<PAGE> 1
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, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from:__________________ to __________________
Commission File 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
incorporation or organization) Identification No.)
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, 1999
Common Stock, $1 Par Value 8,745,110
-------------------------------
<PAGE> 2
First Community Bancshares, Inc.
FORM 10-Q
For the quarter ended September 30, 1999
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION REFERENCE
---------
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1999 and
December 31, 1998 3
Consolidated Statements of Income and Comprehensive Income for the
Three and Nine Month Periods Ended September 30, 1999 and 1998 4
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1999 and 1998 5
Consolidated Statements of Changes in Stockholders'
Equity for the Nine Months Ended September 30,
1999 and 1998 6
Notes to Consolidated Financial Statements 7-9
Independent Accountants' Report 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-19
Item 3. Quantitative and Qualitative Disclosures about 19-20
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 21
Item 6. Exhibits and Reports on Form 8-K 21-23
SIGNATURES 24
</TABLE>
2
<PAGE> 3
PART I. ITEM 1. FINANCIAL STATEMENTS
FIRST COMMUNITY BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
(UNAUDITED) SEPTEMBER 30 DECEMBER 31
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA) 1999 1998
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and due from banks $ 31,845 $ 33,943
Interest bearing balances - FHLB 283 57,523
Federal funds sold 7 25,630
Securities available for sale (amortized cost
of $224,977, September 30, 1999; $191,131
December 31, 1998) 218,150 193,194
Investment securities:
U.S. Treasury securities 100 100
U.S. Government agencies and corporations 4,023 7,546
States and political subdivisions 74,688 75,009
Other securities 1,364 1,361
----------- -----------
Total Investment Securities (market value, $81,245,
September 30, 1999; $88,256,December 31, 1998) 80,175 84,016
Loans held for investment, net of unearned income 661,364 611,493
Loans available for sale 4,278 --
Less: reserve for loan losses 11,091 11,404
----------- -----------
Net loans 654,551 600,089
Premises and equipment, net 18,943 17,986
Other real estate owned 1,786 3,547
Interest receivable 7,421 7,030
Other assets 11,735 6,684
Intangible assets 24,048 24,346
----------- -----------
Total assets $ 1,048,944 $ 1,053,988
=========== ===========
Liabilities
Deposits, non-interest bearing $ 117,555 $ 123,992
Deposits, interest-bearing 725,964 752,004
----------- -----------
Total Deposits 843,519 875,996
Interest, taxes and other liabilities 14,791 10,417
Federal funds purchased 36,000 --
Securities sold under agreement to repurchase 41,672 47,680
Other indebtedness 10,230 18,176
----------- -----------
Total Liabilities 946,212 952,269
----------- -----------
Stockholders' Equity
Common stock, $1 par value, 10,000,000 shares authorized;
8,991,586 issued in 1999 and 1998; 8,750,990 and 8,767,552
shares outstanding in 1999 and 1998, respectively 8,992 8,992
Additional paid-in capital 34,264 34,306
Retained earnings 66,714 60,250
Unallocated common stock held by ESOP, at cost (722) (1,664)
Treasury stock, at cost (2,420) (1,403)
Accumulated other comprehensive (loss) income (4,096) 1,238
----------- -----------
Total Stockholders' Equity 102,732 101,719
----------- -----------
Total Liabilities and Stockholders' Equity $ 1,048,944 $ 1,053,988
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE> 4
FIRST COMMUNITY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
(UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT NINE MONTHS ENDED THREE MONTHS ENDED
SHARE AND PER SHARE DATA) SEPTEMBER 30 SEPTEMBER 30
1999 1998 1999 1998
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest Income:
Interest and fees on loans $ 42,675 $ 47,649 $ 14,646 $ 15,632
Interest on securities available for sale 9,925 6,595 3,331 1,704
Interest on investment securities:
U.S. Treasury securities 26 102 15 14
U.S. Government agencies and corporations 220 883 58 303
States and political subdivisions, tax exempt 2,968 3,002 988 992
Other securities 79 64 26 22
Interest on federal funds sold 403 1,181 1 437
Interest on deposits in banks 424 2,130 23 1,226
----------- ---------- ----------- ----------
Total Interest Income 56,720 61,606 19,088 20,330
----------- ---------- ----------- ----------
Interest Expense:
Interest on deposits 22,092 25,977 7,076 8,638
Interest on borrowings 2,009 2,884 695 995
----------- ---------- ----------- ----------
Total Interest Expense 24,101 28,861 7,771 9,633
----------- ---------- ----------- ----------
Net Interest Income 32,619 32,745 11,317 10,697
Provision for loan losses 1,340 5,825 505 749
----------- ---------- ----------- ----------
Net Interest Income After Provision for
Loan Losses 31,279 26,920 10,812 9,948
----------- ---------- ----------- ----------
Non-Interest Income:
Fiduciary income 1,664 1,270 479 386
Service charges on deposit accounts 2,727 2,809 928 948
Other charges, commissions and fees 1,236 2,325 424 731
Gain on settlement of pension plan,
net of excise tax -- 1,062 -- --
Net securities gains -- 21 -- --
Gain on sale of credit card portfolio -- 841 -- 841
Other operating income 654 482 97 194
----------- ---------- ----------- ----------
Total Non-Interest Income 6,281 8,810 1,928 3,100
----------- ---------- ----------- ----------
Non-Interest Expense:
Salaries and employee benefits 9,161 9,197 3,048 2,946
Occupancy expense of bank premises 1,552 1,468 519 510
Furniture and equipment expense 1,346 1,544 446 540
Goodwill amortization 1,525 1,547 514 512
Other operating expense 6,500 8,228 2,218 2,750
----------- ---------- ----------- ----------
Total Non-Interest Expense 20,084 21,984 6,745 7,258
----------- ---------- ----------- ----------
Income before income taxes 17,476 13,746 5,995 5,790
Income tax expense 5,470 4,261 1,941 1,795
----------- ---------- ----------- ----------
Net Income 12,006 9,485 4,054 3,995
Other comprehensive (loss) income, net of tax (5,334) 168 (720) 223
----------- ---------- ----------- ----------
Comprehensive Income $ 6,672 $ 9,653 $ 3,334 $ 4,218
=========== ========== =========== ==========
Basic and diluted earnings per common share $ 1.37 $ 1.08 $ .46 $ .46
=========== ========== =========== ==========
Weighted average basic and diluted shares outstanding 8,776,029 8,809,780 8,766,031 8,789,818
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE> 5
FIRST COMMUNITY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
(UNAUDITED)
(AMOUNTS IN THOUSANDS) NINE MONTHS ENDED
SEPTEMBER 30
------------------------------
1999 1998
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income $ 12,006 $ 9,485
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 1,340 5,825
Depreciation of premises and equipment 1,059 1,160
Amortization of intangibles 1,495 1,419
Investment amortization and (accretion), net 395 (108)
Gain on the sale of assets, net (251) (224)
Other liabilities, net 601 (1,169)
Interest receivable (391) 735
Other assets, net (1,143) 1,454
Other, net (22) 87
--------- ---------
Net cash provided by operating activities 15,089 18,664
--------- ---------
Cash Flows From Investing Activities:
Increase (decrease) in cash realized from:
Maturities and calls of investment securities 3,864 18,684
Maturities and calls of securities available for sale 27,115 77,393
Sale of securities available for sale 4,568 --
Purchase of investment securities -- (300)
Purchase of securities available for sale (65,861) (51,419)
Loans to customers, net (49,278) 35,875
Purchase of equipment (2,086) (324)
Sale of equipment 80 287
Net cash used in acquisitions (1,413) --
--------- ---------
Net cash (used in) provided by investing activities (83,011) 80,196
--------- ---------
Cash Flows From Financing Activities:
Increase (decrease) in cash realized from:
Demand and savings deposits, net (11,041) 18,798
Time deposits, net (21,432) (1,622)
Short-term borrowings, net 29,992 (2,262)
Increase in long-term debt -- 3,000
Payment of long-term debt (7,981) (3,966)
Acquisition of treasury stock (1,017) (86)
Acquisition of unallocated ESOP shares -- (1,274)
Cash paid in lieu of fractional shares (18) (27)
Cash dividends paid (5,542) (5,283)
--------- ---------
Net cash (used in) provided by financing activities (17,039) 7,278
--------- ---------
Net (decrease) increase in cash and cash equivalents (84,961) 106,138
Cash and cash equivalents at beginning of year 117,096 47,123
--------- ---------
Cash and cash equivalents at end of quarter $ 32,135 $ 153,261
========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
5
<PAGE> 6
FIRST COMMUNITY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
(UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT ACCUMULATED
SHARE AND PER SHARE DATA) ADDITIONAL UNALLOCATED OTHER
COMMON PAID-IN RETAINED COMMON STOCK TREASURY COMPREHENSIVE
STOCK CAPITAL EARNINGS HELD BY ESOP STOCK INCOME (LOSS)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance beginning of
the period,
January 1, 1998 $8,992 $ 34,306 $ 54,564 $ -- $(1,271) $ 1,251
Net Income -- -- 9,485 -- -- --
Common dividends
declared ($.60
per common share) -- -- (5,283) -- -- --
Purchase of 3,281 shares
at $26.20 per share -- -- -- -- (86) --
Purchase of unallocated common stock
by ESOP -- -- -- (1,274) -- --
Other comprehensive income, net of tax -- -- -- -- -- 168
------ -------- -------- ------- ------- -------
Balance, September 30, 1998 $8,992 $ 34,306 $ 58,766 $(1,274) $(1,357) $ 1,419
====== ======== ======== ======= ======= =======
Balance beginning of
the period,
January 1, 1999 $8,992 $ 34,306 $ 60,250 $(1,664) $(1,403) $ 1,238
Net income -- -- 12,006 -- -- --
Common dividends
declared ($.63
per common share) -- -- (5,542) -- -- --
Allocation of ESOP shares -- (42) -- 942 -- --
Purchase of 47,436 shares
at $21.44 per share -- -- -- -- (1,017) --
Other comprehensive loss, net of tax -- -- -- -- -- (5,334)
------ -------- -------- ------- ------- -------
Balance, September 30, 1999 $8,992 $ 34,264 $ 66,714 $ (722) $(2,420) $(4,096)
====== ======== ======== ======= ======= =======
</TABLE>
See Notes to Consolidated Financial Statements.
6
<PAGE> 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. UNAUDITED FINANCIAL STATEMENTS
The unaudited consolidated balance sheet as of September 30, 1999 and the
unaudited consolidated statements of income and comprehensive income, cash flows
and changes in stockholders' equity for the periods ended September 30, 1999 and
1998 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, 1999 and its results of operations, cash
flows, and changes in stockholders' equity for the periods ended September 30,
1999 and 1998, 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, 1998 has been extracted from
audited financial statements included in the Company's 1998 Annual Report to
Stockholders. Certain information and footnote disclosure normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been omitted. It is suggested that these financial statements
should be read in conjunction with the financial statements and notes thereto
included in the 1998 Annual Report of FCBI.
NOTE 2. ACQUISITIONS
On September 28, 1999, First Community Bank, N.A. (FCBNA), the Company's
wholly-owned banking subsidiary acquired 100% of the common stock of United
First Mortgage, Inc. (UFM), headquartered in Richmond, Virginia. UFM is a
mortgage brokerage company with assets of approximately $6.4 million and 9
offices located in a geographic region along a corridor of Interstates I-64 and
I-81 and ranging from Virginia Beach, Virginia to Harrisonburg, Virginia.
Pursuant to the Agreement, FCBNA exchanged cash of $1.95 million for all of
UFM's outstanding 3,000 common shares with provisions for additional
consideration contingent upon the financial performance of UFM in subsequent
years. The total initial consideration paid resulted in an intangible asset of
approximately $1.2 million, which is being amortized on a straight-line basis
over a 15-year period. The contingent payments to be made in subsequent years
will be capitalized as goodwill upon the determination of the contingent payment
amounts and amortized over the remaining useful life, if any, of the original
goodwill purchase. The acquisition was accounted for under the purchase method
of accounting. Accordingly, results of operations of UFM are included in
consolidated results of FCBI from the date of acquisition. Subsequent to the
merger, UFM operates as a wholly owned subsidiary of FCBNA. Presently, all loans
originated by UFM are classified as held for sale. The loans are reviewed
individually and presented at the lower of cost or market value, however, due to
the short turnaround on outstanding commitments and the fact that investors are
identified at the point of the loan commitment, the market value is generally
greater than cost. UFM does not securitize the loans that are available for sale
and UFM does not retain servicing on any of the loans sold.
The following unaudited proforma financial information shows the effect of the
United First Mortgage, Inc. acquisition as if the transaction were consummated
on January 1, 1998:
FIRST COMMUNITY BANCSHARES, INC.
UNAUDITED SUPPLEMENTAL PROFORMA FINANCIAL INFORMATION
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30 September 30
1999 1998 1999 1998
-------- -------- ------- --------
<S> <C> <C> <C> <C>
Net Interest Income $ 32,619 $ 32,745 $ 11,317 $ 10,697
Net Income 11,902 9,479 4,015 3,967
Basic and diluted earnings per common share 1.36 1.08 .46 .45
</TABLE>
7
<PAGE> 8
NOTE 3. CASH FLOWS
For the nine months ended September 30, 1999 and 1998, for purposes of reporting
cash flows, cash and cash equivalents include cash and due from banks and
interest-bearing balances available for immediate withdrawal of $32.1 million at
September 30, 1999 and $118.8 million at September 30, 1998, and federal funds
sold of $7,000 at September 30, 1999 and $34.5 million at September 30, 1998.
NOTE 4. LITIGATION
The Company is currently a defendant (as well as plaintiff and counterclaimant)
in various legal actions and asserted claims, involving employment matters,
lending and collection and fiduciary activities in the normal course of
business. While the Company and legal counsel are unable to assess the outcome
of each of these matters, 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.
The Company is currently a defendant in litigation styled Ann Tierney Smith,
Executrix, et al versus FCFT, First Community Bank, Gentry, Locke and William
Gust. In this matter, the plaintiffs are seeking to overturn the establishment
of a charitable foundation established by a customer of the Company's Trust
Division. In February of this year the court ruled in favor of the Company's
motion for dismissal on one key allegation in the complaint, affirming the
Trustee's authority to execute certain estate plans directed by the donor. The
plaintiff subsequently filed a motion requesting an immediate appeal of that
ruling to the state supreme court; however, the court denied this motion in a
ruling on April 21, 1999. Discovery and depositions continue in this matter,
however, the Company and legal counsel are of the opinion that it will prevail
in this matter and resolution of this litigation will not have a material
adverse effect on the financial position or results of operations of the
Company.
NOTE 5. COMMON STOCK
In the first quarter of 1999, the Company declared a five-for-four stock split
which was effected in the form of a 25% stock dividend on March 31, 1999.
Accordingly, $1.8 million was transferred from additional paid-in capital to
common stock, representing the par value of the new shares issued. Share and per
share amounts for all periods presented have been restated to reflect the stock
split.
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:
<TABLE>
<CAPTION>
Nine months ended Three months ended
September 30 September 30
1999 1998 1999 1998
----------------- ------------------
<S> <C> <C> <C> <C>
(Amounts in Thousands)
OTHER COMPREHENSIVE INCOME:
Holding (losses) gains arising during the period $(8,890) $ 282 $(1,200) $ 371
Tax benefit (expense) 3,556 (114) 480 (149)
------- ------- ------- -------
Holding (losses) gains arising during the period, net of tax (5,334) 168 (720) 223
------- ------- ------- -------
Other comprehensive (loss) income, net of tax (5,334) 168 (720) 223
Beginning accumulated other comprehensive income (loss) 1,238 1,251 (3,376) 1,196
------- ------- ------- -------
Ending accumulated other comprehensive (loss) income $(4,096) $ 1,419 $(4,096) $ 1,419
======= ======= ======= =======
</TABLE>
8
<PAGE> 9
NOTE 7. RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standard (SFAS) No. 133 was issued in June
1998. SFAS No. 133 sets forth a comprehensive approach to addressing the
accounting for derivative instruments, including certain derivative instruments
embedded in other contracts, and hedging activities. This standard addresses the
type of activities, which are included within the definition of derivatives and
embedded derivatives, and identifies the methods to be used for valuation and
income recognition. In addition to the derivative and hedging activities
addressed, the standard also allows a one-time transfer of securities from the
held-to-maturity to the available-for-sale or the trading category, which can
only be applied at the date of initial application of the Statement. This
Statement was effective for all fiscal quarters of all fiscal years beginning
after June 15, 1999, however, on July 7, 1999 the Financial Accounting Standards
Board (FASB) delayed the implementation date of this Standard for one year by
the issuance of SFAS No. 137. The implementation has been delayed until fiscal
years beginning after June 15, 2000. Earlier application of the provisions of
this Statement is encouraged but is permitted only as of the beginning of any
fiscal quarter that begins after issuance of Statement No. 133. Management is
currently in the process of evaluating the impact of Statement No. 133.
NOTE 8. OTHER ITEMS
In July 1999, the Company executed a commitment to purchase an equity interest
in Virginia Bankers Insurance Center, LLC (VBIC). The investment and
participation in VBIC will allow the Company to offer a full line of property,
casualty, life and health insurance products through its branch network through
the newly established bank consortium. The initial investment in VBIC totaled
$460,000 and resulted in a 3.23% ownership interest in the consortium. This
investment was recorded and being accounted for using the cost method of
accounting. The VBIC is in the development stage and has no operations as of the
date of this report.
9
<PAGE> 10
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors and Stockholders
of First Community Bancshares, Inc.
We have reviewed the accompanying consolidated balance sheet of First Community
Bancshares, Inc. and subsidiaries as of September 30, 1999, and the related
consolidated statements of income and comprehensive income, changes in
stockholders' equity and cash flows for the three-month and nine-month periods
ended September 30, 1999 and 1998. These financial statements are the
responsibility of the Corporation's management.
We conducted our review 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 of making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such consolidated financial statements for them to be in conformity
with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of First Community Bancshares, Inc.
and subsidiaries as of December 31, 1998, and the related consolidated
statements of income and comprehensive income, changes in stockholders' equity,
and cash flows for the year then ended (not presented herein); and in our report
dated January 29, 1999, 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, 1998, is fairly
stated, in all material respects, in relation to the consolidated balance sheet
from which it has been derived.
Deloitte & Touche LLP
Pittsburgh, Pennsylvania
October 19 , 1999
10
<PAGE> 11
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 incorporated by
reference or included in this report. This discussion and analysis should be
read in conjunction with the 1998 Annual Report to Shareholders and the other
financial information included in this report.
RESULTS OF OPERATIONS
The Company reported net income of $12.0 million for the nine month period ended
September 30, 1999, a 26.6% increase over net income of $9.5 million for the
corresponding period in 1998. Basic earnings per common share between the two
periods increased 26.9%, from $1.08 to $1.37.
Net income for the third quarter of 1999 totaled $4.1 million, 1.5% higher than
net earnings for the corresponding third quarter of 1998. Net income for the
third quarter of 1999 was positively impacted by lower interest cost as a result
of more aggressive deposit pricing strategies taken by the Company beginning in
the fourth quarter of 1998. Also impacting earnings was the downward pricing of
loans as a result of pressures stemming from market rate declines beginning in
the third quarter of 1998. This trend began to reverse at the end of the second
quarter of 1999 with preemptive moves taken by the Federal Reserve to raise
short-term borrowing rates by 50 basis points since June 30, 1999.
Year-to-date earnings for 1998 were adversely impacted by the write-off of a
portion of a commercial loan relationship which led to a $2.75 million
additional loan loss provision for the second quarter of 1998. The Company
recognized the write-off in operations for the second quarter of 1998 to retain
existing reserves and to maintain overall asset quality and strengthen its
reserve coverage of non-performing loans. The increase in year-to-date 1999
earnings reflects the added loan loss provisions of $2.9 million in the second
quarter of 1998, which absorbed the above referenced loan charge-off and brought
loan loss reserves to a level targeted to exceed 100% of non-performing loans at
June 30, 1998. The improvement in earnings for 1999 is primarily attributed to
the reduction in loan loss provisions, improvement in net interest margin
through deposit and short-term borrowing cost control and increased efficiency
in operations. Operations for nine months ending September 30, 1999 reflect a
decline in interest income, however, this was offset by a corresponding
reduction in interest expense which increased the level of net interest income.
The sale of credit card portfolios in the third and fourth quarters of 1998
resulted in reductions in interest income of $1.6 million and a like decrease in
operating expenses of $1.6 million associated with credit card maintenance and
operations when comparing the nine-month periods ended September 30, 1999 to
September 30, 1998.
Non-interest income for the quarter ended September 30, 1999 decreased
$1,172,000 from the comparable period in 1998. The largest portion of this
decrease is the result of a gain on the sale of a portion of the Company's
credit card portfolio in the third quarter of 1998 totaling $841,000 and a
$307,000 reduction in 1999 service charges, commissions and fees also as a
result of the sale of the credit card portfolio. The credit card portfolio was
sold in the third and fourth quarters of 1998.
Basic and diluted earnings per share were $.46 for the third quarter of 1999 and
1998. The per share results presented for 1998 have been restated to reflect the
effect of the change in the number of outstanding shares as a result of the
March 31, 1999 five-for-four stock split.
NET INTEREST INCOME
Net interest income, the largest contributor to earnings was $32.6 million for
the first nine months of 1999 as compared with $32.7 million for the
corresponding period in 1998. Tax equivalent net interest income totaled $35.2
million for the nine months of 1999, unchanged from the $35.2 million reported
in the first nine months of 1998. Although there was a $4.9 million decline in
interest income, this was offset by a $4.8 million reduction in the cost of
total interest bearing liabilities. Average loans between the two periods
declined due to the sale of $15 million in credit card receivables and a high
level of commercial loan prepayments experienced in response to the declining
loan
11
<PAGE> 12
rate environment in the latter part of 1998. The declining rate environment
stimulated refinancing of loans during 1998 with significant volume moving to
competing capital markets securitized arrangements. These declines led to a $5.1
million reduction in loan revenues. The declining loan volume began to stabilize
and reverse at the end of the first quarter of 1999. Partially offsetting the
decline due to loan volume was a decrease in deposit interest cost as well as an
increase in the level of tax exempt earnings and assets.
The Company's tax equivalent net interest margin of 4.99% for the first nine
months of 1999 reflects an increase over margin of 4.88% in the corresponding
period in 1998. The increase in margin was achieved through significant
reductions in the cost of funds between the two periods over and above decreases
in the yield on earning assets. In 1999, the Company's average balances in
earning assets moved from loans to investment securities and securities
available for sale as a result of loan prepayments experienced in 1998. As a
result, the overall yield on average earning assets declined by 48 basis points
from 8.88% at September 30, 1998 to 8.40% at September 30, 1999. During the same
period, the cost of interest-bearing liabilities declined by 60 basis points
from 4.62% in 1998 to 4.02% in 1999. As a result of significant decreases in the
cost of funds and recent gains in the loan portfolio, net interest margin has
recovered to its current level of 4.99% at the end of September 1999.
Loans, the Company's highest yielding asset category, experienced a decrease in
average balances of $32.7 million or 5.0%, comparing the first nine months of
1999 to the corresponding period in 1998. This decrease in the loan portfolio is
largely the result of the aforementioned credit card portfolio sale and the
increase in prepayment levels on commercial loans. The tax equivalent yield on
the loan portfolio was 9.20% for the first nine months of 1999 down from 9.77%
for the same period in 1998. The tax equivalent yield on securities available
for sale declined from 6.72% in 1998 to 6.35% in the corresponding first nine
months of 1999. Investment securities held to maturity experienced a 27 basis
points increase in yield from 7.73% in the first nine months of 1998 to 8.00%
for the corresponding period in 1999.
Despite the decrease in average loan balances between 1998 and 1999, total loans
outstanding at September 30, 1999 have recovered to $665.0 million, very near
their high level recorded in 1998. This reverses the downward trend in loan
balances in the fourth quarter of 1998 and in early 1999. Renewed loan demand
and successful development efforts have resulted in strong increases in total
loans throughout the second and third quarters of 1999. Strong increases in
outstanding loans have been achieved in commercial, commercial real estate and
residential real estate categories while consumer loans decreased slightly
between year-end 1998 and September 30, 1999.
Average balances in securities available for sale increased from the September
30, 1998 level of $140.5 million to $224.5 million at September 30, 1999. This
increase is the result of the substantial investment of interest-bearing
balances and federal funds sold (short-term investments) in order to achieve
higher yields.
The cost of short-term borrowings decreased 83 basis points over the past twelve
months from 4.58% in 1998 to 3.75% for the corresponding first nine months of
1999 while time deposits decreased 43 basis points from 5.55% in the first nine
months of 1998 to 5.12% for the corresponding period in 1999. Interest-bearing
demand deposits experienced a 67 basis point decrease from 2.82% in 1998 to
2.15% in 1999. Savings accounts experienced a similar 75 basis point decrease
from 3.03% in 1998 to 2.28% in 1999. With the accumulation of significant
liquidity in 1998 from rolloff and prepayments on loans and investment
securities, rates paid on both core and non-core sources of funding were reduced
resulting in stabilizing interest margins in the first nine months of 1999.
Average deposit balances have declined as a result of a degree of price
sensitivity primarily in non-core time deposits and repurchase agreements.
In comparing the third quarter of 1999 with the third quarter of 1998, net
interest income increased by $620,000. Despite a slight decrease in earning
assets and the declining asset yields as a result of prepayment and refinancing
activity between the quarters, interest income declined only $1.24 million
between the third quarters of 1998 and 1999 while the cost of deposits and
borrowings declined by $1.86 million. Deposit cost reflected reductions in all
categories of interest bearing liabilities between September 30, 1999 and 1998.
Additionally, the interest cost on other indebtedness declined by $300,000 as a
result of the repayment of term borrowings in the fourth quarter of 1998 and the
second quarter of 1999.
12
<PAGE> 13
AVERAGE BALANCE SHEETS AND
NET INTEREST INCOME ANALYSIS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED NINE MONTHS ENDED
(UNAUDITED) SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
----------------------------------------- ------------------------------------------
(AMOUNTS IN AVERAGE INTEREST YIELD/RATE AVERAGE INTEREST YIELD/RATE
THOUSANDS, EXCEPT %'S) BALANCE (1) (2) (2) BALANCE (1) (2) (2)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Earning Assets:
Loans (3)
Taxable $ 614,404 $42,145 9.17% $ 643,669 $46,916 9.75%
Tax-Exempt 10,252 816 10.64% 13,705 1,127 11.00%
----------- ------- ----- ----------- ------- -----
Total 624,656 42,961 9.20% 657,374 48,043 9.77%
------- -------
Reserve for Loan Losses (11,230) (11,771)
----------- -----------
Net Total 613,426 645,603
Investment Securities
Available for Sale:
Taxable 188,263 8,567 6.08% 117,744 5,722 6.50%
Tax-Exempt 36,223 2,090 7.71% 22,741 1,343 7.89%
----------- ------- ----- ----------- ------- -----
Total 224,486 10,657 6.35% 140,485 7,065 6.72%
------- -------
Investment Securities
Held to Maturity:
Taxable 7,251 374 6.90% 22,679 1,098 6.47%
Tax-Exempt 74,016 4,491 8.11% 74,936 4,543 8.11%
----------- ------- ----- ----------- ------- -----
Total 81,267 4,865 8.00% 97,615 5,641 7.73%
------- -------
Interest-Bearing Deposits 12,516 423 4.52% 51,598 2,130 5.52%
Federal Funds Sold 11,764 403 4.58% 28,769 1,181 5.49%
----------- ------- ----- ----------- ------- -----
Total Earning Assets 943,459 59,309 8.40% 964,070 64,060 8.88%
------- ----- ------- -----
Other Assets 94,192 94,093
----------- -----------
Total $ 1,037,651 $ 1,058,163
=========== ===========
Interest-Bearing Liabilities:
Interest-bearing Demand
Deposits $ 137,972 2,223 2.15% $ 133,259 2,806 2.82%
Savings Deposits 146,812 2,500 2.28% 151,424 3,428 3.03%
Time Deposits 453,977 17,375 5.12% 475,774 19,749 5.55%
Short-Term Borrowings 49,097 1,377 3.75% 51,481 1,765 4.58%
Other Indebtedness 13,809 628 6.08% 23,620 1,113 6.30%
----------- ------- ----- ----------- ------- -----
Total Interest-Bearing 801,667 24,103 4.02% 835,558 28,861 4.62%
----------- ------- ----- ----------- ------- -----
Liabilities
Demand Deposits 120,030 109,904
Other Liabilities 12,294 12,406
Stockholders' Equity 103,660 100,295
----------- -----------
Total $ 1,037,651 $ 1,058,163
=========== ===========
Net Interest Earnings $35,206 $35,199
======= =======
Net Interest Spread 4.38% 4.26%
==== ====
Net Interest Margin 4.99% 4.88%
==== ====
</TABLE>
(1) Interest amounts represent taxable equivalent results for the first
nine months of 1999 and 1998.
(2) Fully Taxable Equivalent-using the statutory rate of 35%.
(3) Non-accrual loans are included in average balances outstanding with no
related interest income.
13
<PAGE> 14
PROVISION AND RESERVE FOR LOAN LOSSES
In order to maintain a balance in the reserve for loan losses which is
sufficient to absorb loan losses, charges are made to the provision for loan
losses (provision). The provision was $1,340,000 for the first nine months of
1999 compared with $5,825,000 for the corresponding period in 1998. The second
quarter of 1998 provision was elevated as a result of the previously discussed
$2.75 million commercial loan charge-off and efforts to increase the Company's
coverage ratio of non-performing loans to over 100%.
The Company consistently applies a monthly review process to continually
evaluate loans for changes in credit risk. This process serves as the primary
means by which the Company evaluates the adequacy of loan loss reserves. The
total loan loss reserve is divided into two categories which apply to
specifically identified loan relationships which are on non-accrual status,
ninety-days past due and loans with elements of credit weakness (allocated
reserves) and formula and unallocated reserves.
Allocated reserves are specifically targeted to cover loan relationships, which
are identified with significant credit weakness and for which a collateral
deficiency may be present. Impaired loans are identified in accordance with
Statement of Financial Accounting Standard (SFAS) No. 5 and measured and
recorded in accordance with SFAS No. 114 and SFAS No. 118. The allocated
reserves established under the specific identification method are judged based
upon the borrower's current operating status and projected liquidation value of
pledged collateral.
Formula and unallocated reserves are available to cover the homogeneous pool of
loans, which are not specifically identified as potential problems. The formula
and unallocated 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, a rolling three-year average net loan
charge-off percentage is calculated. The calculated percentage is used to
determine the required reserve excluding the relationships specifically
identified under the allocated reserve method. The Company's policy also
requires that the historic net charge-off percentage be maintained at not less
than 1% for each category of loans.
The composition of First Community's allowance for loan losses was as follows at
September 30, 1999, and December 31, 1998.
<TABLE>
<CAPTION>
September 30 December 31
(In Thousands) 1999 1998
------------ -----------
<S> <C> <C>
Specific Reserves $ 1,909 $ 1,642
Formula and Unallocated Reserves 9,182 9,762
-------- -------
Total Reserves $ 11,091 $11,404
======== =======
</TABLE>
The formula and unallocated reserve for loan losses decreased by $581,000 or
5.95% when comparing September 30, 1999 to December 31, 1998. The decline is
primarily a function of a continued moderate level of consumer net charge-offs
and reduced monthly loan loss provisions as a result of improvements in consumer
loan underwriting, the sale of the credit card portfolio and a general
improvement in overall loan quality evidenced by a reduction in loan delinquency
from 4.86% in 1997 to 2.22% in 1999.
Net charge-offs for the first nine months of 1999 were $1.7 million as compared
to $5.8 million for the corresponding period in 1998. Expressed as a percentage
of average loans, net charge-offs were .26% for the nine-month period ended
September 30, 1999 and .88% for the corresponding period in 1998.
The reserve for loan losses totaled $11.1 million at September 30, 1999 and 11.4
million at December 31, 1998 resulting in reserve to loan ratios of 1.67% and
1.87% for the respective periods.
The reserve coverage ratio represents the percentage of non-performing loans
covered through available reserves. As of September 30, 1999, this ratio was
128.0% down from 140.1% at December 31, 1998. This decrease in the reserve
coverage ratio reflects the $313,000 decrease in the loan loss reserve since
year-end 1998 while non-performing loans increased $523,000 during the period.
14
<PAGE> 15
Management continually evaluates the adequacy of the reserve 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. It is
the opinion of management that the allowance for loan losses of $11.1 million as
of September 30, 1999 is adequate based on the current risk profile in the loan
portfolio. However, there can be no assurance that the Company will not sustain
losses in future periods, which could be substantial in relation to the size of
the loan loss reserve at September 30, 1999.
NON-INTEREST INCOME
Non-interest income consists of all revenues that are not included in interest
and fee income. Total non-interest income decreased $2,529,000, or 28.7% from
$8,810,000 for the nine months ended September 30, 1998 to $6,281,000 for the
corresponding period in 1999. The largest contributors to the decrease in
non-interest income were the recognition in 1998 of a $1.062 million gain on the
settlement of the Company's defined benefit pension plan as well as the
aforementioned $841,000 gain on the sale of a portion of the Company's credit
card portfolio reflected in the third quarter of 1998. In addition service
charges, commissions and other revenues decreased 46.8% due primarily to the
reduced transaction fees of $1,287,000 associated with the sale of the credit
card portfolio. Non-interest income decreased $1,172,000 when comparing the
third quarter of 1998 to the corresponding period in 1999, which is a direct
result of the above referenced gain on the sale of the credit card portfolio and
reduced transactional revenue of approximately $330,000 relative to the credit
card division.
NON-INTEREST EXPENSE
Non-interest expense, which totaled $20.1 million in the first nine months of
1999, decreased $1.9 million from $22.0 million in the corresponding period in
1998. The largest contributor to the decline relates to the elimination of
credit card operating expenses of $1.6 million including credit card processing
fees of $1,117,000, as a result of the sale of substantially all credit card
loans in the third and fourth quarters of 1998. Other operating expense of
$6,500,000 for the nine months ended September 30, 1999 decreased by $1.7
million from $8,228,000 in the corresponding period in 1998. This category of
costs includes the $1,117,000 decrease in credit card processing fees.
Non-interest expense decreased $513,000 when comparing the third quarter of 1998
to the corresponding period in 1999. Of this amount, the credit card operating
expenses accounted for approximately $412,000, substantially all of the
reduction.
15
<PAGE> 16
FINANCIAL POSITION
SECURITIES
Securities consisting of U.S. Agency and state and municipal bonds and various
collateralized mortgage obligations totaled $298.3 million at September 30,1999
which represents an increase of $21.1 million from December 31, 1998. This 7.6%
increase is primarily attributable to the reinvestment of interest bearing bank
balances representing overnight funds sold to various correspondents and the
Federal Home Loan Bank (FHLB). This increase is net of securities called prior
to maturity and principal prepayments on mortgage backed securities. Securities
are divided into two basic categories: Held to Maturity and Available for Sale.
Securities available for sale were $218.2 million at September 30, 1999 as
compared to $193.2 million at December 31, 1998. Securities available for sale
are recorded at their fair market value. The unrealized gain or loss, which is
the difference between book value and market value, net of related deferred
taxes, is recognized in the Stockholders' Equity section of the balance sheet as
part of accumulated other comprehensive (loss) income. The accumulated other
comprehensive income after taxes of $1.2 million at December 31, 1998, decreased
significantly by $5.3 million to an accumulated other comprehensive loss of $4.1
million at September 30, 1999.
The material reduction in the market value of available for sale securities
reflects recent increases in the bond interest rate environment and its inverse
effect on bond market values. The decrease in market value is reflected, net of
deferred taxes, as other comprehensive loss in the Company's statements of
income and is accumulated within the Company's stockholders' equity. Market
gains and losses on bonds fluctuate with the interest rate environment as
evidenced by the recent fluctuations in the bond portfolio market value.
Other assets have increased as a result of increases in the deferred tax asset
relative to the decline in market value of the securities available for sale
since December 31, 1998. The decline resulted in an increase in this deferred
tax asset of $3.6 million and is an offsetting component of the decline in
comprehensive income included in other comprehensive income.
The Held to Maturity category of investment securities, which is purchased with
the intent to hold until maturity, totaled $80.2 million at September 30, 1999
as compared with $84.0 million at December 31, 1998. The market value of these
securities was 105.1% and 101.3% of book value at December 31, 1998 and
September 30, 1999, respectively. This category of securities is comprised
largely of state and municipal bonds, which are generally not subject to federal
income taxes.
LOANS
The Company's lending strategy stresses quality growth, diversified by product,
geography and industry. A common credit underwriting structure and review
process for loans is in place throughout the Company.
Total loans increased $54.1 million from $611.5 million at December 31, 1998 to
$665.6 million at September 30, 1999. Likewise, the loan to deposit ratio
increased from 69.8% at December 31, 1998 to 78.9% at September 30, 1999. The
increase in outstanding loans reflects an increase in commercial and commercial
real estate loan demand and effective sales and relationship management
activities by loan account officers in 1999.
Average total loans decreased $32.7 million between the third quarter of 1998
and 1999 due primarily to the accelerated prepayment levels experienced in 1998
as a result of the declining rate environment in the latter part of 1998 which
increased the refinancing incentive in the marketplace. As noted above, this
trend began to reverse in early to mid 1999 as evidenced by the increase in
loans in the first nine months of 1999.
The loan portfolio continues to be diversified among loan types and industry
segments. Commercial and commercial real estate loans represent the largest
portion of the portfolio, comprising $275.5 million or 41.3% of total loans at
September 30, 1999 and $247.9 million or 40.5% of total loans at December 31,
1998. Residential real estate loans increased in total dollars to $247.7 million
which includes $4.3 million in loans of United First Mortgage, the Company's new
mortgage brokerage subsidiary, and remained relatively consistent as a
percentage of the portfolio at 37.1% of total loans at September 30, 1999 as
compared with $228.3 million or 37.3% at
16
<PAGE> 17
December 31, 1998. Loans to individuals increased slightly from $126.1 million
or 20.6% of total loans at December 31, 1998 to $126.4 million or 19.0% of total
loans at September 30, 1999.
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 $10.5 million at September
30, 1999, or 1.57% of total loans and OREO, down from $11.9 million (1.90% of
total loans) at September 30, 1998 and from $11.7 million (1.91% of total loans)
at December 31, 1998. The following schedule details non-performing assets by
category at the close of each of the last five quarters:
<TABLE>
<CAPTION>
(In Thousands) September 30 June 30 March 31 December 31 September 30
1999 1999 1999 1998 1998
<S> <C> <C> <C> <C> <C>
Non-Accrual $ 8,246 $ 7,970 $7,157 $ 7,763 $ 7,752
Ninety Days Past Due 417 328 493 377 343
Other Real Estate Owned 1,786 1,798 2,041 3,547 3,811
--------- --------- --------- --------- ---------
$10,449 $10,096 $ 9,691 $11,687 $11,906
======= ======= ======= ======= =======
Restructured loans
performing in accordance
with modified terms $ 458 $ 460 $ 524 $ 509 $ 511
========= ========= ========= ======== =========
</TABLE>
Non-accrual loans and loans ninety days past due increased $483,000 and $40,000,
respectively, when comparing September 30, 1999 and December 31, 1998. The
increase in non-accrual loans is the result of the addition of a $2.0 million
dollar commercial loan relationship, which was transferred to non-accrual status
since December 31, 1998. Partially offsetting this addition to non-accrual loans
were several smaller relationships that were brought current. In addition,
ninety day past due loans were impacted by the addition of a number of smaller
accounts that were past due but in the process of collection at September 30,
1999.
Management believes that the extent of problem loans at September 30, 1999 is
disclosed as non-performing assets in the preceding chart. However, there can be
no assurance that future circumstances, such as erosions in economic conditions
and the related potential effect that such erosions may have on certain
borrowers' ability to continue to meet payment obligations, will not lead to an
increase in problem loan totals. Management further believes that non-performing
asset carrying values will be substantially recoverable after taking into
consideration the adequacy of applicable collateral and, in certain cases,
partial writedowns, which have been taken and reserves that have been
established.
DEPOSITS AND FUNDING RESOURCES
Total deposits decreased $32.5 million between year-end 1998 and September 30,
1999. The largest decrease was realized in interest bearing deposits, which
decreased $26.0 million or 3.5% from year-end totals. Interest bearing time
deposits decreased $21.4 million, a 4.6% decrease from year-end 1998. The
decrease in interest-bearing deposits is consistent with the Company's reduced
emphasis on higher rate time deposits and replacement with short-term funding
commitments from the Federal Home Loan Bank. Less aggressive pricing on these
deposits has resulted in slower growth and fewer rollovers of certain jumbo
deposits (greater than $100,000) which are more rate sensitive.
Deposit balances decreased $27.2 million between September 30, 1998 and 1999 and
decreased $11.6 million when comparing average balances for the nine months
ended September 30, 1999 and 1998. The decrease in average balances is also
reflective of the increased emphasis on deposit cost control since the third
quarter of 1998.
Federal funds purchased from the Federal Home Loan Bank of Atlanta were $36.0
million at September 30, 1999. The Federal Home Loan Bank is presently being
used as an alternative to higher rate time and other non-core
17
<PAGE> 18
funding sources in order to stabilize and maintain the net interest margin in
light of lower asset yields realized in 1999.
STOCKHOLDERS' EQUITY
Total stockholders' equity was $102.7 million at September 30, 1999, increasing
$1.0 million, versus $101.7 million reported for December 31, 1998.
Stockholders' equity increased by earnings, net of dividends of $6.5 million.
However, this increase was offset by the decrease in the accumulated other
comprehensive income of $5.3 million from $1,238,000 at December 31, 1998 to an
accumulated other comprehensive loss of $4,096,000 at September 30, 1999.
Stockholders' equity also reflects an increase due to the allocation of $942,000
of the $1,664,000 cost of unallocated ESOP shares and a decrease of $1.0 million
as a result of treasury stock purchases in the first nine months of 1999
pursuant to the Company's stock repurchase program.
The Federal Reserve's risk based capital guidelines and leverage ratios measure
capital adequacy of banking institutions. Risk-based capital guidelines weight
balance sheet assets and off-balance commitments based on inherent risks
associated with the respective asset types. At September 30, 1999, the Company's
risk adjusted capital-to-asset ratio was 13.52%. The Company's leverage ratio at
September 30, 1999 was 8.20% compared with 7.37% at December 31, 1998. Both the
risk adjusted capital-to-asset ratio and the leverage ratio exceed the current
minimum levels prescribed for bank holding companies of 8% and 3%, respectively.
LIQUIDITY
The Company maintains a significant level of liquidity in the form of cash and
due from bank balances ($32.0 million), investment securities available for sale
($218.2 million) and Federal Home Loan Bank credit availability of approximately
$173.3 million. Cash 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.
YEAR 2000
The arrival of January 1, 2000 is expected to cause disruption in some computer
systems with two-digit year fields, which cannot distinguish between the years
1900 and 2000. In response to this potential threat, First Community Bancshares,
Inc. and affiliates established an oversight committee in 1997 to assess its
systems and to direct and monitor its Year 2000 readiness project. As of
September 30, 1999 and the date of this report, the project is substantially
complete with all major milestones achieved. The principal purpose of the
project was to address issues or potential issues involving computer programs
and imbedded computer chips which may be unable to distinguish between the Year
1900 and the Year 2000. The Project Committee is comprised of key management and
operational personnel within the Company. This committee which was appointed by
the Company's Board of Directors, was provided full authority to direct
resources as necessary to ensure that project objectives were achieved and
completed within prescribed time frames and well in advance of the millennium
date change. The committee completed work in the awareness and assessment phases
by identifying those computer systems which the Company uses to process
important information, and those other systems which may have embedded computer
chips which are subject to Year 2000 problems, such as security systems,
elevators and bank vaults. The Committee then determined which of such systems
should be considered "mission critical". The remediation phase involved
upgrading or replacing hardware, software and other systems, which could be
affected by Year 2000 problems. In order to determine the Company's exposure due
to potential third-party Year 2000 problems, the oversight committee coordinated
the risk assessment of significant loan relationships and suppliers, in order to
evaluate the state of readiness of these entities to deal with Year 2000
problems. The remediation and testing phases are complete for all mission
critical systems. Additional testing for some systems may be required as vendor
provided releases are made available throughout the remainder of 1999.
18
<PAGE> 19
Risks
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely effect the Company's
results of operations, liquidity and financial condition. For example, if
significant loan customers experience severe Year 2000 problems, their ability
to repay their loan obligations in a timely manner would be adversely affected.
Due to the general uncertainty inherent in the Year 2000 problem, resulting in
part from the uncertainty of the Year 2000 readiness of certain third party
suppliers and customers, the Company is unable to determine at this time whether
the consequences of Year 2000 failures will have a material impact on the
Company's results of operations, liquidity or financial condition, however, risk
assessments, stratification of significant loan relationships and follow up
assessments have been completed to help reduce the likelihood of problems with
these relationships. Additionally, loan review procedures and assessment of year
2000 readiness of new loan relationships have been implemented. Completion of
the Year 2000 project is expected to significantly reduce the Company's level of
uncertainty about the Year 2000 problem and, in particular, about the Year 2000
compliance and readiness of its material external agents and customers.
Costs
The projected cost of the Year 2000 project (excluding allocation of
administrative time) was approximately $150,000. The total amount expended on
the project through September 30, 1999 is approximately $146,000 and includes a
portion of the cost of existing operational and Information Systems staff in the
assessment, testing and verification of systems. These costs, which have been
charged to operations, are comprised primarily of salaries of existing personnel
who redirected portions of their normal work schedule to complete testing and
validation.
The costs of the project, the dates on which with Company plans to complete Year
2000 modifications, and the impact of third party compliance are based on
management's best estimates which were derived utilizing certain assumptions as
to future events including the availability of outside resources, cooperation
from third parties and external agents of the Company as well as the level of
Year 2000 readiness by various vendors and customers. Some of these assumptions
involve contingencies, which are beyond the control of the Company. Accordingly,
the actual cost and impact of Year 2000 problems, which the Company may
experience, particularly those caused by third-party difficulties, can only be
estimated at this time.
Contingency Planning
The Company has developed a contingency plan for mission critical systems
designed to allow it to avoid significant business interruption in the event
current systems are affected by Year 2000 issues. This Contingency Plan involves
the maintenance of alternate processing sites, acquisition and development of
additional human resources to assist in additional remediation, if necessary,
throughout 1999 and in the first quarter of year 2000, as well as the
development of alternate procedures which can be employed as back-up processes
for existing automated business processes. The Company has validated its
Contingency Plan to assure its effectiveness as a viable business recovery tool.
The plan will be continually evaluated through year-end 1999 and updated in
light of changing circumstances.
PART I. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk (IRR) and Asset/Liability Management
The Bank's profitability is dependent to a large extent upon its net interest
income (NII), which is the difference between its interest income on
interest-earning assets, such as loans and securities, and its interest expense
on interest-bearing liabilities, such as deposits and borrowings. 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 interest rate risk (IRR) have included shortening the average 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.
19
<PAGE> 20
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 of NII
using financial models which project NII 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
attained in those future rate environments and rates which will be paid on
various deposit instruments and borrowings.
The overall interest rate environment remained relatively flat during the first
three months of 1999, however, interest rates have trended up through the second
quarter which included a .25% increase in the Fed Funds Rate by the Federal Open
Market Committee on June 30, 1999 and another .25% increase on August 24, 1999.
The New York prime rate, now at 8.25%, moved up .50% concurrent with the Fed
Funds Rate changes and the treasury yield curve has also experienced increases.
Since December 31, 1998, the Company's balance sheet profile has shifted to a
less asset sensitive position due to the reinvestment of securities into longer
term, higher yielding investments to increase the portfolio yield and increase
the net interest margin. While the interest rate environment has experienced
moderate to significant increases since year-end 1998, changes in market risks
and the Company's exposure to IRR remain within the Company's guidelines for
tolerance of risk to net interest income. A more detailed discussion of interest
rate risk, including tabular presentation of projected changes in net interest
income, is included in the Company's annual report on Form 10-K for December 31,
1998.
20
<PAGE> 21
FIRST COMMUNITY BANCSHARES, INC.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
(a) In the matter of Ann Tierney Smith, Executrix, et al versus FCFT, First
Community Bank, Gentry, Locke and William Gust, the court has ruled in
favor of the Company's motion for dismissal on one key allegation in
the complaint, affirming the Trustee's authority to execute certain
estate plans directed by the donor. The plaintiff filed a motion
requesting an immediate appeal of that ruling to the state supreme
court, however, the court denied this motion in a ruling on April 21,
1999. Discovery and depositions continue in this matter, however, the
Company and legal counsel are of the opinion that it will prevail in
this matter and resolution of this litigation will not have a material
adverse effect 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
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 15 - Letter regarding unaudited interim financial information
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the third quarter of 1999.
21
<PAGE> 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 12, 1999
- ------------------------------
James L. Harrison, Sr.
President & Chief Executive Officer
(Duly Authorized Officer)
DATE: November 12, 1999
- ------------------------------
John M. Mendez
Vice President & Chief Financial Officer
(Principal Accounting Officer)
24
<PAGE> 1
Exhibit 15
November 12,1999
To the Board of Directors and Stockholders
of First Community Bancshares, Inc.
Dear Sirs:
We have made a review, in accordance with standards established by the American
Institute of Certified Public Accountants, of the unaudited interim financial
information of First Community Bancshares, Inc. and subsidiaries for the periods
ended September 30, 1999 and 1998, as indicated in our report dated October 19,
1999; because we did not perform an audit, we expressed no opinion on that
information.
We are aware that our report referred to above, which is included in your
Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, is
incorporated by reference in Registration Statement No. 33-63865 on Form S-8.
We also are aware that the aforementioned report, pursuant to Rule 436(c) under
the Securities Act of 1933, is not considered a part of the Registration
Statement prepared or certified by an accountant or a report prepared or
certified by an accountant within the meaning of Sections 7 and 11 of that Act.
Yours truly,
Deloitte & Touche LLP
Pittsburgh, Pennsylvania
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