<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: June 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.
Nevada 55-0694814
---------------------------------------- -----
One Community Place, Bluefield, Virginia 24605
(540) 326-9000
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 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 August 4, 1999
Common Stock, $1 Par Value 8,769,635
-----------------------------
<PAGE> 2
First Community Bancshares, Inc.
FORM 10-Q
For the quarter ended June 30, 1999
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NUMBER
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 1999 and
December 31, 1998 3
Consolidated Statements of Income and Comprehensive Income
for the Three and Six Month Periods Ended June 30, 1999 and 1998 4
Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 1999 and 1998 5
Consolidated Statements of Changes in Stockholders'
Equity for the Six Months Ended June 30,
1999 and 1998 6
Notes to Consolidated Financial Statements 7-8
Independent Accountants' Report 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-18
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18-19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities and Use of Proceeds 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 21
</TABLE>
2
<PAGE> 3
ITEM 1. FINANCIAL STATEMENTS
FIRST COMMUNITY BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
(Unaudited) June 30 December 31
(Amounts in Thousands, Except Share Data) 1999 1998
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and due from banks $ 31,089 $ 33,943
Interest bearing balances, FHLB 915 57,523
Federal funds sold 1 25,630
Securities available for sale (amortized cost
of $229,997 June 30, 1999; $191,131
December 31, 1998) 224,370 193,194
Investment securities held to maturity:
U.S. Treasury securities 100 100
U.S. Government agencies and corporations 4,507 7,546
States and political subdivisions 74,687 75,009
Other securities 1,363 1,361
----------- -----------
Total Investment Securities held to maturity (market
value, $82,498 June 30, 1999; $88,256 December 31, 1998) 80,657 84,016
----------- -----------
Total loans, net of unearned income 634,695 611,493
Less: reserve for loan losses 11,111 11,404
----------- -----------
Net loans 623,584 600,089
Premises and equipment, net 19,150 17,986
Interest receivable 8,298 7,030
Other assets 13,871 10,231
Intangible assets 23,335 24,346
----------- -----------
Total Assets $ 1,025,270 $ 1,053,988
=========== ===========
Liabilities
Deposits, non-interest bearing $ 120,817 $ 123,992
Deposits, interest-bearing 731,266 752,004
----------- -----------
Total Deposits 852,083 875,996
Interest, taxes and other liabilities 11,907 10,417
Federal funds purchased 9,000 --
Securities sold under agreement to repurchase 40,297 47,680
Other indebtedness 10,197 18,176
----------- -----------
Total Liabilities 923,484 952,269
----------- -----------
Stockholders' Equity
Common stock, $1 par value; 10,000,000 shares
authorized; 8,991,586 issued in 1999 and 1998;
8,772,535 and 8,767,552 shares outstanding in 1999 and 1998 8,992 8,992
Additional paid-in capital 34,264 34,306
Retained earnings 64,593 60,250
Unallocated common stock held by ESOP, at cost (722) (1,664)
Treasury stock, at cost (1,965) (1,403)
Accumulated other comprehensive (loss) income (3,376) 1,238
----------- -----------
Total Stockholders' Equity 101,786 101,719
----------- -----------
Total Liabilities and Stockholders' Equity $ 1,025,270 $ 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 Six Months Ended Three Months Ended
Share and Per Share Data) June 30 June 30
1999 1998 1999 1998
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest Income:
Interest and fees on loans $ 28,029 $ 32,017 $ 14,157 $ 15,951
Interest on securities available for sale 6,594 4,891 3,457 2,155
Interest on investment securities:
U.S. Treasury securities 11 88 10 34
U.S. Government agencies and corporations 162 580 69 258
States and political subdivisions, tax exempt 1,980 2,010 988 993
Other securities 53 42 26 21
Interest on federal funds sold 402 744 106 427
Interest on deposits in banks 401 904 83 781
----------- ----------- ----------- -----------
Total Interest Income 37,632 41,276 18,896 20,620
----------- ----------- ----------- -----------
Interest Expense:
Interest on deposits 15,016 17,339 7,322 8,716
Interest on borrowings 1,314 1,889 604 962
----------- ----------- ----------- -----------
Total Interest Expense 16,330 19,228 7,926 9,678
----------- ----------- ----------- -----------
Net Interest Income 21,302 22,048 10,970 10,942
Provision for loan losses 835 5,076 391 3,789
----------- ----------- ----------- -----------
Net Interest Income After Provision for
Loan Losses 20,467 16,972 10,579 7,153
----------- ----------- ----------- -----------
Non-Interest Income:
Fiduciary income 1,185 884 669 430
Service charges on deposit accounts 1,799 1,861 921 970
Other charges, commissions and fees 812 1,594 432 857
Gain on settlement of pension plan, net of excise tax -- 1,062 -- --
Net securities gains -- 21 -- 21
Other operating income 557 288 193 174
----------- ----------- ----------- -----------
Total Non-Interest Income 4,353 5,710 2,215 2,452
----------- ----------- ----------- -----------
Non-Interest Expense:
Salaries and employee benefits 6,113 6,251 3,046 3,103
Occupancy expense of bank premises 1,033 958 530 459
Furniture and equipment expense 900 1,004 442 515
Goodwill amortization 1,011 1,035 508 500
Other operating expense 4,282 5,478 2,363 2,811
----------- ----------- ----------- -----------
Total Non-Interest Expense 13,339 14,726 6,889 7,388
----------- ----------- ----------- -----------
Income before income taxes 11,481 7,956 5,905 2,217
Income tax expense 3,529 2,466 1,787 681
----------- ----------- ----------- -----------
Net Income 7,952 5,490 4,118 1,536
Other comprehensive loss, net of tax (4,614) (54) (3,517) (172)
----------- ----------- ----------- -----------
Comprehensive Income $ 3,338 $ 5,436 $ 601 $ 1,364
=========== =========== =========== ===========
Basic and diluted earnings per common share $ .91 $ .62 $ .47 $ .18
=========== =========== =========== ===========
Weighted average basic and diluted shares outstanding 8,781,110 8,819,926 8,776,799 8,811,326
=========== =========== =========== ===========
</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) Six Months Ended
June 30
----------------------------
1999 1998
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income $ 7,952 $ 5,490
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 835 5,076
Depreciation of premises and equipment 709 749
Amortization of intangibles 988 925
Investment amortization and accretion, net 283 (145)
Gain on the sale of assets, net (264) (83)
Other liabilities, net 2,080 (2,199)
Interest receivable (1,268) 930
Other assets, net (2,003) 2,194
Other, net (56) 29
--------- ---------
Net cash provided by operating activities 9,256 12,966
--------- ---------
Cash Flows From Investment Activities:
Increase (decrease) in cash realized from:
Maturities and calls of investment securities 3,374 16,006
Maturities and calls of securities available for sale 20,393 63,407
Purchase of investment securities -- (120)
Purchase of securities available for sale (63,068) (23,185)
Sales of securities available for sale 3,511 --
Net (increase) decrease in loans made to customers (22,152) 9,079
Purchase of equipment (1,996) (233)
Sales of equipment 33 28
--------- ---------
Net cash (used in) provided by investment activities (59,905) 64,982
--------- ---------
Cash Flows From Financing Activities:
Increase (decrease) in cash realized from:
Demand and savings deposits, net (6,514) 14,225
Time deposits, net (17,396) 3,042
Short-term borrowings, net 1,617 (3,960)
Increase in long-term debt -- 3,000
Payments of long-term debt (7,979) (3,664)
Acquisition of Treasury stock (562) --
Acquisition of unallocated ESOP shares -- (1,274)
Cash paid in lieu of fractional shares -- (27)
Cash dividends paid (3,608) (3,517)
--------- ---------
Net cash (used in) provided by financing activities (34,442) 7,825
--------- ---------
Net (decrease) increase in cash and cash equivalents (85,091) 85,773
Cash and cash equivalents at beginning of year 117,096 47,123
--------- ---------
Cash and cash equivalents at end of quarter $ 32,005 $ 132,896
========= =========
</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
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 -- -- 5,490 -- -- --
Common dividends
declared ($.40
per common share) -- -- (3,518) -- -- --
Purchase of unallocated common
stock by ESOP (1,274)
Other comprehensive loss, net of tax -- -- -- -- -- (54)
-------- -------- -------- -------- -------- --------
Balance, June 30, 1998 $ 8,992 $ 34,306 $ 56,536 $ (1,274) $ (1,271) $ 1,197
======== ======== ======== ======== ======== ========
Balance beginning of
the period,
January 1, 1999 $ 8,992 $ 34,306 $ 60,250 $ (1,664) $ (1,403) $ 1,238
Net income -- -- 7,952 -- -- --
Common dividends
declared ($.41
per common share) -- -- (3,609) -- -- --
Allocation of ESOP shares -- (42) -- 942 -- --
Purchase of 22,312 shares of treasury
stock at $25.18 (562)
Other comprehensive loss, net of tax -- -- -- -- -- (4,614)
-------- -------- -------- -------- -------- --------
Balance, June 30, 1999 $ 8,992 $ 34,264 $ 64,593 $ (722) $ (1,965) $ (3,376)
======== ======== ======== ======== ======== ========
</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 June 30, 1999 and the unaudited
consolidated statements of income and other comprehensive income, cash flows and
changes in stockholders' equity for the periods ended June 30, 1999 and 1998
have been prepared by management of First Community Bancshares, Inc. (FCBI, the
"Company"). In the opinion of management, all adjustments (including normal
recurring accruals) necessary to present fairly the financial position of FCBI
and subsidiaries at June 30, 1999 and its results of operations, cash flows, and
changes in stockholders' equity for the periods ended June 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 disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been omitted. It is suggested that these financial statements be
read in conjunction with the financial statements and notes thereto included in
the 1998 Annual Report of FCBI.
NOTE 2. CASH FLOWS
For the six months ended June 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 $32.0 million at
June 30, 1999 and $111.7 million at June 30, 1998, and federal funds sold of
$1,000 at June 30, 1999 and $21.2 million at June 30, 1998.
NOTE 3. COMMITMENTS AND CONTINGENCIES
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, some of which have remained dormant for a number of years.
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. The court recently 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 4. 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 5. 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
7
<PAGE> 8
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 applications of the
provisions of this Statement are 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.
In October 1998, the FASB issued Statement of Financial Accounting Standard
(SFAS) No. 134. This Statement addresses the Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise. This Statement amends FASB Statements No. 65 and
No. 115. This Statement is effective for the first fiscal quarter beginning
after December 15, 1998. Management is currently in the process of evaluating
the impact of Statement No. 134.
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>
Six months ended Three months ended
June 30 June 30
1999 1998 1999 1998
---------------------- -----------------------
<S> <C> <C> <C> <C>
(Amounts in Thousands)
OTHER COMPREHENSIVE INCOME:
Holding losses arising during the period $(7,690) $ (89) $(5,862) $ (288)
Tax benefit 3,076 35 2,345 116
------- ------- ------- -------
Holding losses arising during the period, net of tax (4,614) (54) (3,517) (172)
Reclassification adjustment for (gains) losses realized
in net income -- -- -- --
Tax expense (benefit) of reclassifications -- -- -- --
------- ------- ------- -------
Other comprehensive loss, net of tax (4,614) (54) (3,517) (172)
Beginning accumulated other comprehensive income 1,238 1,251 141 1,369
------- ------- ------- -------
Ending accumulated other comprehensive (loss) income $(3,376) $ 1,197 $(3,376) $ 1,197
======= ======= ======= =======
</TABLE>
NOTE 7. SUBSEQUENT EVENTS
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 will total
$460,000 and will result in an approximate 4% ownership interest in the
consortium.
NOTE 8. CORPORATE REORGANIZATION
On April 19th, the Company completed the move of its corporate headquarters to
Virginia and is now occupying its new Corporate Center at One Community Place in
Bluefield, Virginia. Also effective April 30, 1999, the Company completed the
consolidation of the former four subsidiary banks through the merger of three
subsidiaries into First Community Bank, Inc., the surviving bank, which was then
converted to a National Charter. As a result, all First Community divisions and
branches operate as First Community Bank, N.A., the sole banking subsidiary of
First Community Bancshares, Inc.
8
<PAGE> 9
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 June 30, 1999, and the related
consolidated statements of income and comprehensive income, changes in
stockholders' equity and cash flows for the three-month and six-month periods
ended June 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
July 16, 1999
9
<PAGE> 10
FIRST COMMUNITY BANCSHARES, INC.
PART 1. 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 $8.0 million for the six month period ended
June 30, 1999, a 44.9% increase over net income of $5.5 million for the
corresponding period in 1998. Basic earnings per common share between the two
periods increased 46.8%, from $.62 to $.91.
Net income for the second quarter of 1998 was 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 that quarter. The Company recognized the
write-off in operations for the quarter and retained existing reserves to
maintain overall asset quality and strengthen its reserve coverage of
non-performing loans. The reduction in non-performing loans and additional
provisions totaling $2.9 million increased the reserve to non-performing loans
ratio to 112.2% as of June 30, 1998, up from 79.3% at year-end 1997 and has been
further increased to 133.9% at June 30, 1999 in comparison to 140.1% at December
31, 1998.
Net income for the second quarter of 1999 totaled $4.1 million, 168.1% higher
than net earnings for the corresponding second quarter of 1998. The increase
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. Net income for the second quarter of 1999 reflects a decline in
interest income, however, this was offset by a corresponding reduction in
interest expense in order to maintain 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 $1.3 million and in operating expenses of
$835,000 associated with credit card maintenance and operations when comparing
the six month periods ended June 30, 1999 to June 30, 1998.
Non-interest income for the six month period ended June 30, 1999 decreased
$1,357,000 from the comparable period in 1998. The largest portion of this
decrease is the result of a one time gain on settlement of the Company's defined
benefit pension plan in the first half of 1998 totaling $1.062 million and an
$855,000 reduction in 1999 service charges, commissions and fees stemming from
the sale of the credit card portfolio. The credit card portfolio was sold in the
third and fourth quarters of 1998. However, this reduction was partially offset
by a $301,000 increase in fiduciary earnings in the first half of 1999.
Basic and diluted earnings per share for the second quarter of 1999 were $.47
versus $.18 for the three months ended June 30, 1998. The per share amounts
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.
10
<PAGE> 11
NET INTEREST INCOME
Net interest income, the largest contributor to earnings was $21.3 million for
the first six months of 1999 as compared with $22.0 million for the
corresponding period in 1998. Tax equivalent net interest income totaled $23.0
million for the first half of 1999, a decrease of $.6 million from the $23.6
million reported in the first six months of 1998. This decrease in net interest
income relates largely to a $50.1 million decrease in average loans between the
two periods 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 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. Partially offsetting the
decline due to loan volume was an increase in the level of tax exempt earnings
and assets as well as significant reductions in deposit interest cost.
The Company's tax equivalent net interest margin of 4.91% for the first half of
1999 reflects a declining yield on earning assets, largely offset by the
declining cost of funds, from the first six months of 1998 when tax equivalent
net interest margin was 4.93%. The Company's earning asset base moved from loans
to investment securities and securities available for sale as a result of loan
prepayments experienced in 1998. The overall yield on average earning assets
declined by 57 basis points from 8.95% at June 30, 1998 to 8.38% at June 30,
1999. Alternatively, the cost of interest-bearing liabilities declined by 54
basis points from 4.63% in 1998 to 4.09% 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 5.02% at the end of June
1999.
Loans, the Company's highest yielding asset category, experienced a decrease in
average balances of $50.1 million or 7.5%, comparing the first six 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 9.25% for the first six months of 1999 down from 9.79%
for the same period in 1998. The tax equivalent yield on securities available
for sale declined from 6.90% in 1998 to 6.32% in the corresponding first six
months of 1999. Investment securities held to maturity experienced a 59 basis
points increase in yield from 7.45% in the first six months of 1998 to 8.04% for
the corresponding period in 1999.
Average balances in securities available for sale increased from the June 30,
1998 level of $150.7 million to $226.0 million at June 30, 1999. This increase
is the result of the 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 4.57% in 1998 to 3.74% for the corresponding first six months of
1999 while time deposits decreased 39 basis points from 5.57% in the first six
months of 1998 to 5.18% for the corresponding period in 1999. Interest-bearing
demand deposits experienced a 63 basis point decrease from 2.80% in 1998 to
2.17% in 1999. Savings accounts experienced a similar 69 basis point decrease
from 3.04% in 1998 to 2.35% 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
and resulted in stabilizing interest margins in the first half 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 second quarter of 1999 with the second quarter of 1998, net
interest income remained relatively flat. Despite decreases in earning assets
and the declining asset yields as a result of prepayment and refinancing
activity between the quarters, interest income declined $1.72 million while
deposit cost declined by $1.75 million between the quarters. Deposit cost
reflected reductions in all categories of interest bearing liabilities between
June 30, 1999 and 1998.
11
<PAGE> 12
AVERAGE BALANCE SHEETS AND
NET INTEREST INCOME ANALYSIS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1999 JUNE 30, 1998
(UNAUDITED) --------------------------------------- ----------------------------------------
(AMOUNTS IN AVERAGE INTEREST YIELD/RATE AVERAGE INTEREST YIELD/RATE
THOUSANDS) BALANCE (1) (2) (2) BALANCE (1) (2) (2)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Earning Assets:
Loans (3)
Taxable $ 604,577 27,670 9.23% $ 651,163 $ 31,524 9.76%
Tax-Exempt 10,421 552 10.69% 13,921 759 10.99%
----------- -------- ----------- ----------- -----
Total 614,998 28,222 9.25% 665,084 32,283 9.79%
-------- -----------
Reserve for Loan Losses (11,277) (11,816)
----------- -----------
Net Total 603,721 653,268
Investments Available for Sale:
Taxable 189,063 5,676 6.05% 128,158 4,392 6.91%
Tax-Exempt 36,974 1,411 7.70% 22,528 767 6.86%
----------- -------- ----------- -----------
Total 226,037 7,087 6.32% 150,686 5,159 6.90%
-------- ----------- -----------
Investment Securities Held to Maturity:
Taxable 7,579 258 6.86% 25,005 899 7.25%
Tax-Exempt 74,107 2,998 8.16% 75,185 2,802 7.52%
----------- -------- ----------- -----------
Total 81,686 3,256 8.04% 100,190 3,701 7.45%
-------- -----------
Interest-Bearing Deposits 17,963 401 4.50% 32,969 904 5.53%
Federal Funds Sold 17,730 402 4.57% 27,328 744 5.49%
----------- -------- ----- ----------- ----------- -----
Total Earning Assets 947,137 39,368 8.38% 964,441 42,791 8.95%
-------- ----- ----------- -----
Other Assets 94,101 93,867
----------- -----------
Total $ 1,041,238 $ 1,058,308
=========== ===========
Interest-Bearing Liabilities:
Interest-Bearing Demand Deposits$ 137,646 1,482 2.17% $ 131,963 1,835 2.80%
Savings Deposits 147,939 1,725 2.35% 151,747 2,287 3.04%
Time Deposits 459,461 11,809 5.18% 478,772 13,217 5.57%
Short-Term Borrowings 45,272 839 3.74% 50,894 1,154 4.57%
Other Indebtedness 15,638 474 6.11% 23,749 735 6.24%
----------- -------- ------ ----------- ----------- -----
Total Interest-Bearing Liabilities 805,956 16,329 4.09% 837,125 19,228 4.63%
----------- -------- ------ ----------- ----------- -----
Demand Deposits 119,459 108,178
Other Liabilities 11,996 12,884
Stockholders' Equity 103,827 100,121
----------- -----------
Total $ 1,041,238 $ 1,058,308
=========== ===========
Net Interest Earnings $ 23,039 $ 23,563
======== ===========
Net Interest Spread 4.29% 4.32%
====== =====
Net Interest Margin 4.91% 4.93%
====== =====
</TABLE>
(1) Interest amounts represent taxable equivalent results for the first six
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.
12
<PAGE> 13
PROVISION AND RESERVE FOR LOAN LOSSES
In order to maintain a balance in the reserve for loan losses which is
sufficient to absorb potential loan losses, charges are made to the provision
for loan losses (provision). The provision was $835,000 for the first six months
of 1999 compared with $5,076,000 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%.
First Community 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 either on non-accrual
status, ninety-days past due or 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
June 30, 1999, and December 31, 1998.
<TABLE>
<CAPTION>
June 30 December 31
(In Thousands) 1999 1998
------- -------
<S> <C> <C>
Specific Reserves $ 1,762 $ 1,642
Formula and Unallocated Reserves 9,349 9,762
------- -------
Total Reserves $11,111 $11,404
======= =======
</TABLE>
The formula and unallocated reserve for loan losses decreased by $413,000 or
4.2% when comparing June 30, 1999 to December 31, 1998. The decline is primarily
a function of a decline in net charge-offs as a result of the sale of the credit
card portfolio, improvements in consumer loan underwriting, and a general
improvement in overall loan quality. In light of the reduction in net
charge-offs in 1999, the monthly provision for possible loan losses was reduced
from the prior year level.
Net charge-offs for the first half of 1999 were $1.1 million as compared to $4.7
million for the corresponding period in 1998. Expressed as a percentage of
average loans, net charge-offs were .18% for the six month period ended June 30,
1999 and .71% for the corresponding period in 1998.
The reserve for loan losses totaled $11.1 million at June 30, 1999 and 11.4
million at December 31, 1998 resulting in reserve to loan ratios of 1.75% and
1.87% for the respective periods.
13
<PAGE> 14
The coverage ratio represents the percentage of non-performing loans covered
through available reserves. As of June 30, 1999, this ratio was 133.9% as
compared to 112.2% at June 30, 1998 and 140.1% at December 31, 1998.
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 of
June 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 allowance at June 30, 1999.
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 decreased
$1,357,000, or 23.8% from $5,710,000 for the six months ended June 30, 1998 to
$4,353,000 for the corresponding period in 1999. The largest contributor to the
decrease in non-interest income is the recognition in 1998 of a $1.062 million
gain on the settlement of the Company's defined benefit pension plan. In
addition to this non-recurring gain, service charges, commissions and other
revenues decreased 49.1% due in large part to the reduced transaction fees of
$855,000 associated with the sale of the credit card portfolio. Non-interest
income decreased $237,000 when comparing the second quarter of 1998 to the
corresponding period in 1999, of which $159,000 was the result of the sale of
the credit card division.
NON-INTEREST EXPENSE
Non-interest expense which totaled $13.3 million in the first six months of 1999
decreased $1.4 million from $14.7 million in the corresponding period in 1998.
The largest contributor to the decline relates to the elimination of credit card
costs of $1.2 million including credit card processing fees of $835,000, as a
result of the sale of substantially all credit card loans. Other operating
expense of $4,282,000 for the six months ended June 30, 1999 decreased by $1.2
million from $5,478,000 in the corresponding period in 1998. This category of
costs includes the $835,000 decrease is credit card processing fees.
Non-interest expense decreased $500,000 when comparing the second quarter of
1998 to the corresponding period in 1999. Of this amount, the credit card
operating expenses accounted for approximately $493,000, substantially all of
the reduction.
14
<PAGE> 15
FINANCIAL POSITION
SECURITIES
Securities consisting of U.S. Agency and state and municipal bonds and various
collateralized mortgage obligations totaled $305.0 million at June 30,1999 which
represents an increase of $27.8 million from December 31, 1998. This 10.0%
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 $224.4 million at June 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 $4.6 million to an accumulated other comprehensive loss of $3.4
million at June 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 increase in market value, net of tax, of $856,000 between the close of the
second quarter and the end of July 1999.
The Held to Maturity category of investment securities, which is purchased with
the intent to hold until maturity, totaled $80.7 million at June 30, 1999 as
compared with $84.0 million at December 31, 1998. The market value of these
securities was 105.1% and 102.3% of book value at December 31, 1998 and June 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 $23.2 million from $611.5 million at December 31, 1998 to
$634.7 million at June 30, 1999. Likewise, the loan to deposit ratio increased
from 69.8% at December 31, 1998 to 74.5% at June 30, 1999. The increase in
outstanding loans reflects a slight 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 $50.1 million between the second 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 half 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 $260.4 million or 40.9% of total loans at
June 30, 1999 and $247.9 million or 40.4% of total loans at December 31, 1998.
Residential real estate loans increased in total dollars to $237.4 million and
increased as a percentage of the portfolio to 37.3% of total loans at June 30,
1999 as compared with $228.2 million or 37.2% at December 31, 1998. Loans to
individuals decreased slightly from $126.6 million or 20.9% of total loans at
December 31, 1998 to $125.8 million or 19.8% of total loans at June 30, 1999.
15
<PAGE> 16
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 $10.1 million at June 30,
1999, or 1.59% of total loans and OREO, compared with $11.7 million or 1.91% 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) June 30 March 31 December 31 September 30 June 30
1999 1999 1998 1998 1998
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Non-Accrual $ 7,970 $ 7,157 $ 7,763 $ 7,752 $ 8,725
Ninety Days Past Due 328 493 377 343 1,740
Other Real Estate Owned 1,798 2,041 3,547 3,811 2,878
------- ------- ------- ------- -------
$10,096 $ 9,691 $11,687 $11,906 $13,343
======= ======= ======= ======= =======
Restructured loans
performing in accordance
with modified terms $ 460 $ 524 $ 509 $ 511 $ 517
======= ======= ======= ======= =======
</TABLE>
Non-accrual loans increased $207,000 while loans ninety days past due decreased
$49,000, respectively when comparing June 30, 1999 to December 31, 1998. The
increase in non-accrual loans is the result of the addition of a $2.0 million
commercial loan relationship, which was transferred to non-accrual status.
However, this was largely offset by the cure of several smaller commercial
relationships that were brought current or liquidated and removed from
non-accrual status as a result of proceeds received on the outstanding balances.
The $2.0 million loan relationship referenced above represents a real estate
secured commercial loan with planned a resolution involving liquidation of the
collateral through foreclosure. The volume of non-accrual loans remains near
$8.0 million due to several larger loan relationships which are slow in
resolution due to pending Chapter 11 Bankruptcy proceedings.
Management believes that the extent of problem loans at June 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 allowances that have been
established.
STOCKHOLDERS' EQUITY
Total stockholders' equity was $101.8 million at June 30, 1999, substantially
unchanged, versus $101.7 million reported for December 31, 1998. Stockholders'
equity was increased by earnings net of dividends of $4.4 million. However, this
increase was offset by the decrease in the accumulated other comprehensive
income of $4.6 million from $1,238,000 at December 31, 1998 to an accumulated
other comprehensive loss of $3,376,000 at June 30, 1999. Stockholders' equity
also reflects an increase due to the allocation of $942,000 of the $1,274,000
cost of unallocated ESOP shares and a decrease of $562,000 as a result of
treasury stock purchases in the first half of 1999 pursuant to the Company's
stock repurchase program.
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 commitments based on inherent risks
associated with the respective asset types. At June 30, 1999, the Company's risk
adjusted capital-to-asset ratio was 13.80%. The Company's leverage ratio at June
30, 1999 was 8.07% 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.
16
<PAGE> 17
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
($224.4 million) and Federal Home Loan Bank credit availability of approximately
$149.0 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 June
30, 1999 and the date of this report, the project is proceeding on schedule with
all major milestones in the project now complete. The principal purpose of the
project is 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, has full authority to direct resources as
necessary to ensure that project objectives are 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.
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.
17
<PAGE> 18
Costs
The projected cost of the Year 2000 project (excluding allocation of
administrative time) is approximately $150,000. The total amount expended on the
project through June 30, 1999 is approximately $132,000 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 have redirected portions of their normal work schedule to complete testing
and validation. The total remaining cost of the Year 2000 project is estimated
at $22,000, which will be used primarily to replace additional personal
computers, which are not considered mission critical. These remaining computers
will be placed into service within the third quarter of 1999.
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.
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 over the past
several months and concluded the quarter with the Federal Open Market Committee
increasing the Fed Funds rate by .25% on June 30, 1999. The New York prime rate,
now at 8.00%, moved up .25% with the Fed Funds rate and the treasury yield curve
has also experienced increases. Since
18
<PAGE> 19
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. The interest rate environment has experienced moderate
increases since year-end 1998, however 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.
FCB, 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 Gurst, 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
(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
19
<PAGE> 20
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 second quarter of 1999.
20
<PAGE> 21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
First Community Bancshares, Inc.
DATE: August 12, 1999
/s/ JAMES L. HARRISON, SR.
- ----------------------------------------
James L. Harrison, Sr.
President & Chief Executive Officer
(Duly Authorized Officer)
DATE: August 12, 1999
/s/ JOHN M. MENDEZ
- ----------------------------------------
John M. Mendez
Vice President & Chief Financial Officer
(Principal Accounting Officer)
21
<PAGE> 1
Exhibit 15
August 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 June 30, 1999 and 1998, as indicated in our report dated July 16, 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 June 30, 1999, is
incorporated by reference in Registration Statement No. 333-63865 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,
/s/ Deloitte & Touche LLP
Pittsburgh, Pennsylvania
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 31,089
<INT-BEARING-DEPOSITS> 915
<FED-FUNDS-SOLD> 1
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 224,370
<INVESTMENTS-CARRYING> 80,657
<INVESTMENTS-MARKET> 82,498
<LOANS> 634,695
<ALLOWANCE> 11,111
<TOTAL-ASSETS> 1,025,270
<DEPOSITS> 852,083
<SHORT-TERM> 49,297
<LIABILITIES-OTHER> 11,907
<LONG-TERM> 10,197
0
0
<COMMON> 8,992
<OTHER-SE> 92,794
<TOTAL-LIABILITIES-AND-EQUITY> 1,025,270
<INTEREST-LOAN> 28,029
<INTEREST-INVEST> 8,800
<INTEREST-OTHER> 803
<INTEREST-TOTAL> 37,632
<INTEREST-DEPOSIT> 15,016
<INTEREST-EXPENSE> 16,330
<INTEREST-INCOME-NET> 21,302
<LOAN-LOSSES> 835
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 13,339
<INCOME-PRETAX> 11,481
<INCOME-PRE-EXTRAORDINARY> 11,481
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,952
<EPS-BASIC> .91
<EPS-DILUTED> .91
<YIELD-ACTUAL> 4.91
<LOANS-NON> 7,970
<LOANS-PAST> 328
<LOANS-TROUBLED> 460
<LOANS-PROBLEM> 10,096
<ALLOWANCE-OPEN> 11,404
<CHARGE-OFFS> 1,495
<RECOVERIES> 367
<ALLOWANCE-CLOSE> 11,111
<ALLOWANCE-DOMESTIC> 1,762
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 9,349
</TABLE>
