FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 No. 0-19618
FIRST COMMUNITY BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
Indiana 35-1833586
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
136 East Harriman
Bargersville, IN 46106
(Address of principal executive offices)
(Zip Code)
(317) 422-5171
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Sections 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Outstanding Shares of Common Stock on November 1, 2000 1,039,926
<PAGE>
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
Page No.
-------
Forward Looking Statement...................................................3
Part I. Financial Information:
Item 1. Financial Statements:
Consolidated Condensed Balance Sheet......................4
Consolidated Condensed Statement of Income................5
Consolidated Condensed Statement of Comprehensive Income..6
Consolidated Condensed Statement of Stockholders' Equity..7
Consolidated Condensed Statement of Cash Flows............8
Notes to Consolidated Condensed Financial Statements......9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.....................10
Item 3. Quantitative and Qualitative Disclosures About Market Risk....16
Part II. Other Information:
Item 1. Legal Proceedings.............................................16
Item 2. Changes In Securities.........................................16
Item 3. Defaults Upon Senior Securities...............................16
Item 4. Submission of Matters to a Vote by Security Holders...........16
Item 5. Other Information.............................................16
Item 6. Exhibits and Reports on Form 8-K..............................16
Signatures.................................................................17
2
<PAGE>
FORWARD LOOKING STATEMENT
This Quarterly Report on Form 10-Q ("Form 10-Q") contains statements which
constitute forward looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements appear in a number of
places in this Form 10-Q and include statements regarding the intent, belief,
outlook, estimate or expectations of the Company (as defined below), its
directors or its officers primarily with respect to future events and the future
financial performance of the Company. Readers of this Form 10-Q are cautioned
that any such forward looking statements are not guarantees of future events or
performance and involve risks and uncertainties, and that actual results may
differ materially from those in the forward looking statements as a result of
various factors. The accompanying information contained in this Form 10-Q
identifies important factors that could cause such differences. These factors
include changes in interest rates; loss of deposits and loan demand to other
financial institutions; substantial changes in financial markets; changes in
real estate values and the real estate market or regulatory changes.
3
<PAGE>
Item 1 Financial Statements
--------- --------------------
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Condensed Balance Sheet
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------------------------
<S> <C> <C>
Assets
Cash and due from banks $ 1,947,553 $ 2,357,531
Short-term interest-bearing deposits 1,650,641 2,245,670
------------------------------
Cash and cash equivalents 3,598,194 4,603,201
Investment securities
Available for sale 9,909,079 14,065,377
Held to maturity 1,449,907 6,966,605
------------------------------
Total investment securities 11,358,986 21,031,982
Loans 121,736,058 111,715,874
Allowance for loan losses (962,487) (873,203)
------------------------------
Net loans 120,773,571 110,842,671
Premises and equipment 4,557,567 4,448,634
Federal Home Loan Bank of Indianapolis stock, at cost 777,800 777,800
Interest receivable 1,004,313 1,084,609
Cash value of life insurance 1,650,773 1,593,788
Other assets 999,246 854,001
------------------------------
Total assets $ 144,720,450 $ 145,236,686
==============================
Liabilities
Deposits
Noninterest-bearing $ 9,907,824 $ 9,411,994
Interest-bearing 118,224,237 118,903,006
------------------------------
Total deposits 128,132,061 128,315,000
Federal Home Loan Bank of Indianapolis advances 3,500,000 4,597,389
Other borrowings 2,593,856 2,613,827
Interest payable 414,053 334,234
Other liabilities 738,126 570,756
------------------------------
Total liabilities 135,378,096 136,431,206
------------------------------
Commitments and Contingent Liabilities
Stockholders' Equity
Preferred stock, no-par value
Authorized and unissued - 1,000,000 shares
Common stock, no-par value
Authorized - 4,000,000 shares
Issued and outstanding - 1,039,926 and 1,019,694 shares 7,023,225 6,930,024
Retained earnings and contributed capital 2,459,881 2,096,894
Accumulated other comprehensive loss (140,752) (221,438)
------------------------------
Total stockholders' equity 9,342,354 8,805,480
------------------------------
Total liabilities and stockholders' equity $ 144,720,450 $ 145,236,686
==============================
</TABLE>
See notes to consolidated condensed financial statements
4
<PAGE>
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Condensed Statement of Income
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------------------------------
2000 1999 2000 1999
-------------------------------------------------------
<S> <C> <C> <C> <C>
Interest Income
Loans, including fees $ 2,685,337 $ 2,256,752 $ 7,698,599 $ 6,491,244
Investment securities
Taxable 25,460 101,042 163,102 204,716
Tax exempt 115,065 118,302 364,483 279,159
Interest-bearing time deposits 9,606 171,046 153,474 382,749
Dividends 16,664 15,684 49,065 47,999
-------------------------------------------------------
Total interest income 2,852,132 2,662,826 8,428,723 7,405,867
-------------------------------------------------------
Interest Expense
Deposits 1,503,495 1,366,061 4,438,936 3,717,186
FHLB advances 62,064 81,465 188,906 238,497
Other borrowings 47,409 44,180 142,730 111,067
-------------------------------------------------------
Total interest expense 1,612,968 1,491,706 4,770,572 4,066,750
-------------------------------------------------------
Net Interest Income 1,239,164 1,171,120 3,658,151 3,339,117
Provision for loan losses 40,000 75,000 159,100 225,000
-------------------------------------------------------
Net Interest Income After Provision for Loan Losses 1,199,164 1,096,120 3,499,051 3,114,117
-------------------------------------------------------
Other Income
Trust fees 2,240 3,728 20,229 29,043
Service charges on deposit accounts 126,078 89,899 355,688 245,354
Loss on sale of securities (4,666) 0 (6,515) 0
Other operating income 83,161 12,213 184,172 38,158
-------------------------------------------------------
Total other income 206,813 105,840 553,574 312,555
-------------------------------------------------------
Other Expenses
Salaries and employee benefits 567,478 431,485 1,676,337 1,211,700
Premises and equipment 197,913 106,170 519,852 289,873
Advertising 37,762 42,310 120,581 127,372
Data processing fees 140,954 90,663 372,473 254,398
Deposit insurance expense 16,464 23,308 29,842 52,651
Printing and office supplies 53,238 47,472 192,877 107,297
Legal and professional fees 41,529 69,380 140,297 182,006
Telephone expense 29,415 23,160 87,590 69,684
Other operating expense 154,462 121,326 379,927 367,573
-------------------------------------------------------
Total other expenses 1,239,215 955,274 3,519,776 2,662,554
-------------------------------------------------------
Income Before Income Tax 166,762 246,686 532,849 764,118
Income tax expense 9,714 39,477 46,302 171,524
-------------------------------------------------------
Net Income $ 157,048 $ 207,209 $ 486,547 $ 592,594
=======================================================
Basic earnings per share $ .15 $ .20 $ .48 $ .58
Diluted earnings per share .15 .20 .47 .56
</TABLE>
See notes to consolidated condensed financial statements.
5
<PAGE>
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Condensed Statement of Comprehensive Income
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-----------------------------------------------------
2000 1999 2000 1999
-----------------------------------------------------
<S> <C> <C> <C> <C>
Net Income $ 157,048 $ 207,209 $ 486,547 $ 592,594
Other comprehensive income, net of tax
Unrealized gains (losses) on securities available
Unrealized holding gains (losses) arising
During the period, net of tax expense
(benefit)Of $51,842, $57,826, $50,342
and $(27,703) 79,039 88,163 76,752 (42,236)
Less: Reclassification adjustment for losses
included in net income, net of tax benefit
of $1,848 and $2,581 (2,818) (3,934)
-----------------------------------------------------
81,857 88,163 80,686 (42,236)
-----------------------------------------------------
Comprehensive income $ 238,905 $ 295,372 $ 567,233 $ 550,358
=====================================================
</TABLE>
See notes to consolidated condensed financial statements
6
<PAGE>
FIRST COMMUNITY BANCSHARES, INC AND SUBSIDIARIES
Consolidated Condensed Statement of Stockholders' Equity
For the Nine Months Ended September 30, 2000
(Unaudited)
<TABLE>
<CAPTION>
Retained
Common Stock Earnings Accumulated
------------------------- and Other
Shares Contributed Comprehensive
Outstanding Amount Capital Loss Total
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balances, January 1, 2000 1,019,694 $6,930,024 $2,096,894 $ (221,438) $8,805,480
Net income for the period 486,547 486,547
Unrealized losses on securities 80,686 80,686
Cash dividend ($.12 per share) (123,560) (123,560)
Options exercised, net of cost 30,840 170,854 170,854
Tax benefits on options
exercised 12,300 12,300
Purchase of stock (10,608) (89,953) (89,953)
------------------------------------------------------------------------
Balances, September 30, 2000 1,039,926 $7,023,225 $2,459,881 $ (140,752) $9,342,354
========================================================================
</TABLE>
See notes to consolidated condensed financial statements.
7
<PAGE>
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Condensed Statement of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------------
2000 1999
----------------------------
<S> <C> <C>
Operating Activities
Net income $ 486,547 $ 592,594
Adjustments to reconcile net income to net cash provided by
operating activities
Provision for loan losses 159,100 225,000
Depreciation and amortization 286,704 146,732
Investment securities (accretion) amortization (4,868) 48,878
Loss on sale of fixed assets 0 2,318
Loss on sale of securities available for sale 6,515 0
Gain on sale of foreclosed real estate 0 (7,241)
Net change in:
Cash value of life insurance (56,985) (835)
Interest receivable 80,296 (74,077)
Interest payable 79,819 71,640
Other assets (89,413) (238,053)
Other liabilities 166,562 375,084
----------------------------
Net cash provided by operating activities 1,114,277 1,142,040
----------------------------
Investing Activities
Purchases of securities available for sale 0 (15,360,373)
Purchases of securities held to maturity (4,973,179) (225,000)
Proceeds from maturities of securities available for sale 4,256,137 1,689,110
Proceeds from paydowns and maturities of securities held to maturity 10,522,000 455,000
Net change in loans (10,186,455) (12,322,018)
Proceeds from sale of foreclosed real estate 0 72,500
Purchases of property and equipment (395,637) (591,332)
Premiums paid on life insurance 0 (950,000)
----------------------------
Net cash used by investing activities (777,134) (27,232,113)
----------------------------
Financing Activities
Net change in
Noninterest-bearing, NOW and savings deposits (959,625) 3,057,164
Certificates of Deposit 776,686 21,645,073
Proceeds from borrowings 13,000,000 2,252,800
Repayment of borrowings (14,117,360) (98,497)
Purchase of stock (89,953) (60,419)
Cash dividends (122,752) (61,301)
Rights and options exercised, net of costs 170,854 104,192
----------------------------
Net cash provided (used) by financing activities (1,342,150) 26,839,012
----------------------------
Net Change in Cash and Cash Equivalents (1,005,007) 748,939
Cash and Cash Equivalents, Beginning of Period 4,603,201 14,292,071
----------------------------
Cash and Cash Equivalents, End of Period $ 3,598,194 $ 15,041,010
============================
Supplemental cash flow disclosures
Interest paid $ 4,690,753 $ 3,995,110
Income tax paid 99,733 271,570
Dividend payable 41,597 40,722
</TABLE>
See notes to consolidated condensed financial statements
8
<PAGE>
FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Condensed Financial Statements
Note 1: Basis of Presentation
-----------------------------
The consolidated financial statements include the accounts of First Community
Bancshares, Inc. (the "Company") and its wholly owned subsidiaries, First
Community Bank & Trust, a state chartered bank (the "Bank") and First Community
Real Estate Management, Inc. ("FCREMI"). FCREMI holds and manages real estate
used by the Company and the Bank. A summary of significant accounting policies
is set forth in Note 1 of Notes to Financial Statements included in the December
31, 1999, Annual Report to Stockholders. All significant intercompany accounts
and transactions have been eliminated in consolidation.
The interim consolidated financial statements have been prepared in accordance
with instructions to Form 10-Q, and therefore do not include all information and
footnotes necessary for a fair presentation of financial position, results of
operations and cash flows in conformity with generally accepted accounting
principles.
The interim consolidated condensed financial statements at September 30, 2000,
and for the three months and nine months ended September 30, 2000 and 1999, have
not been audited by independent accountants, but reflect, in the opinion of
management, all adjustments (which include only normal recurring adjustments)
necessary to present fairly the financial position, results of operations and
cash flows for such periods.
Note 2: Earnings Per Share
--------------------------
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
September 30, 2000 September 30, 1999
------------------ ------------------
Weighted Weighted
Average Per Share Average Per Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Basic earnings per share
Income available to common
shareholders $ 157,048 1,039,940 $ .15 $ 207,209 1,019,085 $ .20
========= =========
Effect of dilutive stock options 6,663
Effect of convertible debt 10,568 90,910 10,568 90,910
-------------------------- ------------------------
Diluted earnings per share
Income available to common
shareholders and assumed
conversions $ 167,616 1,130,850 $ .15 $ 217,777 1,116,658 $ .20
===================================== ===================================
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 2000 September 30, 1999
------------------ ------------------
Weighted Weighted
Average Per Share Average Per Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Basic earnings per share
Income available to common
shareholders $ 486,547 1,022,145 $ .48 $ 592,594 1,020,263 $ .58
========= =========
Effect of dilutive stock options 2,614 7,083
Effect of convertible debt 21,136 60,607 24,404 68,724
-------------------------- ------------------------
Diluted earnings per share
Income available to common
shareholders and assumed
conversions $ 507,683 1,085,366 $ .47 $ 616,998 1,096,070 $ .56
===================================== ===================================
</TABLE>
Note 3: Business Combinations
-----------------------------
On November 10, 1999, the Company signed a definitive agreement to acquire Blue
River Federal Savings Bank, Edinburgh, Indiana. The acquisition will be
accounted for under the purchase method of accounting. Under the terms of the
agreement, the Company will pay $41.50 for each share of common stock of Blue
River Federal Savings Bank. The Company plans to borrow $4,000,000 to finance
the transaction. It is anticipated that a loan for $2,000,000 will be secured
with Bank stock and the second loan for $2,000,000 will be unsecured. Both loans
will have a 15-year term with interest only due for the first five years. The
secured $2,000,000 loan will bear interest at .25% below the lender's prime rate
of interest and the unsecured $2,000,000 loan will bear interest at .75% over
the lender's prime rate of interest. The Company anticipates amortizing core
deposit intangibles over ten years and goodwill over twenty years.
The transaction is subject to approval by appropriate regulatory agencies. The
Agreement provides that either party may terminate if the transaction has not
been consummated by September 30, 2000. In light of the fact that all required
regulatory approvals have not yet been obtained, the Company is considering
whether to continue efforts to obtain such approvals or terminate the Agreement.
Item 2 Management's Discussion and Analysis of Financial Condition
------ and Results of Operations
-----------------------------------------------------------
General
-------
The Company has two subsidiaries; the Bank which operates as an Indiana
commercial bank and First Community Real Estate Management, Inc. ("FCREMI")
whose purpose is to purchase and lease properties to the Bank thereby allowing
the Bank to deploy its capital to other uses. The Bank makes monthly lease
payments to FCREMI as lessee of these locations. These lease payments are
sufficient to service the debt incurred by FCREMI to purchase these properties.
As a bank holding company, the Company depends upon the operations of its
subsidiaries for all revenue and reports its results of operations on a
consolidated basis with its subsidiaries.
The Bank's profitability depends primarily upon the difference between the
income on its loans and investments and the cost of its deposits and borrowings.
This difference is referred to as the spread or net interest margin. The
difference between the amount of interest earned on loans and investments and
the interest incurred on deposits and borrowings is referred to as net interest
income. Interest income from loans and investments is a function of the amount
of loans and investments outstanding during the period and the interest rates
earned. Interest expense related to deposits and borrowings is a function of the
amount of deposits and borrowings outstanding during the period and the interest
rates paid.
10
<PAGE>
Financial Condition
-------------------
Total assets decreased $516,000, or .34%, to $144.7 million at September 30,
2000, from $145.2 million at December 31, 1999. Net loans increased $10.0
million, or 9.0% from $110.8 million on December 31, 1999 to $120.8 million on
September 30, 2000. Deposits decreased $183,000 from $128.3 million on December
31, 1999 to $128.1 million on September 30, 2000.
The Company has continued to see strong demand for loan products. These
increases in loans can be attributed to several factors, none of which can be
singled out as the predominant reason for the growth, but each of which is
believed to have contributed to these increases. These factors include: (i)
increased population in the geographic areas serviced; (ii) increased
per-household disposable income in the geographic areas serviced; (iii) an
increase in the number of branch offices; and (iv) the preference of certain
individuals in the service area for dealing with a locally owned institution.
The decrease in deposits is directly related to the pricing methodology used by
management during the period and the efforts being made to shift the
concentration of deposits from higher costing products to lower costing
products. The increase in loans and the outflow of deposits were primarily
funded by paydowns and maturities of securities owned by the Company.
Stockholders' equity was $9.3 million at September 30, 2000, compared to $8.8
million at December 31, 1999. During the nine months ended September 30, 2000,
the Company repurchased 10,608 shares of common stock in the open market at a
cost of $89,953, or an average price of $8.48. Certain directors exercised stock
options previously granted by the Company during the nine months ended September
30, 2000, which raised $170,854 and increased outstanding shares by 30,840.
The Company owns certain warrants entitling it to purchase, for a nominal
consideration, shares of common stock (the "Warrant Shares") of a privately held
software development company. The software company has indicated that it has
entered into a strategic relationship with a major customer and is planning to
significantly expand its labor force and operations. There can be no assurance
that such expansion will be successful or that, even if it is successfully
implemented, the Warrant Shares will increase in value or that the amount of any
such increase would be significant.
Results of Operations Comparison of Three Months Ended September 30, 2000 and
September 30, 1999
-----------------------------------------------------------------------------
The Company had net income of $157,000 and $207,000 for the three months ended
September 30, 2000 and 1999, respectively. Net interest income was $1.2 million
for both three month periods ending September 30, 2000 and 1999.
The Company made a $40,000 provision for loan loss for the three months ended
September 30, 2000 compared to a $75,000 provision in the same period last year.
Loan loss reserve calculations are reviewed monthly by the Bank's senior lending
officer and consider all loans in the portfolio, with special consideration
given to classified loans and non-performing loans. The Company believes the
current loan loss reserve levels are adequate at this time.
Total other income increased by $101,000 or 95.4% for the three months ended
September 30, 2000, compared to the year ago period. This stark increase is due
to a combination of changes to operating procedures. The Company is servicing
more demand accounts, which have increased service charges collected on deposit
accounts by $36,000. A decision to implement ATM surcharging at seven of the
Company's eight ATM terminals in the second quarter of 2000, coupled with
additional volume at the same terminals, increased other operating income by
$35,000 for the three months ended September 30, 2000 compared to the same
period a year ago. Cash value increases on company owned life insurance also
increased other operating income by $23,000 for the nine months ended September
30, 2000 compared to the year earlier period.
11
<PAGE>
Total other expenses increased by $284,000, or 29.7% for the three months ended
September 30, 2000, compared to the three months ended September 30, 1999. The
Bank opened a branch facility in Whiteland, Indiana in September 1999, an
Operations/Finance Center in Franklin, Indiana in October 1999, and a branch
facility in Edinburgh, Indiana in January 2000. These facility investments have
been the primary reason for increases in salaries, premises and equipment, data
processing fees, telephone expense, and other operating expenses for the three
months ended September 30, 2000 compared to the three months ended September 30,
1999. In addition, the Bank switched to imaged statements on deposit accounts
through its service bureau in June 2000, which has substantially increased the
monthly fee due to the service bureau. While the switch to imaging added expense
to the Bank, greater efficiencies were gained in the statement rendering
process, the ability to research items, and the enhanced statement now being
delivered to customers. The Company believes that the current infrastructure,
which has been an increase to other operating expenses thus far, is necessary to
facilitate serving an increasing customer base and to handle anticipated growth
in it's primary markets.
Income taxes decreased $30,000 for the three months ended September 30, 2000
compared to the year ago period. The decrease in taxes is due to the Bank having
a larger tax exempt securities portfolio, a larger investment in company owned
life insurance, and having less pre-tax income for the three months ended
September 30, 2000 compared to the prior three month period.
Results of Operations Comparison of Nine Months Ended September 30, 2000 and
September 30, 1999
----------------------------------------------------------------------------
Net income for the nine months ended September 30, 2000, was $487,000 compared
with $593,000 for the nine months ended September 30, 1999, a decrease of
$106,000 or 17.9%. Interest income for the nine months ended September 30, 2000
increased to $8.4 million, or 13.8% from the $7.4 million in interest income
reported in the same period of the prior year. Interest expense for the nine
months ended September 30, 2000 increased to $4.8 million, or 17.3% from the
$4.1 million in interest expense for the nine months ended September 30, 1999.
As a result, net interest income for the nine months ended September 30, 2000
increased $319,000 or 9.5% to $3.7 million, compared to $3.3 million in the year
ago period.
The Company made a $159,000 provision for loan loss for the nine months ended
September 30, 2000 compared to a $225,000 provision for the nine months ended
September 30, 1999. As previously discussed, loan loss reserve calculations are
reviewed monthly by the Bank's senior lending officer.
Total other income increased by $241,000 or 77.1% for the nine months ended
September 30, 2000, compared to the year ago period. Increases in number of
deposit accounts along with operating procedural changes have led to this
improvement. The Company was servicing more demand accounts during the nine
months ended September 30, 2000 compared to the year ago period, which have
increased service charges collected on deposit accounts by $110,000.
Implementing ATM surcharging at seven of the Company's eight ATM terminals
during the second quarter of 2000, coupled with additional volume at the same
terminals, increased other operating income by $88,000 for the nine months ended
September 30, 2000 compared to the same period a year ago. Cash value increases
on company owned life insurance also increased other operating income by $57,000
for the nine months ended September 30, 2000 compared to the nine months ended
September 30, 1999.
Total other expenses increased by $857,000, or 32.2% to $3.5 million for the
nine months ended September 30, 2000, compared to $2.7 million for the nine
months ended September 30, 1999. As previously noted, the Bank opened three new
facilities and switched its deposit statement delivery process to imaging within
the past twelve months. These investments in facilities and technology have been
the primary reason for increases in salaries, premises and equipment, data
processing fees, telephone expense, and other operating expenses for the nine
months ended September 30, 2000 compared to the nine months ended September 30,
1999. As previously discussed, the Company believes that the current
infrastructure, which has been an increase to other
12
<PAGE>
operating expenses thus far, is necessary to facilitate serving an increasing
customer base and to handle anticipated growth in it's primary markets.
Income taxes decreased $125,000 for the nine months ended September 30, 2000
when compared to the same period in 1999. The decrease in taxes is due to the
Bank having a larger tax exempt securities portfolio, a larger investment in
company owned life insurance, and having less pre-tax income for the nine months
ended September 30, 2000 compared to the prior nine month period.
Asset Quality
-------------
The Bank currently classifies loans as substandard, doubtful and loss to assist
management in addressing collection risks and pursuant to regulatory
requirements which are not necessarily consistent with generally accepted
accounting principles. Substandard loans represent credits characterized by the
distinct possibility that some loss will be sustained if deficiencies are not
corrected. Doubtful loans possess the characteristics of substandard loans, but
collection or liquidation in full is doubtful based upon existing facts,
conditions and values. A loan classified as a loss is considered uncollectible.
As of September 30, 2000, the Bank had $996,000 of assets classified as
substandard, none as doubtful and none as loss. The allowance for loan losses
was $962,000 or .79% of loans receivable at September 30, 2000 compared to
$873,000 or .78% of net loans receivable at December 31, 1999. A portion of
classified loans are non-accrual loans. First Community had non-accrual loans
totaling $269,000 at September 30, 2000 compared to $296,000 at December 31,
1999.
Asset/Liability Management
--------------------------
One of the actions undertaken by the Company's management has been to adopt
asset/liability management policies in an attempt to reduce the susceptibility
of the Company's net interest spread to the adverse impact of volatile interest
rates by attempting to match maturities (or time-to-repricing) of assets with
maturities or repricing of liabilities and then actively managing any mismatch.
Accomplishing this objective requires attention to both the asset and liability
sides of the balance sheet. The difference between maturity of assets and
maturity of liabilities is measured by the interest-rate gap.
At September 30, 2000, the Company's one-year cumulative interest-rate gap as a
percent of total assets was a negative 23.97%. This negative interest-rate gap
represents substantial risk for the Company in an environment of rising interest
rates. A negative interest-rate gap means the Company's earnings are vulnerable
in periods of rising interest rates because during such periods the interest
expense paid on liabilities will generally increase more rapidly than the
interest income earned on assets. Conversely, in a falling interest-rate
environment, the total interest expense paid on liabilities will generally
decrease more rapidly than the interest income earned on assets. A positive
interest-rate gap would have the opposite effect.
Asset management goals have been directed toward obtaining a suitable balance of
asset quality, liquidity and diversification in order to stabilize and improve
earnings. The asset management strategy has concentrated on shortening the
maturity of its loan portfolio by increasing adjustable-rate loans and
short-term installment and commercial loans. However, increasing short-term
installment and commercial loans increases the overall risk of the loan
portfolio. Such risk relates primarily to collection and to rapidly depreciating
assets which serve as collateral for such loans. The Company's ratio of
non-performing assets to total assets was .29% at September 30, 2000 and .24% at
December 31, 1999.
The primary goal in the management of liabilities has been to extend the
maturities and improve the stability of deposit accounts. Management has
attempted to combine a policy for controlled growth with a strong, loyal
customer base to control interest expense.
The following schedule illustrates the interest-rate sensitivity of
interest-earning assets and interest-bearing liabilities at September 30, 2000.
Mortgages which have adjustable or renegotiable interest rates are shown as
13
<PAGE>
subject to change every one to three years based upon the contracted-for
adjustment period. This schedule does not reflect the effects of possible
prepayments or enforcement of due-on-sale clauses.
<TABLE>
<CAPTION>
At September 30, 2000 Maturing or Repricing
------------------------------------------------------
One Year 1 - 3 3 - 5 Over 5
or Less Years Years Years Total
------------------------------------------------------
(Dollars in 000's)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Adjustable rate mortgages $13,791 $10,371 $4,205 $28,367
Fixed rate mortgages 1,451 114 401 24,400 26,366
Commercial loans 17,637 4,555 2,055 4,497 28,744
Consumer loans 10,700 15,819 7,218 2,062 35,799
Tax-exempt loans and leases 921 1,539 2,460
Investments 1,025 3,029 4,071 3,467 11,592
FHLB stock 778 778
Interest-bearing deposits 1,651 1,651
------------------------------------------------------
Total interest-earning assets 47,033 33,888 18,871 35,965 135,757
------------------------------------------------------
Interest-bearing liabilities:
Fixed maturity deposits 56,914 14,942 1,393 3,276 76,525
Other deposits 24,302 10,861 4,956 1,580 41,699
FHLB advances 500 2,000 1,000 3,500
------------------------------------------------------
Total interest-bearing liabilities 81,716 27,803 7,349 4,856 121,724
------------------------------------------------------
Excess (deficiency) of interest-earning
assets over interest-bearing liabilities (34,683) 6,085 11,522 31,109 14,033
Cumulative excess (deficiency) of
interest-earning assets over
interest-bearing liabilities (34,683) (28,598) (17,067) 14,033
Cumulative ratio at September 30, 2000 as
a percent of total assets (23.97)%
</TABLE>
14
<PAGE>
Liquidity and Capital Resources
-------------------------------
Liquidity refers to the ability of a financial institution to generate
sufficient cash to fund current loan demand, meet savings deposit withdrawals
and pay operating expenses. The primary sources of liquidity are cash,
interest-bearing deposits in other financial institutions, marketable
securities, loan repayments, increased deposits and total institutional
borrowing capacity.
Cash and interest-bearing deposits, when combined with investments, have
remained a relatively constant percent of total assets, while increasing in
dollar volume. Management's goal is to maintain approximately twenty percent
(20%) to twenty-five percent (25%) of total assets in cash, interest-bearing
deposits and investments in order to satisfy the Company's need for liquidity
and other short-term obligations.
Management believes that it has adequate liquidity for the Company's short- and
long-term needs. Short-term liquidity needs resulting from normal
deposit/withdrawal functions are provided by the Company retaining a portion of
cash generated from operations in a Federal Home Loan Bank ("FHLB") daily
investment account. This account acts as a short-term liquidity source while
providing interest income to the Company. Long-term liquidity and other
liquidity needs are provided by the ability of the Company to borrow from the
FHLB. The balance of its FHLB advances was $3.5 million at September 30, 2000
and $4.6 million at December 31, 1999.
On October 30, 1998, the Company issued rights and warrants to shareholders to
purchase one share of common stock of the Company for every ten shares owned as
of October 29, 1998, subject to a minimum offer and purchase of 100 shares. The
rights were exercisable until March 30, 1999 and the warrants were exercisable
from September 15, 1999 to December 13, 1999. The net proceeds to the Company
from the sale of the stock, after deducting the expenses, were $149,000. The
purpose of the rights offering was to raise additional capital for the Bank to
support additional growth and for general corporate purposes.
In addition, on October 30, 1998, the Company commenced the offer and sale of up
to $1.0 million in unsecured convertible notes, of which all $1.0 million were
sold. The notes are due December 31, 2008, bear interest at the rate of 7% per
annum and, at the option of the holder, are convertible to common stock of the
Company at the conversion price of $11.00 per share. The net proceeds of this
offering were used to provide capital to FCREMI to acquire and lease branch
facilities to the Bank and to provide additional capital to the Bank to support
asset growth.
At September 30, 2000, the Bank had tier 1 capital of approximately 7.1% and
risk-based capital of approximately 9.9%. The regulatory tier 1 and risk-based
capital requirements are 4.0% and 8.0% respectively.
Impact of Inflation and Changing Prices
---------------------------------------
The financial statements and related data presented herein have been prepared in
accordance with generally accepted accounting principles. These principles
require the measurement of financial position and operating results in terms of
historical dollars, without considering changes in the relative purchasing power
of money over time due to inflation.
The primary assets and liabilities of the Company are monetary in nature.
Consequently, interest rates generally have a more significant impact on
performance than the effects of inflation. Interest rates, however, do not
necessarily move in the same direction or with the same magnitude as the price
of goods and services. In a period of rapidly rising interest rates, the
liquidity and the maturity structure of the Company's assets and liabilities are
critical to the maintenance of acceptable performance levels.
15
<PAGE>
Other
-----
The Securities and Exchange Commission maintains a Web site that contains
reports, proxy information statements, and other information regarding
registrants that file electronically with the Commission, including First
Community. The address is (http://www.sec.gov).
Item 3. Quantitative and Qualitative Disclosures About Market Risk
------- ----------------------------------------------------------
Although the Company files a Form 10-K in lieu of Form 10-KSB, the Company
qualifies as a small business issuer. Therefore, Item 7A is not required under
Section 229.305 of Regulation S-K.
Part II - Other Information
Item 1. Legal Proceedings.
------- ------------------
None.
Item 2. Changes in Securities.
------- ----------------------
None.
Item 3. Defaults upon Senior Securities.
------- --------------------------------
Not applicable.
Item 4. Submission of Matters to a Vote by Security Holders.
------- ----------------------------------------------------
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
------- --------------------------------
(a) Exhibit 27 Financial Data Schedule.
(b) No reports were filed on Form 8-K during the quarter
ended September 30, 2000.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST COMMUNITY BANCSHARES, INC.
Date: November 14, 2000 By: /s/ Albert R. Jackson III
----------------- ---------------------------
Albert R. Jackson III
Chief Executive Officer and
Director
Date: November 14, 2000 By: /s/ Randy J. Sizemore
----------------- ---------------------------
Randy J. Sizemore, Vice
President of Finance
17
