charges on deposit accounts 1,463 1,305
Other service charges, commissions and fees 326 477
Mortgage banking income 3,249 1,745
Other operating income 296 231
Gain on sale of securities 177 51
---------- ----------
Total noninterest income 5,854 4,218
---------- ----------
Noninterest Expense:
Salaries and employee benefits 5,803 4,671
Occupancy expense of bank premises 743 662
Furniture and equipment expense 503 463
Goodwill and core deposit amortization 287 556
Other operating expense 3,501 2,601
---------- ----------
Total noninterest expense 10,837 8,953
---------- ----------
Income before income taxes 8,553 6,433
Income tax expense 2,375 1,977
---------- ----------
Net Income $ 6,178 $ 4,456
========== ==========
Basic and diluted earnings per common share $ 0.62 $ 0.45
========== ==========
Weighted average basic shares outstanding 9,933,222 9,945,443
========== ==========
Weighted average diluted shares outstanding 9,977,531 9,951,840
========== ==========
See Notes to Consolidated Financial Statements.
4
FIRST COMMUNITY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) (UNAUDITED)
- -------------------------------------------------------------------------------
Three Months Ended
March 31
2002 2001
--------- ---------
Operating Activities
Cash flows from operating activities:
Net income $ 6,178 $ 4,456
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Provision for loan losses 937 747
Depreciation of premises and equipment 376 373
Amortization of intangible assets 237 529
Net investment amortization and accretion 415 31
Net gain on the sale of assets (1,928) (931)
Mortgage loans originated for sale (148,816) (115,665)
Proceeds from sale of mortgage loans 168,074 69,239
Increase in interest receivable (374) 1,157
Decrease in other assets (4,126) (839)
Increase in other liabilities 1,214 1,765
Other, net 597 (4)
--------- ---------
Net cash provided by (used in) operating activities 22,784 (39,142)
--------- ---------
Investing Activities
Cash flows from investing activities:
Proceeds from sales of securities available for sale 2,792 7,444
Proceeds from maturities and calls of securities available for sale 12,297 31,664
Proceeds from maturities and calls of investment securities 445 1,246
Purchase of securities available for sale (31,719) (838)
Net increase in loans made to customers (7,414) (11,978)
Purchase of premises and equipment (842) (1,014)
--------- ---------
Net cash (used in) provided by investing activities (24,441) 26,524
--------- ---------
Financing Activities
Cash flows from financing activities:
Net increase in demand and savings deposits 16,938 6,579
Net (decrease) increase in time deposits (12,893) 19,958
Net (decrease) increase in short-term debt (17,712) 8,536
Repayment of long-term debt (105) (4)
Acquisition of treasury stock (521) (223)
Dividends paid (2,488) (2,084)
--------- ---------
Net cash (used in) provided by financing activities (16,781) 32,762
--------- ---------
Cash and Cash Equivalents
Net (decrease) increase in cash and cash equivalents (18,438) 20,144
Cash and cash equivalents at beginning of year 47,815 50,243
--------- ---------
Cash and cash equivalents at end of year $ 29,377 $ 70,387
========= =========
See Notes to Consolidated Financial Statements.
5
FIRST COMMUNITY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE INFORMATION), (UNAUDITED)
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID-IN RETAINED TREASURY COMPREHENSIVE
STOCK CAPITAL EARNINGS STOCK (LOSS) INCOME TOTAL
------ ---------- -------- -------- ------------- --------
Balance January 1, 2001 9,052 35,273 78,097 (202) (1,538) 120,682
Comprehensive income:
Net income -- -- 4,456 -- -- 4,456
Other comprehensive income, net of tax:
Net unrealized gains on
securities available for sale -- -- -- -- 2,536 2,536
-------- -------- --------
Comprehensive income -- -- 4,456 -- 2,536 6,992
Common dividends declared
($.23 per share) -- -- (2,084) -- -- (2,084)
Purchase 10,381 treasury shares at
$21.51 per share -- -- -- (224) -- (224)
Treasury share distribution to ESOP -- 29 -- 378 -- 407
-------- -------- -------- ----- -------- --------
Balance March 31, 2001 9,052 35,302 80,469 (48) 998 125,773
======== ======== ======== ===== ======== ========
Balance January 1, 2002 9,955 60,189 62,566 (424) 755 133,041
Comprehensive income:
Net income -- -- 6,178 -- -- 6,178
Other comprehensive income, net of tax:
Net unrealized gains on
securities available for sale -- -- -- -- (1,124) (1,124)
-------- -------- --------
Comprehensive income -- -- 6,178 -- (1,124) 5,054
Common dividends declared
($.25 per share) -- -- (2,488) -- -- (2,488)
10% stock dividend and fractional share
adjustment 2 (1,729) 1,725 (14) -- (16)
Purchase 17,844 treasury shares at
$29.19 per share -- -- -- (521) -- (521)
Treasury share distribution to ESOP -- 140 -- 792 -- 932
-------- -------- -------- ----- -------- --------
Balance March 31, 2002 9,957 58,600 67,981 (167) (369) 136,002
======== ======== ======== ===== ======== ========
See Notes to Consolidated Financial Statements.
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. UNAUDITED FINANCIAL STATEMENTS
The unaudited consolidated balance sheet as of March 31, 2002 and the unaudited
consolidated statements of income, cash flows and changes in stockholders'
equity for the three months ended March 31, 2002 and 2001 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
March 31, 2002 and its results of operations, cash flows, and changes in
stockholders' equity for the three months ended March 31, 2002 and 2001 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, 2001 has been extracted from
audited financial statements included in the Company's 2001 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 2001 Annual Report of FCBI.
NOTE 2. STOCK DIVIDEND
On February 19, 2002, the Company's Board of Directors authorized a 10% stock
dividend to shareholders of record March 1, 2002, which was distributed March
28, 2002. Average shares outstanding and per share amounts included in the
consolidated financial statements have been adjusted to give effect to the stock
dividend. Stockholders equity beginning balances as of January 1, 2002 have been
adjusted to reflect the effect of the 10% stock dividend. Fractional share
adjustments are reflected in the current period ended March 31, 2002.
NOTE 3. MERGERS AND ACQUISITIONS
On December 7, 2001, the Company completed the acquisition of several branches
of Branch Banking and Trust Company of Virginia ("BB&T") and F & M Bank -
Southern Virginia ("F&M") located in Clifton Forge, Emporia, and Drakes Branch,
Virginia. The total consideration paid of $3.6 million resulted in an intangible
asset of approximately $3.8 million. The consummation of this transaction
resulted in $77 million in cash, an additional $114 million in deposits to the
Bank, and $31 million in additional loans.
NOTE 4. BORROWINGS
Structured term borrowings from the Federal Home Loan Bank (FHLB) of Atlanta of
$125 million in convertible and callable advances and $20 million of noncallable
term advances are presently being used as funding vehicles.
The callable advances may be called based on predefined factors in quarterly
increments after a lockout period, which may substantially shorten the lives of
these instruments. If these advances are called, the debt may be paid in full,
converted to another FHLB credit product, or converted to an adjustable rate
advance. Contractual maturities of the callable advances are $25 million in 2002
and $100 million in 2010.
The above referenced noncallable term borrowings with the FHLB of $20 million as
of March 31, 2002 have defined maturities. $10 million of this debt matures in
2002, $8 million matures in 2003, and the $2 million matures in 2008.
NOTE 5. COMMITMENTS AND CONTINGENCIES
The Company is currently a defendant in various legal actions and asserted
claims most of which involve lending and collection activities arising 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 or results of operations of the
Company.
For loans to be sold, the Company enters into forward commitments or derivatives
to manage the risk inherent in interest rate lock commitments made to potential
borrowers. The inventory of loans and loan commitments (both retail and
wholesale) are hedged to protect the Company from 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 derivative financial instruments derived from these hedging
transactions are recorded at fair value in the Consolidated Balance Sheets and
the changes in fair value are reflected in the Consolidated Statements of
Income.
7
As of March 31, 2002, UFM held an investment in the underlying notional value of
investments in securities ("forward commitments") of $61.0 million and had
interest rate lock commitments of $73.9 million. The combined market value of
the commitments on forwards and loan commitments as of March 31, 2002 and
December 31, 2001 is $1.1 million and $480,000, respectively. The increase in
the fair value is due to an increase in the volume and the change in pricing of
the forward commitments from December 31, 2001 to March 31, 2002. This hedging
strategy is managed through a series of mathematical tools that are used to
quantify the exposure to changes in interest rates and UFM simultaneously enters
into forward transactions to minimize the potential volatility of losses as
rates change.
NOTE 6. 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:
THREE MONTHS ENDED
MARCH 31 MARCH 31
2002 2001
-------- --------
(AMOUNTS IN THOUSANDS)
OTHER COMPREHENSIVE INCOME:
Unrealized (losses) gains arising during the period $(1,687) $ 4,275
Tax benefit (expense) 669 (1,708)
------- -------
Unrealized (losses) gains arising during the period, net of tax (1,018) 2,567
Reclassification adjustment for gains realized in net
income (177) (51)
Tax expense of reclassification 71 20
------- -------
Other comprehensive (loss) income (1,124) 2,536
Beginning accumulated other comprehensive gain (loss) 755 (1,538)
------- -------
Ending accumulated other comprehensive (loss) income $ (369) $ 998
======= =======
NOTE 7. 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 bank that offers 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.
8
Information for each of the segments is included below.
THREE MONTHS ENDED MARCH 31, 2002
(AMOUNTS IN THOUSANDS)
COMMUNITY MORTGAGE
BANKING BANKING PARENT ELIMINATIONS TOTAL
---------- ---------- ---------- ------------ ----------
Net interest income $ 14,122 $ 289 $ 57 $ 5 $ 14,473
Provision for loan losses 937 -- -- -- 937
---------- ---------- ---------- ---------- ----------
Net interest income after provision
for loan losses 13,185 289 57 5 13,536
Other income 2,347 3,249 395 (137) 5,854
Other expenses 8,350 2,379 240 (132) 10,837
---------- ---------- ---------- ---------- ----------
Income before income taxes 7,182 1,159 212 -- 8,553
Income tax expense 1,860 455 60 -- 2,375
---------- ---------- ---------- ---------- ----------
Net income $ 5,322 $ 704 $ 152 $ -- $ 6,178
========== ========== ========== ========== ==========
Average assets $1,451,354 $ 54,087 $ 136,430 $ (185,008) $1,456,863
========== ========== ========== ========== ==========
THREE MONTHS ENDED MARCH 31, 2001
(AMOUNTS IN THOUSANDS)
COMMUNITY MORTGAGE
BANKING BANKING PARENT ELIMINATIONS TOTAL
---------- ---------- ---------- ------------ ----------
Net interest income $ 11,792 $ (34) $ 76 $ 81 $ 11,915
Provision for loan losses 747 -- -- -- 747
---------- ---------- ---------- ---------- ----------
Net interest income after provision
for loan losses 11,045 (34) 76 81 11,168
Other income 2,471 1,747 -- -- 4,218
Other expenses 7,273 1,520 79 81 8,953
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes 6,243 193 (3) -- 6,433
Income tax expense (benefit) 1,921 60 (4) -- 1,977
---------- ---------- ---------- ---------- ----------
Net income $ 4,322 $ 133 $ 1 $ -- $ 4,456
========== ========== ========== ========== ==========
Average assets $1,229,483 $ 30,592 $ 123,648 $ (160,512) $1,223,211
========== ========== ========== ========== ==========
NOTE 8. RECENT ACCOUNTING DEVELOPMENTS
On June 29, 2001, the FASB approved Statements of Financial Accounting Standards
No. 141, Business Combinations (Statement 141) and No. 142, Goodwill and Other
Intangible Assets (Statement 142). These Statements drastically change the
accounting for business combinations, goodwill, and intangible assets.
Statement 141 eliminated the pooling-of-interests method of accounting for
business combinations except for qualifying business combinations that were
initiated prior to July 1, 2001. The requirements of Statement 141 are effective
for any business combination accounted for by the purchase method that is
completed after June 30, 2001.
Statement 142 supersedes APB Opinion No. 17, Intangible Assets and carries
forward its provisions related to internally developed intangible assets without
the FASB's reconsideration. Under Statement 142, certain goodwill and indefinite
lived intangible assets are no longer amortized but are reviewed annually, or
more frequently if impairment indicators arise, for impairment. Goodwill is
required to be tested for impairment between the annual tests if an event occurs
or circumstances change that more-likely-than-not reduce the fair value of a
reporting unit below its carrying value. An indefinite lived intangible asset is
required to be tested for impairment between the annual tests if an event occurs
or
9
circumstances change indicating that the asset might be impaired. Separable
intangible assets that have finite lives will continue to be amortized over
their useful lives, for which Statement 142 does not impose a limit. Goodwill
within the scope of Statement 72 will continue to be amortized and will be
tested for impairment.
Effective January 1, 2002, FCBI ceased amortization of certain goodwill in
accordance with FASB Statement 142. The following table depicts the pro forma
effect of Statement 142 on earnings and earnings per share for the quarter ended
March 31, 2001.
(AMOUNTS IN THOUSANDS EXCEPT EARNINGS PER SHARE AMOUNTS)
THREE MONTHS ENDED
MARCH 31,
2002 2001
------- --------
Reported net income $ 6,178 $ 4,456
Add back: goodwill amortization, net of tax - 355
------- --------
Adjusted net income $ 6,178 $ 4,811
======= ========
Basic and diluted earnings per share:
Reported net income $ 0.62 $ 0.45
Goodwill amortization, net of tax - 0.04
------- --------
Adjusted net income $ 0.62 $ 0.49
======= ========
In accordance with the new disclosure requirements of FASB Statement 142, the
following information is presented regarding intangibles subject to amortization
and those not subject to amortization.
AS OF DECEMBER 31, 2001
-------------------------------------
(AMOUNTS IN THOUSANDS)
GROSS NET
CARRYING ACCUMULATED CARRYING
AMOUNT AMORTIZATION AMOUNT
-------- ------------ --------
Goodwill subject to amortization $ 13,972 $ 2,761 $ 11,211
Goodwill not subject to amortization $ 23,259 $ 9,120 $ 14,139
Core deposit intangibles subject to amortization $ 2,349 $ 1,221 $ 1,128
The net carrying amount of goodwill of $25,350 as of December 31, 2001 is
comprised of goodwill recorded in the community banking segment of $24,347 and
goodwill recorded in the mortgage banking segment of $1,003.
10
The amortization expense for goodwill subject to amortization and core deposit
intangibles for each of the next 5 years is as follows:
(AMOUNTS IN THOUSANDS)
2002 $ 1,165
2003 $ 1,105
2004 $ 1,086
2005 $ 1,078
2006 $ 1,038
FASB Statement 142 requires a transitional impairment test to be applied to all
goodwill and other indefinite-lived intangible assets within the first six
months after adoption. The impairment test involves identifying separate
reporting units based on the reporting structure of the Corporation, then
assigning all assets and liabilities, including goodwill, to these units.
Goodwill is assigned based on the reporting unit benefiting from the factors
that gave rise to the goodwill. Each reporting unit is then tested for goodwill
impairment by comparing the fair value of the unit with its book value,
including goodwill. If the fair value of the reporting unit is greater than its
book value, no goodwill impairment exists. However, if the book value of the
reporting unit is greater than its determined fair value, goodwill impairment
may exist and further testing is required to determine the amount, if any, of
the actual impairment loss. Any impairment loss determined with this
transitional test would be reported as a change in accounting principle. The
Corporation has completed a preliminary transitional impairment test of goodwill
and based on current information does not expect to record an impairment loss as
a result of this test.
NOTE 9. EARNINGS PER SHARE
The Company's basic and diluted earnings per share were $0.62 and $0.45
(adjusted from $0.49 for the 10% stock dividend) for the quarters ending March
31, 2002 and 2001, respectively. The dilutive shares of 44,309 in March 31,
2002, and 6,397 in March 31, 2001 did not have a material impact on the
Company's earnings per share.
NOTE 10. PROVISION AND ALLOWANCE FOR LOAN LOSSES
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. 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. In developing the allowance for loan losses, the Company
also considers various inherent risk factors, such as current economic
conditions, the level of delinquencies and nonaccrual loans, trends in the
volume and term of loans, anticipated impact from changes in lending policies
and procedures, and any concentration of credits in certain industries or
geographic areas.
11
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.
12
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 March 31, 2002 and the related
consolidated statements of income, cash flows and changes in stockholders'
equity for the three month periods ended March 31, 2002 and 2001. 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
as of December 31, 2001, and the related consolidated statements of income,
changes in stockholders' equity, and cash flows for the year then ended (not
presented herein); and in our report dated February 8, 2002, 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, 2001, 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
April 20, 2002
13
FIRST COMMUNITY BANCSHARES, INC.
PART I. 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 2001
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 $1.47 billion at March 31, 2002. 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 38 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.
RESULTS OF OPERATIONS
Net income for the first quarter of 2002 totaled $6.2 million; $1.7 million, or
38.64% higher than net income of $4.5 million reported for the corresponding
first quarter of 2001. Net income for the first quarter of the current and prior
year resulted in basic and diluted earnings per share of $0.62 versus $0.45
(adjusted for the 10% stock dividend), respectively, a 37.78% increase. The
largest factors contributing to this increase are a $2.56 million increase in
net interest income, (the result of a $1.0 million increase in investment
security income and a $1.4 million decrease in interest expense), and a $1.5
million increase in mortgage banking income. Partially offsetting these
increases was an increase of approximately $1.1 million in salaries and benefits
and a $0.9 million increase in other operating expenses.
NET INTEREST INCOME
Net interest income, the largest contributor to earnings was $14.5 million for
the first three months of 2002 compared with $11.9 million for the corresponding
period in 2001. Tax equivalent net interest income totaled $15.5 million for the
first three months of 2002, an increase of $2.7 million from the $12.8 million
reported in the first three months of 2001. This increase in net interest income
relates largely to the combination of an increase in
14
average earning assets of $231.4 million, with a corresponding 108 basis point
decline in yield compared to the prior year, and a $186.1 million increase in
average interest bearing liabilities with an offsetting 125 basis point decline
in the cost of funds. The impact of these rate and volume changes resulted in a
17 basis point increase in the spread between interest earning assets and
interest bearing liabilities.
The Company's tax equivalent net interest margin of 4.64% for the first three
months of 2002 reflects a slight increase of 3 basis points in comparison to the
first three months of 2001 when the tax equivalent net interest margin was
4.61%. Average loans held for investment balances increased $92.6 million while
the overall tax equivalent loan yield decreased 96 basis points from the prior
year to 8.02%. Likewise, the average loans held for sale balance increased $19.8
million and decreased 168 basis points in yield to 7.14%. Additionally, the
taxable equivalent yields on securities available for sale decreased 84 basis
points to 6.02% while the tax equivalent yield on investment securities held to
maturity remained the same. The yield on interest-bearing balances with banks
decreased substantially to 1.68%. The overall tax equivalent yield on average
earning assets decreased 108 basis points from 8.59% to 7.51% for the three
months ended March 31, 2002, compared to March 31, 2001.
Decreases in key lending rates, (throughout 2001, there were 11 reductions in
the Federal Reserve discount rates) corresponded with a reduction in the
Company's overall loan yield when comparing March 31, 2002 to the same period in
2001. The increase in average outstanding loans was funded through investment
portfolio roll-off, increases in the level of deposits and increased wholesale
funding through the FHLB.
The $118 million increase in the average balance of securities available for
sale when comparing the three months ended March 31, 2002 to 2001, was largely
the result of investing funds received from new deposit growth and the purchase
of the four new BB&T and F&M branches in the last quarter of 2001.
The cost of interest-bearing liabilities decreased by 125 basis points from
4.64% in 2001 to 3.39% in 2002. Average short-term and FHLB borrowings increased
by $10 million compared to the prior year while the rate paid decreased 13 basis
points to 5.95% from 6.07%. The rate paid on long-term debt remained the same.
The average balances of interest-bearing demand and savings deposits increased
$50.7 and $19.9 million while the average rates decreased 100 and 70 basis
points, respectively. Average time deposits increased $79.4 million and the
average rate paid decreased 150 basis points from 5.76% in 2001 to 4.26% in
2002. Average Fed Funds and repurchase agreements increased $26.1 million when
comparing the quarter ended March 31, 2002 to March 31, 2001 while the average
rate decreased 195 basis points. Average noninterest-bearing demand deposits
increased $32.6 million in 2002 compared to the quarter ended March 31, 2001.
On a taxable equivalent basis, net interest income increased $1.0 million in the
first quarter of 2002 compared to the fourth quarter of 2001. A 33 basis point
decrease in rate paid on interest-bearing liabilities offset a 13 basis point
decline in the average rate earned on interest-earning assets, increasing the
net interest margin 12 basis points to 4.64%. Average earning assets increased
$86.2 million in the first quarter of 2002 compared to the fourth quarter of
2001, with average securities available for sale increasing $60.1 million and
average loans held for investment increasing $38 million. In the first quarter
of 2002, average interest-bearing deposits with banks decreased $8.5 million and
average loans held for sale decreased $2.6 million when compared to the fourth
quarter of 2001. Total interest-bearing liabilities increased $83 million with
average interest-bearing deposits increasing $79.1 million, while the average
rate paid on these deposits dropped 36 basis points when comparing the first
quarter of 2002 to the fourth quarter of 2001. Average Fed Funds and repurchase
agreements increased $3.9 million as the average rate paid decreased 28 basis
points when comparing the first quarter of 2002 to the fourth quarter of 2001.
Additional funding needed to facilitate loan growth is currently being provided
through increased deposit levels and short-term borrowings obtained through the
Federal Home Loan Bank. The usage of FHLB credit programs is a significant
component of the Company's overall liquidity and funding strategy.
15
AVERAGE BALANCE SHEETS AND
NET INTEREST INCOME ANALYSIS
- -------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS)
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 2002 MARCH 31, 2001
AVERAGE INTEREST YIELD/RATE AVERAGE INTEREST YIELD/RATE
BALANCE (1) (2) (2) BALANCE (1) (2) (2)
------------------------------------ -------------------------------------
Earning Assets:
Loans (3)
Loans Held for Sale $ 47,928 $ 844 7.14% $ 28,105 $ 611 8.82%
Loans Held for Investment:
Taxable 908,406 17,949 8.01% 814,496 17,993 8.96%
Tax-Exempt 6,343 133 8.50% 7,688 210 11.08%
------------ ---------- ------- ----------- ---------- -------
Total 914,749 18,082 8.02% 822,184 18,203 8.98%
Allowance for Loan Losses (14,426) (12,407)
------------ ---------- ----------- ----------
Net Total 900,323 18,082 809,777 18,203
Securities Available For Sale:
Taxable 254,141 3,339 5.33% 164,869 2,621 6.45%
Tax-Exempt 97,090 1,874 7.83% 67,942 1,317 7.86%
------------ ---------- ------- ----------- ---------- -------
Total 351,231 5,213 6.02% 232,811 3,938 6.86%
Investment Securities:
Taxable 2,054 39 7.70% 3,184 58 7.39%
Tax-Exempt 39,662 807 8.25% 39,731 812 8.29%
------------ ---------- ------- ----------- ---------- -------
Total 41,716 846 8.22% 42,915 870 8.22%
Interest Bearing Deposits 10,400 43 1.68% 6,579 98 6.04%
Fed Funds Sold - - 0.00% - - 0.00%
------------ ---------- ------- ----------- ---------- -------
Total Earning Assets 1,351,598 25,028 7.51% 1,120,187 23,720 8.59%
---------- ----------
Other Assets 105,265 103,024
------------ -----------
Total $ 1,456,863 $ 1,223,211
============= ===========
Interest-Bearing Liabilities:
Demand Deposits $ 188,542 490 1.05% $ 137,795 698 2.05%
Savings Deposits 150,377 381 1.03% 130,480 557 1.73%
Time Deposits 583,048 6,122 4.26% 503,614 7,156 5.76%
Fed Funds Purchased & Repurchase
Agreements 78,887 448 2.30% 52,832 554 4.25%
Short-term Borrowings 135,000 1,979 5.95% 125,000 1,871 6.07%
Long-term Borrowings 10,158 150 5.99% 10,177 150 5.98%
------------ ---------- ------- ----------- ---------- -------
Total Interest-bearing Liabilities 1,146,012 9,570 3.39% 959,898 10,986 4.64%
Demand Deposits 157,055 124,472
Other Liabilities 16,612 14,757
Stockholders' Equity 137,184 124,084
------------ -----------
Total $ 1,456,863 $ 1,223,211
============ ===========
Net Interest Income 15,458 12,734
========== ==========
Net Interest Rate Spread (3) 4.12% 3.95%
======= =======
Net Interest Margin 4.64% 4.61%
======= =======
(1) Interest amounts represent taxable equivalent results for the first three
months of 2002 and 2001.
(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.
16
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses was $14.3 million on March 31, 2002 and $12.4
million on March 31, 2001. The provision and underlying allowance for loan
losses is quantified through a series of objective measures, economic
indications, and estimated levels of losses within various loan types that
portray inherent weaknesses. To maintain a balance in the allowance for loan
losses sufficient to absorb probable loan losses, charges are made to the
provision for loan losses. The $937,000 provision made in the first three months
of 2002 compared to the $747,000 for the corresponding period in 2001, reflects
the increase in allowance for loan losses to cover significant average loan
growth of $92.6 million over March 31, 2001, as well as the consideration of
certain current economic conditions that suggest, through statistically compiled
industry analysis, an increase in national loss trends.
First Community's allowance for loan loss activity for the three month periods
ended March 31, 2002 and March 31, 2001 is as follows:
FOR THE THREE MONTHS ENDED
MARCH 31
(AMOUNTS IN THOUSANDS)
2002 2001
-------- --------
Beginning balance $ 13,952 $ 12,303
Provision 937 747
Charge-offs (820) (861)
Recoveries 202 219
--------- ---------
Ending Balance $ 14,271 $ 12,408
========= =========
Using the allowance for loan losses of approximately $14.3 million and $12.4
million at March 31, 2002 and 2001, respectively, the allowance to loans held
for investment ratios were 1.57% and 1.51% at the respective dates.
Net charge-offs for the first three months of 2002 were $618,000 compared with
$642,000 for the corresponding period in 2001. Expressed as a percentage of
average loans held for investment, net charge-offs were .07% for the three month
period ended March 31, 2002 and .08% for the corresponding period in 2001. As of
March 31, 2002, the allowance as a percentage of non-performing loans was 295.1%
as compared to 188.4% at December 31, 2001.
NON-INTEREST INCOME
Non-interest income consists of all revenues, which are not included in interest
and fee income related to earning assets. Total non-interest income increased
approximately $1.6 million, or 38.8% from $4.2 million for the three months
ended March 31, 2001 to $5.8 million for the corresponding period in 2002. The
largest portion of this increase resulted from the mortgage brokerage operations
of UFM, which recognized approximately $3.2 million of other income in 2002
versus $1.7 million for the comparable three-month period in 2001. This increase
is directly tied to the increased loan production of UFM in late 2001 and the
first quarter 2002 compared to production of the corresponding periods of 2001.
When comparing the first quarter 2002 to the first quarter of 2001 exclusive of
UFM, noninterest income increased $131,000, or 5.34%. Included in this increase
was a $159,000 increase in service charges on deposit accounts (primarily the
result of a new customer-sensitive overdraft program that allows well-managed
customer deposit accounts greater flexibility in managing overdrafts and, in
turn, has achieved higher levels of overdraft charges with minimal charge-offs
of overdrawn accounts), a $125,000 increase in security gains, and a $64,000
increase in other operating income. Decreases partially offsetting these gains
were a $66,000 decrease in fiduciary income, and a $151,000 decrease in other
service charges commissions and fees. Fiduciary earnings correspond to the asset
management fees recorded and have declined from the prior year as a direct
result of a reduction in new estate and trust management activity in the current
year.
NONINTEREST EXPENSE
Non-interest expense totaled $10.8 million in the first three months of 2002,
increasing $1.9 million over the corresponding period in 2001. This increase is
primarily attributable to a $1.1 million increase in salaries and benefits,
$232,000 of which was due to the acquisition of the four BB&T & F&M branches in
the fourth quarter of 2001, a
17
$523,000 increase in salaries and commissions in the mortgage operations of UFM
(mostly due to increased loan production) and a general increase in salaries
cost as staffing needs at several locations were satisfied in order to support
new infrastructure and continued growth.
Other operating expenses increased $900,000 in March 2002 compared to March 2001
with increased other operating costs associated with UFM of $336,000 (again,
largely tied to increased loan production) being the largest component of the
change. Other increases in other operating expenses were an additional $86,000
of costs for the new branches and an increase of $66,000 in OREO expenses. Other
costs associated with the acquisitions such as data communications, supplies and
other service fees account for a large portion of the remaining increase.
In the first quarter of 2002, occupancy expense increased by $81,000 when
compared to the first quarter of 2001, $37,000 of which was due to the new
branches while another $19,000 increase was due to additional expenses of UFM.
Furniture, fixtures and equipment expense increased $40,000; $17,000 of which
was attributable to the new branches with the remainder largely due to
additional equipment rental costs of UFM.
In connection with the adoption of FASB Statement No. 142, the Company ceased
amortization of certain goodwill beginning January 1, 2002, as required by the
Statement. In order to maintain comparability, a pro forma adjustment of
$355,000 would be necessary to conform the prior period 2001 amount to current
year presentation.
The effective income tax rate has been impacted by the Company's continued
emphasis on the utilization of tax-exempt municipal securities and the
discontinuance of amortizing goodwill that was not deductible for income tax
purposes. Municipal securities have offered an attractive tax equivalent yield
and have helped to counter the effect of the declining interest rate
environment.
FINANCIAL POSITION
SECURITIES
Investment securities, which are purchased with the intent to hold until
maturity, totaled $41.4 million at March 31, 2002, a decrease of $438,000 from
December 31, 2001. This 1.0% decrease is largely the result of maturities and
calls within the portfolio during the first quarter of 2002. The market value of
investment securities held to maturity was 103.9% and 103.6% of book value at
March 31, 2002 and December 31, 2001, respectively. The market value of fixed
rate debt securities reacts inversely to rising interest rates; consequently,
recent trends in interest rates have had a negative effect on the underlying
market value since December 31, 2001, due to a general increase in market
offering rates for similar securities as a result of the securities markets
current bias toward a rising rate environment. However, the target short-term
Federal Reserve discount rate and the key prime rates have remained unchanged
since year end 2001.
Securities available for sale were $368.5 million at March 31, 2002 compared to
$354.0 million at December 31, 2001, an increase of $14.5 million. This change
reflected the purchase of $30.6 million in securities, $1.5 million in
maturities and calls, the sale of a $1.2 million security, and the continuation
of larger pay-downs triggered by the rate environment. 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 $369,000 at March 31, 2002, can be contrasted to
a $755,000 gain at December 31, 2001 due to market value decreases in the first
three months of 2002.
LOAN PORTFOLIO
LOANS HELD FOR SALE
The relative size of the portfolio of loans originated by the Company's mortgage
brokerage division, UFM, and held for sale was impacted greatly by the
refinancing activity that occurred during 2001, as evidenced by the substantial
volume of loans originated and sold during the prior year. Average loans held
for sale increased $19.8 million during the first quarter of 2002 compared to
the first quarter of 2001 due to a substantial increase in mortgage refinance
activity prompted by the lower interest rate environment in 2001.
Consistent with the gradual increase in mortgage rates experienced in the first
quarter of 2002, as well as the volume of loans delivered to investors in the
latter part of March 2002, the loans funded and in the process of delivery
declined from year end 2001 by $17.9 million to $47.6 million in March 31, 2002.
Average loans held for sale decreased $2.6 million in the first quarter of 2002
compared to the fourth quarter of 2001.
18
The loan to deposit ratio (including loans held for sale) decreased slightly
from the year end 2001 ratio of 89.96% to 88.65% in March 31, 2002 while the
first quarter of 2001 was 95.14%.
LOANS HELD FOR INVESTMENT
Total loans held for investment increased $7.2 million from $904.5 million at
December 31, 2001 to $911.7 million at March 31, 2002. The substantial increase
in deposits during 2001 year has lowered the loan to deposit ratio from its
first quarter 2001 level. The loan to deposit ratio using only loans held for
investment (excluding loans held for sale) was 83.88% on December 31, 2001versus
84.25% on March 31, 2002 and 88.78% on March 31, 2001.
Average loans held for investment increased $92.6 million when comparing the
first three months of 2002 and 2001, the result of extensive sales and marketing
efforts, a concentration on relationship management and development, and the
acquisition of approximately $31 million of loans in December 2001 as part of
the BB&T and F&M branches.
Largely the result of the branch acquisitions, average loans held for investment
increased $38.0 million during the first quarter 2002 compared to the fourth
quarter of 2001.
The held for investment 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 $359.6 million or
39.45% of total loans at March 31, 2002 compared to $421.9 million or 46.6% of
total loans at December 31, 2001. Residential real estate loans increased to
$342.4 million or 37.55% of total loans at March 31, 2002 compared to $267.1
million or 29.53% of the total loan portfolio at December 31, 2001. Loans to
individuals also decreased slightly to $130.7 million or 14.34% of total loans
at March 31, 2002 from $137.1 million or 15.16% of total loans at December 31,
2001. Construction loans were $78.2 million at March 31, 2002 or 8.57% of total
loans compared to $77.4 million at December 31, 2001 or 8.56% of total loans.
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. Loans held for sale decreased to $47.6 million from $65.5 in
December 31, 2001 as a result of the slowing of refinance activity in the first
quarter of 2002. Other loans were $873,000 at March 31, 2001 compared to
$961,000 at December 31, 2001.
LOAN PORTFOLIO OVERVIEW
(AMOUNTS IN THOUSANDS)
MARCH 31, 2002 MARCH 31, 2001
--------------------------- -----------------------------
AMOUNT PERCENT AMOUNT PERCENT
--------- ------- --------- -------
LOANS HELD FOR INVESTMENT:
Commercial and Agricultural $ 89,248 9.79% $ 84,821 10.31%
Commercial Real Estate 270,359 29.66% 223,272 27.16%
Residential Real Estate 342,371 37.55% 303,155 36.86%
Construction 78,178 8.57% 77,510 9.42%
Consumer 130,717 14.34% 132,934 16.16%
Other 873 0.10% 763 0.09%
--------- ------ --------- -------
Total $ 911,746 100.00% $ 822,455 100.00%
========= ====== ========= =======
LOANS HELD FOR SALE 47,596 58,889
========= =========
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 $7.4 million at March 31,
2002 and $8.0 at December 31, 2001, or 0.81% and 0.88% of total loans and OREO,
respectively. The following schedule details non-performing assets by category
at the close of each of the last five quarters:
(IN THOUSANDS OF DOLLARS) MARCH 31 DECEMBER 31 SEPTEMBER 30 JUNE 30 MARCH 31
2002 2001 2001 2001 2001
------ ------ ------ ------ ------
Nonaccrual $4,644 $3,633 $5,361 $5,167 $5,192
Ninety Days Past Due 192 1,351 1,418 1,442 1,393
Other Real Estate Owned 2,538 3,029 2,595 2,614 2,591
------ ------ ------ ------ ------
$7,374 $8,013 $9,374 $9,223 $9,176
====== ====== ====== ====== ======
Restructured loans
performing in accordance
with modified terms $ 523 $ 449 $ 443 $ 445 $ 446
====== ====== ====== ====== ======
At March 31, 2002, nonaccrual loans increased $1.0 million from December 31,
2001, while ninety day past due loans decreased $1.2 million. The bulk of this
change was one loan relationship moving from the past due category into
nonaccrual. 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. Other real estate owned
decreased $491,000 during the first quarter of 2002 from December 31, 2001. The
decrease in other real estate owned is due to the foreclosure and disposition of
several properties with no large additions in the first quarter of 2002. 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 $136.0 million at March 31, 2002 increasing
$3.0 million (net of dividends of $2.5 million) over the $133.0 million,
reported at December 31, 2001. 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 March 31, 2002, the Company's total risk adjusted capital-to-asset ratio was
12.58% versus 12.10% in December 31, 2001. The Company's leverage ratio at March
31, 2002 was 7.72% compared with 7.93% at December 31, 2001. 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 ($29.4 million), investment securities available for
sale ($368.5 million) and Federal Home Loan Bank credit availability of
approximately $144.0 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.
The Company's risk profile continues to reflect an asset sensitive position. The
substantial level of prepayments and calls consistent with the declining rate
environment that occurred in the prior year, as well as the success of deposit
funding campaigns instituted in the prior year have lead to an increase in the
banks overall liquidity position as reflected in the level of cash reserves of
approximately $29.4 million. The Company continues to reinvest the funds
generated from asset paydowns and prepayments within a framework that attempts
to maintain an acceptable net interest margin in the current interest rate
environment. In addition, the mortgage operations of UFM uses 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, 2001.
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 or
results of operations of the Company.
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
21
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Stockholders was held on April 16, 2002.
(b) The following directors were elected to serve a three-year term
through the date of the 2005 Annual Meeting of Stockholders:
William P. Stafford, Robert E. Perkinson, and W. W. Tinder, Jr.
(c) Three proposals were voted upon at the annual meeting, which
included: 1) the election of the aforementioned directors as Class
of 2005; 2) an amendment to the Articles of incorporation to remove
the provision establishing the minimum number of directors, and to
provide that the number of directors be determined in accordance
with the Corporation's Bylaws; and 3) ratification of the selection
of Ernst & Young, Charleston, West Virginia, as independent auditors
for the year ending December 31, 2002. The results of the proposals
and voting are as follows:
Proposal 1. Election of Directors:
Votes For Votes Withheld
--------- --------------
Robert E. Perkinson, Jr. 6,850,147 86,936
William P. Stafford 6,854,360 82,723
W. W. Tinder, Jr. 6,835,393 101,690
Proposal 2. Amendment to the Articles of Incorporation:
Votes For 6,455,433
Votes Against 46,023
Votes Abstained 24,222
Proposal 3. Ratification of the selection of Ernst & Young LLP:
Votes For 6,832,592
Votes Against 66,424
Votes Abstained 38,066
(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
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(b) Reports on Form 8-K
A report on Form 8-K was filed on January 28, 2002 announcing the
Company's fourth quarter 2001 earnings and depicting certain
financial information as of December 31, 2001 and December 31, 2000
and comparative income statements for the twelve-month periods
ending December 31, 2001 and 2000, respectively.
A report on Form 8-K was filed on April 16, 2002 announcing the
Company's first quarter 2002 earnings and depicting certain
financial information as of March 31, 2002 and December 31, 2001 and
comparative income statements for the three-month periods ending
March 31, 2002 and 2001, respectively.
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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: May 13, 2002
/s/ John M. Mendez
- ------------------------------
John M. Mendez
President & Chief Executive Officer
(Duly Authorized Officer)
DATE: May 13, 2002
/s/ Robert L. Schumacher
- ------------------------------
Robert L. Schumacher
Chief Financial Officer
(Principal Accounting Officer)
24