10-Q 1 fcb-10q.txt 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, 2001 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, 2001 1,042,926 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................................................17 Item 2. Changes In Securities............................................17 Item 3. Defaults Upon Senior Securities..................................17 Item 4. Submission of Matters to a Vote by Security Holders..............17 Item 5. Other Information................................................17 Item 6. Exhibits and Reports on Form 8-K.................................17 Signatures....................................................................18 2 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 Item 1. Financial Statements ------- -------------------- FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES Consolidated Condensed Balance Sheet (Unaudited)

See notes to consolidated condensed financial statements. 4 FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES Consolidated Condensed Statement of Income (Unaudited)

See notes to consolidated condensed financial statements. 5 FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES Consolidated Condensed Statement of Comprehensive Income (Unaudited)

See notes to consolidated condensed financial statements 6 FIRST COMMUNITY BANCSHARES, INC AND SUBSIDIARIES Consolidated Condensed Statement of Stockholders' Equity For the Nine Months Ended September 30, 2001 (Unaudited)

See notes to consolidated condensed financial statements. 7 FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES Consolidated Condensed Statement of Cash Flows (Unaudited)

See notes to consolidated condensed financial statements. 8 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, 2000, 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, 2001, and for the three months and nine months ended September 30, 2001 and 2000, 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

Item 2. Management's Discussion and Analysis of Financial Condition --------- and Results of Operations ----------------------------------------------------------- General ------- The Bank is a subsidiary of the Company and operates as an Indiana commercial bank. In 1998, the Company formed a new subsidiary, First Community Real Estate Management, Inc. whose purpose is to purchase and lease back to the Bank properties originally owned by the Bank thereby allowing the Bank to redeploy 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. Financial Condition ------------------- Total assets decreased $1.5 million, or 1.0%, to $147.7 million at September 30, 2001, from $149.2 million at December 31, 2000. Net loans increased $3.4 million, or 2.8% from $123.6 million on December 31, 2000 to $127.0 million on September 30, 2001. Total investment securities decreased from $10.5 million at December 31, 2000 to $4.2 million at September 30, 2001. Deposits decreased $4.7 million or 3.8% from $123.0 million on December 31, 2000 to $118.3 million on September 30, 2001. FHLB advances increased $2.5 million or 19.2% during the same time frame. Stockholders equity was $10.0 million at September 30, 2001 as compared to $9.3 million at December 31, 2000. The bank has continued to see demand in both its commercial real estate and installment sections of the loan portfolio during the nine months ended September 30, 2001. These net loan increases of $3.4 million were primarily funded by new advances from the Federal Home Loan Bank ("FHLB") of Indianapolis. Management seeks out alternative funding sources, such as FHLB advances, when the terms of these funding sources outperform traditional deposit terms in the Bank's primary markets or for asset-liability matching purposes. 10 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 results include a net increase of $2.8 million in noninterest-bearing, NOW and savings deposits and a decrease of $7.5 million in certificates of deposit during the nine months ended September 30, 2001. The net outflow of deposits were primarily funded by sales and maturities of securities owned by the Company. Results of Operations Comparison of Three Months Ended September 30, 2001 and September 30, 2000 ----------------------------------------------------------------------------- The Company had net income of $273,000 and $157,000 for the three months ended September 30, 2001 and 2000, respectively. Net interest income was $1.5 million for the three months ended September 30, 2001 as compared to $1.2 million for the three months ended September 30, 2000. This stark increase in net interest income is due to both the shift in concentration of the deposit portfolio and the result of interest bearing deposits being repriced at a faster pace than interest earning assets in the falling interest rate environment the Company has witnessed during the nine months ended September 30, 2001. The Company made a $119,000 provision for loan loss for the three months ended September 30, 2001 compared to a $40,000 provision in the same period last year. Loan loss reserve calculations are reviewed monthly by the Bank's senior lending officer and the board of directors. The calculations 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 $89,000 or 43.0% for the three months ended September 30, 2001, compared to the prior year. Service charges on deposit accounts and trust fees increased a combined $54,000 partially offset by a decrease in other operating income of $10,000. In addition, the Bank recognized gains of $7,000 in relation to mortgage banking activities during the quarter ended September 30, 2001 and gains on securities sales of $33,000 compared to no mortgage banking activity during the quarter ended September 30, 2000 and losses on securities sales of $5,000. Total other expenses only increased by $13,000 for the three months ended September 30, 2001, compared to the three months ended September 30, 2000. Management has continually analyzed all operating aspects of the Company in search of greater efficiencies. Increases in salaries and data processing fees of $60,000 were almost completely negated by decreases in premises, advertising, deposit insurance expense, office supplies, legal/professional, and other operating expenses of $47,000. Income taxes increased $121,000 for the three months ended September 30, 2001 compared to the prior year as the Company saw it's effective tax rate increase from 5.8% during the three months ended September 30, 2000 to an effective tax rate of 32.5% for the three months ended September 30, 2001. The increase in taxes is primarily due to the Bank having an increase in pre-tax income of $237,000 coupled with a smaller tax exempt securities portfolio. Results of Operations Comparison of Nine Months Ended September 30, 2001 and September 30, 2000 ---------------------------------------------------------------------------- Net income for the nine months ended September 30, 2001, was $664,000 compared with $487,000 for the nine months ended September 30, 2000, an increase of $177,000 or 36.4%. Interest income for the nine months ended September 30, 2001 increased to $8.8 million, or 3.8% from the $8.4 million in interest income reported in the same period of the prior year. Interest expense for the nine months ended September 30, 2001 decreased to $4.7 million, or .1% from the $4.8 million in interest expense for the nine months ended September 30, 2000. As a result, net interest income for the nine months ended September 30, 2001 increased $354,000 or 9.7% to $4.0 million, compared to $3.7 million in the year ago period. 11 The Company made a $222,000 provision for loan loss for the nine months ended September 30, 2001 compared to a $159,000 provision for the nine months ended September 30, 2000. As previously discussed, loan loss reserve calculations are reviewed monthly by the Bank's senior lending officer and the board of directors. Total other income increased by $265,000 or 47.9% for the nine months ended September 30, 2001, compared to the year ago period. Service charges on deposits increased $159,000 or 44.6% between the two periods primarily due to both an increase in the number of demand accounts being serviced by the Bank and some changes to the fee schedules which the Bank imposes on its demand accounts. In addition, the Bank recognized gains on the sale of loans of $12,000 during the nine months ended September 30, 2001 as compared to no activity in that area during the nine months ended September 30, 2000. As previously discussed, certain securities were sold at gains of $46,000 during the current period compared to losses on the sale of securities of $7,000 during the year earlier period. Other operating income also increased $32,000 or 17.4% from $184,000 for the nine months ended September 30, 2000 to $216,000 for the nine months ended September 30, 2001. The primary reason for this increase is due to the Bank collecting surcharges from foreign cardholders at all 10 of its ATM's during 2001, a change that was made in June/July 2000. Total other expenses increased by $189,000, or 5.4% to $3.7 million for the nine months ended September 30, 2001, compared to $3.5 million for the nine months ended September 30, 2000. The primary reason for these increases is due to data processing fees increasing $108,000 from $372,000 for the nine months ended September 30, 2000 to $480,000 for the nine months ended September 30, 2001. The Bank switched its daily item processing and monthly statement rendering process to imaging in May 2000, which is the primary reason for the increase. Management believes this investment in technology will be beneficial to the Company going forward due to increased back-office research efficiencies and increased ability to satisfy customer demands for these types of services. Advertising and printing/office supplies decreased a combined $95,000 between the two periods as management continued to search for operating inefficiencies and to make changes where applicable. Premises, legal/professional, and telephone remained relatively unchanged. Income taxes increased $189,000 for the nine months ended September 30, 2001 when compared to the same period in 2000. The increase in taxes is primarily due to the Bank having an increase in pre-tax income of $366,000 coupled with a smaller tax exempt securities portfolio during the nine months ended September 30, 2001, as compared to the year ago period. Impact of New Accounting Standards ---------------------------------- Accounting for a Business Combination. Statement of Financial Accounting Standards ("SFAS") No. 141 requires that all business combinations should be accounted for using the purchase method of accounting; use of the pooling method is prohibited. A business combination occurs when an enterprise acquires all or a portion of the net assets that constitutes a business or equity interest of one or more other enterprises and obtains control over the enterprise or enterprises. All two-party and multi-party business combinations, including "roll-up" and "put-together" transactions are included in the scope of this Statement. This Statement requires that goodwill be recognized initially as an asset in the financial statements and measured as the excess of the cost of an acquired entity over the net of the amounts assigned to identifiable assets acquired and liabilities assumed. In addition, SFAS No. 141 requires all other intangibles, such as core deposit intangibles for a financial institution, to be identified. The provisions of Statement No. 141 are effective for any business combination that is initiated after June 30, 2001. Accounting for Goodwill. Under the provisions of SFAS No. 142, goodwill should not be amortized but should be tested for impairment at the reporting unit level. An impairment test of goodwill should be done on an 12 annual basis unless events or circumstances indicate impairment has occurred in the interim period. The annual impairment test can be performed at any time during the year as long as the measurement date is used consistently from year to year. Impairment testing is a two step process. The first step is a comparison of the fair value of a reporting unit to its carrying amount including goodwill. If the fair value of the reporting unit is greater than its carrying value, goodwill is not impaired and no further work is required. Companies should perform the first step of the impairment test on all goodwill within six months of initially applying the Statement. If the fair value is less, the second step should be performed. The second step is to compare the fair value of goodwill to its carrying amount. If the fair value of goodwill is less than its carrying value, then the goodwill is deemed impaired and a loss recognized. Any impairment loss recognized as a result of completing the transitional impairment test should be treated as a change in accounting principle and recognized in the first interim period financial statements. The provisions of Statement No. 142 would be effective for fiscal years beginning after December 15, 2001. Early adoption would be permitted for companies with a fiscal year beginning after March 15, 2001 provided that the first quarter financial statements have not been previously issued. In all cases, the Statement must be adopted as of the beginning of a fiscal year. Goodwill and intangible assets acquired in a transaction completed after June 30, 2001 but before this Statement is initially applied would be accounted for in accordance with the amortization and nonamortization provisions of the Statement. The useful economic life of previously recognized intangible assets should be reassessed upon adoption of the Statement, and remaining amortization periods should be adjusted accordingly. Intangible assets deemed to have an indefinite life would no longer be amortized. Since the Company has no legacy goodwill and is not currently in the process of acquiring another company, the adoption of SFAS 141 and 142 will have no impact on the Company's financial statements. 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, 2001, the Bank had $3,536,000 of assets classified as substandard, none as doubtful and none as loss. The allowance for loan losses was $1,084,000 or .85% of net loans receivable at September 30, 2001 compared to $1,007,000 or .82% of net loans receivable at December 31, 2000. A portion of classified loans are non-accrual loans. First Community had non-accrual loans totaling $464,000 at September 30, 2001 compared to $402,000 at December 31, 2000. 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, 2001, the Company's one-year cumulative interest-rate gap as a percent of total assets was a negative 15.6% compared to a negative 11.07% at December 31, 2000. This negative interest-rate gap 13 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 the fact that such loans often are secured by rapidly depreciating assets. The Company's ratio of non-performing assets to total assets was 1.43% at September 30, 2001 compared to .46% at December 31, 2000. In light of the current economic conditions, management has been monitoring the Bank's non-performing assets closely. These non-performing assets are weighted heavier on the Bank's allowance for loan loss calculation. The Company believes its current loan loss reserve levels are adequate at this time. 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, 2001. Mortgages which have adjustable or renegotiable interest rates are shown as 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 on enforcement of due-on-sale clauses. 14

15 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 $15.5 million at September 30, 2001 and $13.0 million at December 31, 2000. At September 30, 2001, the Bank had a tier 1 leverage ratio of approximately 7.2% and a total risk-based capital ratio of approximately 10.0%. The regulatory tier 1 leverage and total 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. 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. 16 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) No reports were filed on Form 8-K during the quarter ended September 30, 2001. 17 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, 2001 By: /s/ Albert R. Jackson III ----------------- ------------------------------------ Albert R. Jackson III Chief Executive Officer and Director Date: November 14, 2001 By: /s/ Randy J. Sizemore ----------------- ------------------------------------ Randy J. Sizemore Vice President of Finance 18

FIRST COMMUNITY BANCSHARES INC /IN 10-Q