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 June 30, 2002 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 incorporation (IRS Employer Identification No.) 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 August 1, 2002 1,044,926 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 Sheets.................... 4 Consolidated Condensed Statements of Income.............. 5 Consolidated Condensed Statements of Comprehensive Income 6 Consolidated Condensed Statements of Stockholders' Equity 7 Consolidated Condensed Statements of Cash Flows.......... 8 Notes to Unaudited 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.... 15 Part II. Other Information: Item 1. Legal Proceedings............................................. 15 Item 2. Changes In Securities......................................... 15 Item 3. Defaults Upon Senior Securities............................... 15 Item 4. Submission of Matters to a Vote of Security Holders........... 16 Item 5. Other Information............................................. 16 Item 6. Exhibits and Reports on Form 8-K.............................. 16 Signatures................................................................. 16 Certification of the Sarbanes-Oxley Act of 2002............................ 16 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

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

See notes to consolidated condensed financial statements. 5 FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES Consolidated Condensed Statements 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 Six Months Ended June 30, 2002 (Unaudited)

See notes to consolidated condensed financial statements. 7 FIRST COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES Consolidated Condensed Statements 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 June 30, 2002 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, 2001, 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 financial statements at June 30, 2002, and for the three and six months ended June 30, 2002 and 2001, 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. The results of operations for the three and six months ended June 30, 2002 are not necessarily indicative of the results to be expected for the full year. The consolidated condensed balance sheet of the company as December 31, 2001 has been derived from the audited consolidated balance sheet of the Company as of that date. Note 2: Earnings (Loss) 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. Critical Accounting Policies ---------------------------- The notes to the consolidated financial statements contain a summary of the Company's significant accounting policies presented on pages F-7 through F-9 of the Annual Report to Stockholders for the year ended December 31, 2001. Certain of these policies are important to the portrayal of the Company's financial condition, since they require management to make difficult, complex or subjective judgements, some of which may relate to matters that are inherently uncertain. At this time management believes that its critical accounting policies include determining the allowance for loan losses. The allowance for loan losses is a significant estimate that can and does change based on management's assumptions about specific borrowers and current general economic and business conditions, among other 10 factors. Management reviews the adequacy of the allowance for loan losses on at least a quarterly basis. The evaluation by management includes consideration of past loss experience, changes in the composition of the loan portfolio, the current condition and amount of loans outstanding, identified problem loans and the probability of collecting all amounts due. The determination of the adequacy of the allowance for loan losses is based on estimates that are particularly susceptible to significant changes in the economic environment and market conditions. A worsening or protracted economic decline would increase the likelihood of additional losses due to credit and market risk and could create the need for additional loss reserves. Financial Condition ------------------- Total assets increased $3.5 million, or 2.4%, to $150.9 million at June 30, 2002, from $147.4 million at December 31, 2001. Net loans increased from $126.1 million on December 31, 2001 to $128.0 million on June 30, 2002. Deposits increased from $117.7 million on December 31, 2001 to $123.5 million on June 30, 2002, an increase of 4.9%. FHLB advances decreased $2.0 million or 12.9% during the same time frame. Stockholders' equity was $10.1 million at June 30, 2002 as compared to $10.2 million at December 31, 2001. The Bank has experienced demand in both its commercial and installment sections of the loan portfolio during the six months ended June 30, 2002. The increase in net loans of $1.9 million was primarily funded by deposit growth. Management may seek out alternative funding sources, such as FHLB advances, from time to time when the terms of these funding sources outperform traditional deposit terms in the Bank's primary markets or for asset-liability matching purposes. Results of Operations Comparison of Three Months Ended June 30, 2002 and June 30, 2001 ------------------------------------------------------------------------ The Company had a net loss of $199,000 for the three months ended June 30, 2002 compared to $213,000 for the three months ended June 30, 2001, a decrease of $412,000. Net interest income increased to $1.4 million for the three months ended June 30, 2002 from $1.3 million for the three months ended June 30, 2001, an increase of $118,000 or 8.9%. The Company made a $790,000 provision for loan losses for the three months ended June 30, 2002 compared to a $69,000 provision in the same period last year. The increased provision was for the commercial loan portfolio and was primarily necessary due to continued weakness in the general economy of the Indianapolis metro area and due to the charge off of two loans that were partially unreserved. The Company believes that there is potential for recovery of these charged off loans, but the recoveries may be over several quarters. The loan loss reserve calculations are reviewed monthly by both 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. The Company continued to feel effects of interest rate drops of 2001 during 2002. The Bank's deposits were able to reprice in proportion to the interest-earning assets, which repriced during this same time frame. As a result, net interest income was increased by approximately $100,000 when comparing the quarter ended June 30, 2002 to the quarter ended June 30, 2001. Management continued to focus on increasing non-interest income and holding steady or reducing non-interest expenses during the quarter ended June 30, 2002. As a result of these efforts, non-interest income increased $59,000 or 21% from $281,000 for the three months ended June 30, 2001 to $340,000 for the three months ended June 30, 2002. This increase was primarily due to: 11 o Increased service charges on deposit accounts of $12,000 o Increased realized gain on sale of loans of $13,000 o And increases other operating income of $49,000 for the three months ended June 30, 2002. The increase in service charges on deposit accounts can be attributed to more demand deposit accounts being serviced by the Bank coupled with fee change differences between periods. The increases in other operating income is primarily due to credit card merchant and interchange fees, and cash surrender value increases on Company owned life insurance. Non-interest expenses increased $111,000 during the quarter ended June 30, 2002, when compared to the quarter ended June 30, 2001. The primary increase of $68,000 between periods was in salaries and employee benefits expenses. Data processing fees also increased to $185,000 for the three months ended June 30, 2002 from $161,000 for the three months ended June 30, 2001. These increases are primarily related to servicing more demand deposit, savings accounts, and loan accounts. Management has made a commitment to continue to monitor all non-interest expenses to further reduce expenses when practicable. Income taxes decreased $242,000 for the three months ended June 30, 2002, when compared to the same period in 2001 primarily due to a decrease in pretax income caused by an increased provision for loan losses. Results of Operations Comparison of Six Months Ended June 30, 2002 and June 30, 2001 ---------------------------------------------------------------------- The Company reported net income of $31,000 for the six months ended June 30, 2002, a decrease of $360,000 or 92.1% over the $391,000 reported for the six months ended June 30, 2001. Net interest income increased, $327,000, to $2.9 million for the six months ended June 30, 2002, compared to $2.5 million for the six months ended June 30, 2001. This represents a 12.9% increase between the two periods. The Company made a $862,000 provision for loan losses for the six months ended June 30, 2002 compared to a $104,000 provision for the six months ended June 30, 2001. As previously discussed, loan loss reserves are reviewed monthly by both the Bank's senior lending officer and the board of directors. Non-interest income increased by $151,000 or 28.8% for the six months ended June 30, 2002, compared to the year earlier period. Increases in number of demand deposit and savings accounts being serviced along with operational procedural changes have led to this improvement. The Company was servicing more demand deposits during the six months ended June 30, 2002 compared to the year ago period, which coupled with fee changes have increased service charges collected on deposit accounts by $31,000. The Company also recognized gains on the sale of loans of $54,000 during the six months ended June 30, 2002, compared to a gain on the sale of loans of $5,000 during the six months ended June 30, 2001. The increase in other operating income is primarily attributable to increases in credit card merchant and interchange fees, and cash surrender value of Company owned life insurance polices. Non-interest expenses were $2.7 million for the six months ended June 30, 2002, compared to $2.5 million during the six months ended June 30, 2001. The Company has seen increases in salaries, premises, data processing, printing and office supplies, legal, and other expenses while experiencing decreases in advertising, FDIC insurance, and printing expenses during the comparable periods. The increased data processing fees can be attributed to servicing more demand, savings, and loan accounts. The primary decrease in non-interest expense is in deposit insurance, which decreased $20,000 to $10,000 during the six months ended June 30, 2002, compared to $30,000 during the six months ended June 30, 2001. Management is continuing to monitor all expense areas' and implementing systems or procedural changes when deemed beneficial to the Company. 12 Income taxes decreased $176,000 for the six months ended June 30, 2002, when compared to the same period in 2001, primarily due to a decrease in pretax income caused by an increased loan loss provision recorded in the second quarter of 2002. 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 June 30, 2002, the Bank had $4.4 million of loans classified as substandard, none as doubtful and none as loss. The allowance for loan losses was $1.2 million, or .95% of loans receivable at June 30, 2002 compared to $1.1 million or .88% of net loans receivable at December 31, 2001. A portion of classified loans are non-accrual loans. First Community had non-accrual loans totaling $2.3 million at June 30, 2002 compared to $1.6 million at December 31, 2001. 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. This goal can be achieved 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 June 30, 2002, the Company's one-year cumulative interest-rate gap as a percent of total assets was a negative 9.4%. 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 the loans that often are secured by rapidly depreciating assets. The Company's ratio of non-performing assets to total assets was 1.65% at June 30, 2002 and 1.37% at December 31, 2001. 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 June 30, 2002. 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 or enforcement of due-on-sale clauses. 13

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 14 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 $13.5 million at June 30, 2002 and $15.5 million at December 31, 2001. At June 30, 2002, the Bank had a tier 1 leverage ratio of approximately 7.12% and a total risk-based capital ratio of approximately 9.95%. 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 and information statements, and other information regarding registrants that file electronically with the Commission, including the Company. 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. ------- ---------------------- On May 29, 2002 the Company issued options for the purchase of 1,000 shares of common stock to each of four outside directors with an exercise price of $9.70 per share in reliance on the exemption provided by Section 4(2) of the Securities Act of 1933, as amended (the "Act"). On May 29, 2002 the Company issued 2,000 shares of common stock to an outside retired director upon exercise of outstanding options in reliance upon the exemption provided by Section 4(2) of the Act. Item 3. Defaults upon Senior Securities. ------- -------------------------------- Not applicable. 15 Item 4. Submission of Matters to a Vote by Security Holders. ------- ---------------------------------------------------- On May 29, 2002, the Company held its annual meeting of shareholders. A total of 991,868 shares were represented in person or by proxy at the meeting out of a total of 1,042,926 voting shares eligible. Mr. Frank D. Neese and Mr. Roy Martin Umbarger, were re-elected to the Board of Directors for a three-year terms expiring in 2005. Mr. Neese received 989,212 shares voted in favor of his re-election, 180 votes against and 2,576 votes abstained. Mr. Umbarger received a total of 989,147 shares voted in favor of his re-election, 145 votes against, and 2,576 votes abstained. Continuing Directors include, Dr. Merrill Wesemann, M.D., Mr. Albert R. Jackson, III and Mr. Albert R. Jackson, Jr. Dr. Wesemann and Mr. Albert R. Jackson, III terms will expire in 2003. The term for Mr. Albert R. Jackson, Jr. will expire in 2004. 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 June 30, 2002. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FIRST COMMUNITY BANCSHARES, INC. Date: August 13, 2002 By: /s/ Albert R. Jackson III --------------- -------------------------------- Albert R. Jackson III Chief Executive Officer and Director Date: August 13, 2002 By: /s/ Brian D. Heilers --------------- -------------------------------- Brian D. Heilers Vice President of Finance CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of First Community Bancshares, Inc. (the "Company") on Form 10Q for the period ending June 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Albert R. Jackson III, Chief Executive Officer and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the periods stated therein. By: /s/ Albert R. Jackson, III -------------------------- Chief Executive Officer and Chief Financial Officer August 13, 2002 16

FIRST COMMUNITY BANCSHARES INC /IN 10-Q