<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: March 31, 2000 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, VA 24605-0989
(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 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 April 25, 2000
Common Stock, $1 Par Value 8,665,215
-----------------------------
<PAGE> 2
First Community Bancshares, Inc.
FORM 10-Q
For the quarter ended March 31, 2000
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NUMBER
-----------
Item 1. Financial Statements
<S> <C>
Consolidated Balance Sheets as of March 31, 2000 and
December 31, 1999 3
Consolidated Statements of Income for the Three Months
Ended March 31, 2000 and 1999 4
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 2000 and 1999 5
Consolidated Statements of Changes in Stockholders'
Equity for the Three Months Ended March 31,
2000 and 1999 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 10-17
Item 3. Quantitative and Qualitative Disclosures About Market 17
Risk
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities and Use of Proceeds 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of 18
Security Holders
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19-21
SIGNATURES 22
</TABLE>
2
<PAGE> 3
ITEM 1. FINANCIAL STATEMENTS
FIRST COMMUNITY BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
(UNAUDITED) MARCH 31 DECEMBER 31
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA) 2000 1999
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and cash equivalents $ 46,720 $ 37,797
Securities available for sale (amortized cost
of $214,682 March 31, 2000; $221,226
December 31, 1999) 205,155 212,105
Investment securities held to maturity (market
value of $79,033 March 31, 2000; $78,917
December 31, 1999) 78,616 78,768
Total loans, net of unearned income 724,347 704,096
Less: allowance for loan losses 11,851 11,900
----------- -----------
Net loans 712,496 692,196
Premises and equipment, net 18,494 18,630
Other real estate 2,422 1,950
Interest receivable 7,450 8,090
Other assets 21,275 15,178
Intangible assets 22,922 23,448
----------- -----------
Total Assets $ 1,115,550 $ 1,088,162
=========== ===========
Liabilities
Deposits, non-interest bearing $ 115,598 $ 115,288
Deposits, interest-bearing 728,820 717,970
----------- -----------
Total Deposits 844,418 833,258
Interest, taxes and other liabilities 13,102 13,436
Federal funds purchased -- 86,700
Securities sold under agreement to repurchase 39,610 41,062
FHLB borrowings and other indebtedness 113,842 10,218
----------- -----------
Total Liabilities 1,010,972 984,674
=========== ===========
Stockholders' Equity
Common stock, $1 par value; 10,000,000 shares authorized in
2000 and 1999, respectively; 8,991,586 issued in 2000 and 1999;
8,697,927 and 8,726,836 shares outstanding in 2000 and 1999 8,992 8,992
Additional paid-in capital 34,168 34,264
Retained earnings 71,130 69,372
Unallocated common stock held by ESOP -- (722)
Treasury stock, at cost (3,996) (2,945)
Accumulated other comprehensive loss (5,716) (5,473)
----------- -----------
Total Stockholders' Equity 104,578 103,488
----------- -----------
Total Liabilities and Stockholders' Equity $ 1,115,550 $ 1,088,162
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE> 4
FIRST COMMUNITY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
(UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT THREE MONTHS ENDED
SHARE AND PER SHARE DATA) MARCH 31
----------------------------
2000 1999
- ----------------------------------------------------------------------------------
<S> <C> <C>
Interest Income:
Interest and fees on loans $ 15,995 $ 13,872
Interest on securities available for sale 3,260 3,137
Interest on investment securities 1,061 1,113
Interest on federal funds sold -- 296
Interest on deposits in banks 59 318
---------- ----------
Total Interest Income 20,375 18,736
---------- ----------
Interest Expense:
Interest on deposits 7,161 7,694
Interest on borrowings 1,744 710
---------- ----------
Total Interest Expense 8,905 8,404
---------- ----------
Net Interest Income 11,470 10,332
Provision for loan losses 662 444
---------- ----------
Net Interest Income After Provision for
Loan Losses 10,808 9,888
---------- ----------
Non-Interest Income:
Fiduciary income 500 516
Service charges on deposit accounts 812 878
Other charges, commissions and fees 647 380
Other operating income 805 364
---------- ----------
Total Non-Interest Income 2,764 2,138
---------- ----------
Non-Interest Expense:
Salaries and employee benefits 4,047 3,067
Occupancy expense of bank premises 640 503
Furniture and equipment expense 478 458
Goodwill amortization 526 503
Other operating expense 2,485 1,919
---------- ----------
Total Non-Interest Expense 8,176 6,450
---------- ----------
Income before income taxes 5,396 5,576
Income tax expense 1,718 1,742
---------- ----------
Net Income $ 3,678 $ 3,834
========== ==========
Basic and diluted earnings per common share $ 0.42 $ 0.44
========== ==========
Weighted average shares outstanding 8,715,414 8,786,269
========== ==========
</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) THREE MONTHS ENDED
MARCH 31
---------------------------
2000 1999
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income $ 3,678 $ 3,834
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for possible loan losses 662 444
Depreciation of premises and equipment 345 375
Amortization of goodwill and other intangibles 537 491
Investment amortization and accretion, net 67 153
Gain on the sale of assets, net (529) (247)
Change in other liabilities 292 2,138
Change in interest receivable 640 (341)
Change in other assets (1,835) (974)
Change in other 70 (50)
--------- ---------
Net cash (used in) provided by operating activities 3,927 5,823
--------- ---------
Cash Flows From Investment Activities:
Increase (decrease) in cash realized from:
Maturities and calls of investment securities 160 2,704
Maturities and calls of securities available for sale 6,924 11,493
Sales of securities available for sale 1,650 --
Purchases of securities available for sale (2,102) (59,764)
Net (increase) decrease in loans made to customers (20,935) 2,233
Purchase of bank owned life insurance (4,100) --
Purchase of equipment (263) (1,835)
Sales of equipment -- 5
--------- ---------
Net cash used in investment activities (18,666) (45,164)
--------- ---------
Cash Flows From Financing Activities:
Increase (decrease) in cash realized from:
Demand and savings deposits, net 2,658 (5,116)
Time deposits, net 8,503 (4,968)
Short-term borrowings, net 15,478 272
Payments of long-term debt (6) (74)
Acquisition of treasury stock (1,051) (399)
Cash paid in lieu of fractional shares -- (18)
Cash dividends paid (1,920) (1,762)
--------- ---------
Net cash provided by (used in) financing activities 23,662 (12,065)
--------- ---------
Net increase (decrease) in cash and cash equivalents 8,923 (51,406)
Cash and cash equivalents at beginning of year 37,797 117,096
--------- ---------
Cash and cash equivalents at end of quarter $ 46,720 $ 65,690
========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
<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 ESOP TREASURY COMPREHENSIVE
STOCK CAPITAL EARNINGS SHARES STOCK INCOME (LOSS) TOTAL
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance beginning of
the period,
January 1, 1999 $ 8,992 $ 34,306 $ 60,250 $ (1,664) $ (1,403) $ 1,238 $ 101,719
Comprehensive income:
Net Income -- -- 3,834 -- -- -- 3,834
Other comprehensive income:
Unrealized holding losses on
securities available for sale,
net of tax -- -- -- -- -- (1,097) (1,097)
--------- --------- ---------
Comprehensive income -- -- 3,834 -- -- (1,097) 2,737
Common dividends
declared ($.20
per common share) -- -- (1,762) -- -- -- (1,762)
Purchase 17,890 treasury shares
at $22.35 per share -- -- -- -- (399) -- (399)
Allocation of ESOP shares -- (42) -- 942 -- -- 900
--------- --------- --------- --------- --------- --------- ---------
Balance, March 31, 1999 $ 8,992 $ 34,264 $ 62,322 $ (722) $ (1,802) $ 141 $ 103,195
========= ========= ========= ========= ========= ========= =========
Balance beginning of
the period,
January 1, 2000 $ 8,992 $ 34,264 $ 69,372 $ (722) $ (2,945) $ (5,473) $ 103,488
Comprehensive income:
Net Income -- -- 3,678 -- -- -- 3,678
Other comprehensive income:
Unrealized holding losses on
securities available for sale,
net of tax -- -- -- -- -- (243) (243)
--------- --------- ---------
Comprehensive income -- -- 3,678 -- -- (243) 3,435
Common dividends
declared ($.22
per common share) -- -- (1,920) -- -- -- (1,920)
Purchase 53,150 treasury shares
at $19.78 per share -- -- -- -- (1,051) -- (1,051)
Allocation of ESOP shares -- (96) -- 722 -- -- 626
--------- --------- --------- --------- --------- --------- ---------
Balance, March 31, 2000 $ 8,992 $ 34,168 $ 71,130 $ -- $ (3,996) $ (5,716) $ 104,578
========= ========= ========= ========= ========= ========= =========
</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 March 31, 2000 and the unaudited
consolidated statements of income, cash flows, and changes in stockholders'
equity for the periods ended March 31, 2000 and 1999 have been prepared by the
management of First Community Bancshares, Inc. (FCBI). In the opinion of
management, all adjustments (including normal recurring accruals) necessary to
present fairly the financial position of First Community Bancshares, Inc. and
subsidiaries at March 31, 2000 and its results of operations, cash flows, and
changes in stockholders' equity for the periods ended March 31, 2000 and 1999,
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, 1999 has been extracted from
audited financial statements included in the Company's 1999 Annual Report to
Shareholders. 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 1999 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 and when acquired had assets of approximately $6.4
million and 9 offices located in a geographic region along a corridor of
Interstates 64 and 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. The acquisition was accounted for under the purchase method of
accounting. Accordingly, results of operations of UFM are included in the
consolidated results 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 and are included in total loans
outstanding as of March 31, 2000. The loans are reviewed individually and
presented at the lower of cost or market value.
NOTE 3. BORROWINGS
Structured term borrowings from the FHLB of $100 million are presently being
used as a moderately priced funding vehicle and were used to repay the overnight
funds purchased from the FHLB at December 31, 1999. The structured term
borrowings have varying maturities from five to ten years, however; these
advances are callable in quarterly increments after a predefined lockout period.
The Company has additional term borrowings from the FHLB of $10 million and are
included with FHLB borrowings and other indebtedness on the balance sheet.
NOTE 4. 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.
7
<PAGE> 8
The Company is currently involved in litigation styled Ann Tierney Smith,
Executrix, et al versus FCFT, First Community Bank, Gentry, Locke Rakes & Moore
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 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 and court ordered
mediation was conducted on May 2, 2000 with no outcome. A trial date has been
set for October 2000. The Company intends to vigorously defend this action and
both 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.
Subsequent to December 31, 1999, the Company was named as defendant in a civil
action brought by a not-for-profit foundation (plaintiff) as beneficiary under a
Trust Under Will administered by the Company's Trust and Financial Services
Division. The complaint formalized previous asserted but unfiled claims that the
Bank as Trustee failed to appropriately acknowledge and follow the investment
philosophy set forth by the plaintiff which allegedly resulted in a $425,000
loss of value of a bequest. The complaint further alleges that the Trustee
failed to act prudently with respect to the investment of the Trust funds and
alleges that account management fees charged to the Trust account were excessive
and did not constitute legitimate services tangibly benefiting the Trust
account. The Company vigorously denies these allegations and has prepared an
appropriate response to this complaint. The suit seeks recovery of the alleged
losses, removal of the Trustee and unspecified punitive damages. At this time,
it is not possible to predict the outcome of this action; however, the Company
and its legal counsel believe that the Company possesses meritorious defenses
and intend to vigorously defend this suit.
NOTE 5. 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>
March 31 March 31
2000 1999
------- -------
(Amounts in Thousands)
<S> <C> <C>
OTHER COMPREHENSIVE INCOME:
Holding losses arising during the period $ (406) $(1,828)
Tax benefit 163 731
------- -------
Holding losses arising during the period, net of tax (243) (1,097)
Reclassification adjustment for (gains) losses realized in net
income, net of tax -- --
Tax expense (benefit) of reclassifications -- --
------- -------
Other comprehensive loss (243) (1,097)
Beginning accumulated other comprehensive (loss) income (5,473) 1,238
------- -------
Ending accumulated other comprehensive (loss) income $(5,716) $ 141
======= =======
</TABLE>
8
<PAGE> 9
INDEPENDENT ACCOUNTANTS' REPORT
The Audit Committee of the Board of Directors
First Community Bancshares, Inc.
We have reviewed the accompanying consolidated balance sheet of First Community
Bancshares, Inc.(First Community) as of March 31, 2000, and the related
consolidated statements of income, cash flows, and changes in stockholders'
equity for the three month period then ended. These consolidated financial
statements are the responsibility of the Company's management. The accompanying
consolidated statements of income, cash flows, and changes in stockholders'
equity of First Community for the three month period ended March 31, 1999, were
reviewed by other accountants whose report (dated April 30, 1999) stated that
they were not aware of any material modifications that should be made to those
statements for them to be in conformity with accounting principles generally
accepted in the United States.
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 making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with auditing standards generally accepted in the United States, which will be
performed for the full year with the objective of expressing an opinion
regarding the financial statements taken as a whole. Accordingly, we do not
express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying consolidated balance sheet of First Community as of
March 31, 2000, and the related consolidated statements of income, cash flows
and changes in stockholders' equity for the three month period then ended for
them to be in conformity with accounting principles generally accepted in the
United States.
The accompanying consolidated balance sheet of First Community as of December
31, 1999, was audited by other auditors whose report dated January 28, 2000,
expressed an unqualified opinion on that statement.
/s/ Ernst & Young LLP
Charleston, West Virginia
May 4, 2000
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 included in this
report. This discussion and analysis should be read in conjunction with the 1999
Annual Report to Shareholders and the other financial information included in
this report.
FORWARD LOOKING STATEMENTS
First Community Bancshares, Inc. the "Corporation" or "FCBI") may from time to
time make written or oral "forward-looking statements", including statements
contained in the Corporation's filings with the Securities and Exchange
Commission (including this Quarterly Report on Form 10-Q and the Exhibits hereto
and thereto), in its reports to stockholders and in other communications by the
Corporation, which are made in good faith by the Corporation pursuant to the
"safe harbor" provisions of the Private Securities Litigation Reform Act of
1995.
These forward-looking statements include, among others, statements with respect
to the Corporation's beliefs, plans, objectives, goals, guidelines,
expectations, anticipations, estimates and intentions that are subject to
significant risks and uncertainties and are subject to change based on various
factors (many of which are beyond the Corporation's control). The words "may",
"could", "should", "would", "believe", "anticipate", "estimate", "expect",
"intend", "plan" and similar expressions are intended to identify
forward-looking statements. The following factors, among others, could cause the
Corporation's financial performance to differ materially from that expressed in
such forward-looking statements: the strength of the United States economy in
general and the strength of the local economies in which the Corporation
conducts operations; the effects of, and changes in, trade, monetary and fiscal
policies and laws, including interest rate policies of the Board of Governors of
the Federal Reserve System; inflation, interest rate, market and monetary
fluctuations; the timely development of competitive new products and services of
the Corporation and the acceptance of these products and services by new and
existing customers; the willingness of customers to substitute competitors'
products and services for the Corporation's products and services and vice
versa; the impact of changes in financial services' laws and regulations
(including laws concerning taxes, banking, securities and insurance);
technological changes; the effect of acquisitions, including, without
limitation, the failure to achieve the expected revenue growth and/or expense
savings from such acquisitions; the growth and profitability of the
Corporation's noninterest or fee income being less than expected; unanticipated
regulatory or judicial proceedings; changes in consumer spending and saving
habits; and the success of the Corporation at managing the risks involved in the
foregoing.
The Corporation cautions that the foregoing list of important factors is
not exclusive. The Corporation does not undertake to update any forward-looking
statement, whether written or oral, that may be made from time to time by or on
behalf of the Corporation.
RESULTS OF OPERATIONS
The Company reported net income of $3.7 million for the quarter ended March 31,
2000, a 3.0% decrease from net income of $3.8 million for the same period in
1999. Basic earnings per common share between the same periods decreased 4.5%,
from $.44 to $.42.
The reduction in net income between the first quarter of 1999 and 2000 is the
result of a non-recurring gain realized in the first quarter of 1999 and the
negative impact of losses in the Company's mortgage origination division in the
first quarter of 2000. Net of tax, the impact on net income of the gain recorded
in the first quarter of 1999 was $189,000 while the impact of the mortgage
origination division reduced earnings in the first quarter of 2000 by $182,000.
On an operational basis (excluding the aforementioned non-recurring gain),
earnings in 2000 were roughly equivalent to the comparable quarter in 1999.
10
<PAGE> 11
NET INTEREST INCOME
Net interest income was $11.5 million for the first quarter of 2000 as compared
with $10.3 million for the corresponding period in 1999. Tax equivalent net
interest income totaled $12.3 million for 2000, an increase of $1.1 million from
the $11.2 million reported in the first quarter of 1999. This increase in net
interest income relates largely to a $105.1 million increase in average
outstanding loans between the two quarters.
The Company's first quarter 2000 tax equivalent net interest margin of 4.99%
reflects a 22 basis point increase from the 4.77% margin in the first quarter of
1999 due to a shift in earning assets to higher yielding loans and higher asset
yields obtained in the portfolio of securities available for sale. The increase
in yield on available-for-sale securities was achieved through the investment of
funds that were previously held as federal funds sold at March 31, 1999. The
shift in earning assets resulted from the reinvestment activity occurring in the
prior year into maturity and sector distributions to enhance the portfolio
performance and subsequently resulted in a 24 basis point increase in the
overall asset yield between the two quarters. Beginning in the second half of
1999, increases in the loan portfolio were funded with wholesale advances from
the Federal Home Loan Bank. The tax equivalent yield on the loan portfolio was
9.07% for the first quarter of 2000 as compared with 9.33% for the same period
in 1999.
Loans, the Company's highest yielding asset category, experienced an increase in
average balances of $105.2 million or 17.3%, between the first quarter of 2000
and the corresponding period in 1999. This significant increase in the loan
portfolio continues to be funded with advances from the Federal Home Loan Bank
(FHLB). The overall yield in the loan portfolio declined by 26 basis points from
the prior year period as a result of the strong price competition for loan
opportunities. The industry experienced increased competition for commercial
loans in 1998, led by capital markets groups and other banks, and the industry
responded with lower interest rates. The Company resisted the easing of
underwriting standards and sacrificed some existing and new loan business in the
process in 1998. This shift in industry underwriting standards coupled with the
declining interest rate environment resulted in above average principal
prepayments and contributed to the shrinking in the loan portfolio that
continued into early 1999. Prepayment and refinancing activity began to slow in
the second quarter of 1999 and loan volume began to rise.
The tax equivalent yield on securities available for sale increased to 6.72%
from 6.28% in the corresponding first quarter of 1999. This increase in the
portfolio yield was achieved through the purchase of a mix of higher yielding
tax-exempt municipal securities, callable agency securities and investments in
corporate bonds. Investment securities held to maturity remained relatively
consistent with the prior year at tax equivalent yields of 8.09% and 8.07%,
respectively, for the first quarter in 2000 and 1999.
The Company's cost of funds was reduced from 4.19% in 1999 to 4.17% for the
first quarter of 2000. The reduction in the overall cost was a result of
continued focus on funding cost control in this critical area of operations.
Reductions in the cost of money were achieved in all categories of
interest-bearing deposits between 1999 and 2000 as indicated in the Net Interest
Income Analysis on the following page. Short-term borrowings, however,
experienced a 122 basis point increase due to the rising rate environment. The
increased balances are a result of an increased reliance on wholesale funding
from the FHLB. The use of FHLB credit programs is a significant component of the
Company's overall funding strategy.
11
<PAGE> 12
<TABLE>
<CAPTION>
NET INTEREST INCOME ANALYSIS
- -----------------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 2000 MARCH 31, 1999
---------------------------------------- -------------------------------------
(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 $ 704,122 $15,853 9.06% $ 596,848 $ 13,690 9.30%
Tax-Exempt 8,477 219 10.39% 10,563 280 10.75%
---------- ------- ----- ---------- -------- -----
Total 712,599 16,072 9.07% 607,411 13,970 9.33%
Allowance for Loan Losses (11,925) (11,398)
---------- ----------
Net Total 700,674 597,013
Investments Available for Sale:
Taxable 176,024 2,824 6.45% 180,931 2,680 6.01%
Tax-Exempt 33,164 670 8.13% 37,371 703 7.63%
---------- ------- ----- ---------- -------- -----
Total 209,188 3,494 6.72% 218,302 3,383 6.28%
Investment Securities Held to Maturity:
Taxable 5,061 89 7.07% 8,149 138 6.87%
Tax-Exempt 73,641 1,495 8.16% 74,160 1,500 8.20%
---------- ------- ----- ---------- -------- -----
Total 78,702 1,584 8.09% 82,309 1,638 8.07%
Interest-Bearing Deposits 2,866 45 6.32% 28,104 318 4.59%
Federal Funds Sold 2 0 0.00% 26,635 296 4.51%
---------- ------- ----- ---------- -------- -----
Total Earning Assets 991,432 21,195 8.60% 951,363 19,605 8.36%
------- ----- -------- -----
Other Assets 99,096 93,342
---------- ----------
Total $ 1,090,528 $1,044,705
=========== ==========
Interest-Bearing Liabilities:
Interest-bearing Demand Deposits $ 131,873 719 2.19% $ 136,301 749 2.23%
Savings Deposits 138,634 732 2.12% 148,352 902 2.47%
Time Deposits 449,748 5,710 5.11% 464,595 6,044 5.28%
Short-Term Borrowings 129,368 1,593 4.95% 46,603 429 3.73%
Other Indebtedness 10,214 151 5.95% 18,250 280 6.22%
---------- ------- ----- ---------- -------- -----
Total Interest-Bearing Liabilities 859,837 8,905 4.17% 814,101 8,404 4.19%
---------- ------- ----- ---------- -------- -----
Demand Deposits 113,804 115,906
Other Liabilities 12,554 11,891
Stockholders' Equity 104,333 102,807
---------- ----------
Total $1,090,528 $1,044,705
========== ==========
Net Interest Earnings $12,290 $ 11,201
======= ========
Net Interest Spread 4.43% 4.17%
===== =====
Net Interest Margin 4.99% 4.77%
===== =====
</TABLE>
(1) Interest amounts represent taxable equivalent results for the first three
months of 2000 and 1999.
(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 ALLOWANCE FOR LOAN LOSSES
To maintain a balance in the allowance for loan losses which is sufficient to
absorb known and estimable loan losses, charges are made to the provision for
loan losses. The provision for loan losses was $662,000 for the first quarter of
2000 compared with $444,000 for the corresponding period in 1999. The increase
is reflective of higher outstanding loan balances. The increased provision was
necessary to maintain policy guidelines for adequate coverage of inherent losses
in to the portfolio as well as an acceptable level of reserve coverage to the
total portfolio.
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 i)
specifically identified loan relationships which are on non-accrual status,
ninety days past due or more and loans with elements of credit weakness and ii)
formula reserves.
Specific reserves are targeted to cover loan relationships which are identified
with significant cash flow weakness and for which a collateral deficiency may be
present. Impaired loans are identified, measured, and recorded in accordance
with SFAS No. 114 and SFAS No. 118. The reserves established under the specific
identification method are judged based upon the borrower's estimated cash flow
or projected liquidation value of pledged collateral.
Formula and general reserves (Reserves Allocated to Classifications) are
available to cover the homogeneous classification of loans, which are not
individually identified as potential problems. The formula and general 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 loss percentage is
calculated. The calculated percentage is used to determine the required reserve
excluding any relationships specifically identified and evaluated. While
allocations are made to specific loans and classifications within the various
classifications of loans, the reserve is available for all loan losses.
The composition of First Community's allowance for loan losses was as follows at
March 31, 2000 and December 31, 1999:
<TABLE>
<CAPTION>
March 31 December 31
2000 1999
------- -------
(Amounts in Thousands)
<S> <C> <C>
Specific Reserves $ 1,876 $ 2,195
Reserves Allocated to Classifications 9,975 9,705
------- -------
Total Reserves $11,851 $11,900
======= =======
</TABLE>
The allowance for loan losses totaled approximately $11.9 million at March 31,
2000 and December 31, 1999 resulting in reserve to loan ratios of 1.64% and
1.69% for the respective periods.
Net charge-offs for the first quarter of 2000 were $711,248 as compared with
$758,456 for the corresponding period in 1999. Expressed as a percentage of
average loans, net charge-offs were .10% for the three month period ended March
31, 2000 and .13% for the corresponding period in 1999.
The reserve coverage ratio represents the percentage of non-performing loans and
other real estate owned covered through available reserves. As of March 31,
2000, this ratio was 108.1% as compared to 113.6% at March 31, 1999 and 102.2%
at December 31, 1999. Management continually evaluates the adequacy of the
allowance for loan losses and makes specific adjustments to it based on the
results of risk analysis in the credit review process, the recommendation of
regulatory agencies, and other factors, such as loan loss experience and
prevailing economic conditions. Management considers the level of reserves
adequate based on the current risk profile in the loan portfolio.
13
<PAGE> 14
NON-INTEREST INCOME
Non-interest income consists of all revenues which are not included in interest
and fee income related to earning assets. Total non-interest income increased
$626,000, or 29.3% from $2,138,000 for the three months ended March 31, 1999 to
$2,764,000 for the corresponding period in 2000. The largest contributor to the
increase was the acquisition of UFM which added an additional $899,000 in loan
origination fees. Also impacting and offsetting this increase was a gain
included in other operating revenue for 1999 of $275,000 on the sale of
foreclosed property. This gain resulted from the sale of a foreclosed commercial
facility in Princeton, West Virginia in March 1999.
NON-INTEREST EXPENSE
Non-interest expense totaled $8.2 million in the first quarter of 2000
increasing $1.7 million from the corresponding period in 1999. This increase
includes and relates primarily to the effect of the addition of United First
Mortgage, Inc. (UFM) which added an additional $1.2 million in non-interest
expense. Other cost increases (excluding UFM) were noted in employee benefit
cost, occupancy and other non-interest expense which, in aggregate, added
approximately $432,000 of expense.
14
<PAGE> 15
FINANCIAL POSITION
SECURITIES
Securities totaled $283.8 million at March 31, 2000 and reflect a decrease of
$7.1 million from December 31, 1999. This 2.4% decrease is the result of
maturities and principal payments in the investment portfolio. As a result of
the high loan demand, these funds are currently being reinvested into the higher
yielding loan portfolio.
Securities available for sale were $205.2 million at March 31, 2000 as compared
to $212.1 million at December 31, 1999. Securities available for sale are
recorded at their fair market value at March 31, 2000 and December 31, 1999. 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 accumulated other comprehensive income. The
unrealized loss after taxes of $5.5 million at December 31, 1999, increased
$200,000 to an unrealized loss of $5.7 million at March 31, 2000 as market
yields on securities continued to increase in the first quarter of 2000.
Investment securities, which are purchased with the intent to hold until
maturity, totaled $78.6 million at March 31, 2000 as compared to $78.8 million
at December 31, 1999. The market value of investment securities was 100% and
101% of book value at December 31, 1999 and March 31, 2000, respectively.
LOANS
The Company's lending strategy stresses quality growth, diversified by product,
geography, and industry. All loans made by the Company are subject to a common
credit underwriting structure. Loans are also subject to a quarterly and annual
review process based on the loan size and type. Total loans increased $20.2
million from $704.1 million at December 31, 1999 to $724.3 million at March 31,
2000. Additionally, the loan to deposit ratio increased slightly from 84.5% at
December 31, 1999 to 85.7% at March 31, 2000 in contrast to an $11.2 or 1.3%
increase in total customer deposits during the first quarter of 2000.
Average total loans have increased $105.2 million between the first quarter of
1999 and 2000 due primarily to the extensive sales and marketing efforts. This
significant growth was experienced even though there was continued competition
from local and regional banks for certain larger commercial loan customers.
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 $297.4 million or 41.05% of total loans at
March 31, 2000 and $301.0 million or 42.74% of total loans at December 31, 1999.
Residential real estate loans increased slightly to $258.4 million from $251.3
remaining at approximately 35.7% of the total portfolio at March 31, 2000 and
December 31, 1999. Loans to individuals remained relatively unchanged at $127.1
million or 18.1% of total loans at December 31, 1999 and $127.7 million or 17.6%
of total loans at March 31, 2000. Construction loans increased to $40.8 million
at March 31, 2000 or 5.64% of total loans from $24.7 million at December 31,
1999 or 3.51% of total loans.
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 $11.0 million at March 31,
2000, or 1.5% of total loans and OREO, compared with $11.1 million or 1.6% at
December 31, 1999 and up $1.3 million from the $9.7 million (1.6% of loans and
OREO) reflected at March 31, 1999. The following schedule details non-performing
assets by category at the close of each of the last five quarters:
<TABLE>
<CAPTION>
(In Thousands) March 31 December 31 September 30 June 30 March 31
2000 1999 1999 1999 1999
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Non-Accrual $ 7,455 $ 7,889 $ 8,246 $ 7,970 $ 7,157
Ninety Days Past Due 1,090 1,259 417 328 493
Other Real Estate Owned 2,422 1,950 1,786 1,798 2,041
------- ------- ------- ------- -------
$10,967 $11,098 $10,449 $10,096 $ 9,691
======= ======= ======= ======= =======
Restructured loans
performing in accordance
with modified terms $ 449 $ 505 $ 458 $ 460 $ 524
======= ======= ======= ======= =======
</TABLE>
The change in non-performing assets which resulted in a decline in total
non-performing assets of approximately $131,000 is the result of activity
between the categories including collections on delinquencies, foreclosures and
movements into or out of the non-performing classification. Non-accrual loans
decreased $434,000 when comparing March 31, 2000 and December 31, 1999. The
decrease in non-accrual and loans ninety days past due has been offset by an
increase in other real estate owned and is due, primarily, to several loan
relationships which have either been satisfied through foreclosure or are in the
process of resolution and a resulting reclassification to either non-accrual,
ninety days past due or other real estate owned. Included in the ninety days
past due category are two loans with FmHA and SBA guarantees comprising $980,000
of the balance in that category of non-performing loans. Management believes
that non-performing asset carrying values are substantially recoverable.
STOCKHOLDERS' EQUITY
Total stockholders' equity reached $104.6 million at March 31, 2000 increasing
$1.1 million over the $103.5 million reported for December 31, 1999. The Federal
Reserve's risk based capital guidelines and leverage ratio measure capital
adequacy of banking institutions. Risk-based capital guidelines weight balance
sheet assets and off-balance sheet commitments based on inherent risks
associated with the respective asset types. At March 31, 2000, the Company's
risk adjusted capital-to-asset ratio was 12.78%. The Company's leverage ratio at
March 31, 2000 was 8.14% compared with 8.25% at December 31, 1999. Both the risk
adjusted capital-to-asset ratio and the leverage ratio exceed the current well
capitalized levels prescribed for bank holding companies of 10% and 5%,
respectively.
16
<PAGE> 17
LIQUIDITY
The Company maintains a significant level of liquidity in the form of cash and
due from bank balances including interest bearing cash balances ($46.7 million),
investment securities available for sale ($205.2 million), and Federal Home Loan
Bank credit availability of approximately $113 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.
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 IRR have included shortening the amortized maturity of fixed-rate loans and
increasing the volume of adjustable rate loans to reduce the average maturity of
the Bank's interest-earning assets.
The Bank seeks to control its interest rate risk (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.
There have been no significant changes to the Company's risk profile since
December 31, 1999. A more complete discussion of the overall interest rate risk
is included in the Company's annual report for December 31, 1999.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
(a) The Company is currently a defendant in various legal actions and
asserted claims most of which involve lending and collection activities
in the normal course of business, 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 involved in litigation styled Ann Tierney
Smith, Executrix, et al versus FCFT, First Community Bank, Gentry,
Locke Rakes & Moore 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
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 and court ordered mediation was conducted on
May 2, 2000. There was
17
<PAGE> 18
no outcome from the mediation process. A trial date has been set for
October 2000. The Company intends to vigorously defend this action and
both 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.
Subsequent to December 31, 1999, the Company was named as defendant in
a civil action brought by a not-for-profit foundation (plaintiff) as
beneficiary under a Trust Under Will administered by the Company's
Trust and Financial Services Division. The complaint formalized
previous asserted but unfiled claims that the Bank as Trustee failed to
appropriately acknowledge and follow the investment philosophy set
forth by the plaintiff which allegedly resulted in a $425,000 loss of
value of a bequest. The complaint further alleges that the Trustee
failed to act prudently with respect to the investment of the Trust
funds and alleges that account management fees charged to the Trust
account were excessive and did not constitute legitimate services
tangibly benefiting the Trust account. The Company vigorously denies
these allegations and is preparing an appropriate response to this
complaint. The suit seeks recovery of the alleged losses, removal of
the Trustee and unspecified punitive damages. This civil action is in
the preliminary phase. The Company filed an answer on April 7, 2000
denying all pertinent allegations. Discovery and depositions in this
matter are pending but have not been scheduled.
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) The Annual Meeting of Stockholders was held on April 11, 2000.
(b) The following directors were elected to serve a three-year term
through the date of the 2003 Annual Meeting of Stockholders.
James L. Harrison, Sr., I. Norris Kantor, A.A. Modena and William P.
Stafford, II
18
<PAGE> 19
(c) Three proposals were voted upon at the annual meeting, which included
the election of the aforementioned directors, amendment of the
Articles of Incorporation to increase the authorized common stock of
the Company from ten million shares to fifteen million shares and the
ratification of Ernst & Young LLP as independent auditors for the
corporation for the fiscal year ending December 31, 2000. The results
of the proposals and voting are as follows:
Proposal 1. Election of Directors
<TABLE>
<CAPTION>
Votes For Votes Against Votes Abstained
--------- ------------- ---------------
<S> <C> <C> <C>
James L. Harrison, Sr. 6,062,604 13,438 12,212
I. Norris Kantor 6,064,486 11,556 12,212
A.A. Modena 6,062,561 13,481 12,212
William P. Stafford, II 6,073,386 2,656 12,212
</TABLE>
Proposal 2. Approve Amendment to the Articles of Incorporation to
increase authorized common stock
Votes For 5,828,158
Votes Against 259,051
Votes Abstained 1,045
Proposal 3. Ratification of the selection of Ernst & Young LLP
Votes For 6,084,420
Votes Against 3,347
Votes Abstained 487
(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
A report on Form 8-K was filed on February 28, 2000 in regard to the
change of the Corporation's independent auditors.
19
<PAGE> 20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
First Community Bancshares, Inc.
DATE: May 12, 2000
/s/ James L. Harrison, Sr.
- -----------------------------------
James L. Harrison, Sr.
President & Chief Executive Officer
(Duly Authorized Officer)
DATE: May 12, 2000
/s/ John M. Mendez
- ----------------------------------------
John M. Mendez
Vice President & Chief Financial Officer
(Principal Accounting Officer)
20
<PAGE> 1
Exhibit 15
May 1, 2000
To the Board of Directors of First Community Bancshares
We are aware of the incorporation by reference in the Registration Statement
Nos. 333-63865 and 333-31338 of First Community Bancshares, Inc. relating to the
unaudited consolidated interim financial statements of First Community
Bancshares that are included in its Forms 10-Q for the quarter ended March 31,
2000.
/s/ Ernst & Young LLP
Charleston, West Virginia
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 30,773
<INT-BEARING-DEPOSITS> 15,947
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 205,155
<INVESTMENTS-CARRYING> 78,616
<INVESTMENTS-MARKET> 79,033
<LOANS> 724,347
<ALLOWANCE> 11,851
<TOTAL-ASSETS> 1,115,550
<DEPOSITS> 844,418
<SHORT-TERM> 143,240
<LIABILITIES-OTHER> 13,102
<LONG-TERM> 10,212
0
0
<COMMON> 8,992
<OTHER-SE> 95,586
<TOTAL-LIABILITIES-AND-EQUITY> 1,115,550
<INTEREST-LOAN> 15,995
<INTEREST-INVEST> 4,321
<INTEREST-OTHER> 59
<INTEREST-TOTAL> 20,375
<INTEREST-DEPOSIT> 7,161
<INTEREST-EXPENSE> 8,905
<INTEREST-INCOME-NET> 11,470
<LOAN-LOSSES> 662
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 8,176
<INCOME-PRETAX> 5,396
<INCOME-PRE-EXTRAORDINARY> 5,396
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,678
<EPS-BASIC> .42
<EPS-DILUTED> .42
<YIELD-ACTUAL> 4.99
<LOANS-NON> 7,455
<LOANS-PAST> 1,090
<LOANS-TROUBLED> 449
<LOANS-PROBLEM> 8,545
<ALLOWANCE-OPEN> 11,900
<CHARGE-OFFS> 910
<RECOVERIES> 199
<ALLOWANCE-CLOSE> 11,851
<ALLOWANCE-DOMESTIC> 1,876
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 9,975
</TABLE>
