10-Q 1 fcb-902q.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, 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 or (IRS Employer Identification No.) 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, 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 Item 4. Controls and Procedures.........................................15 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 of Security Holders.............16 Item 5. Other Information...............................................16 Item 6. Exhibits and Reports on Form 8-K................................16 Signatures...................................................................16 Certification pursuant to the Sarbanes-Oxley Act of 2002.....................17 Certification of Controls and Procedures.....................................17 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; the status of the economy in our market area; decisions made with respect to the classification of loans and the amount of our loan loss reserves; 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 Nine Months Ended September 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 September 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 September 30, 2002, and for the three and nine months ended September 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 nine months ended September 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 of December 31, 2001 has been derived from the audited consolidated balance sheet of the Company as of that date. 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. 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 $1.9 million, or 1.3%, to $149.3 million at September 30, 2002, from $147.4 million at December 31, 2001. Net loans increased from $126.1 million on December 31, 2001 to $127.1 million on September 30, 2002. Deposits increased from $117.7 million on December 31, 2001 to $121.4 million on September 30, 2002, an increase of 3.1%. FHLB advances decreased $2.0 million or 12.9% during the same time frame. Stockholders' equity was $10.5 million at September 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 nine months ended September 30, 2002. The increase in net loans of $1.0 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 September 30, 2002 and September 30, 2001 ------------------------------------------------------------------------- The Company had a net income of $420,000 for the three months ended September 30, 2002 compared to net income of $273,000 for the three months ended September 30, 2001, an increase of $147,000 or 54%. This increase in net income is a result of continued lowered interest rates and management's focus on increasing non-interest income. The Bank's net interest income increased from $1.5 million for the three months ended September 30, 2001 to approximately $1.6 million for the three months ended September 30, 2002, an increase of $71,000. This increase is primarily due to the interest rate reductions that occurred during 2001 with interest rates remaining at these lower levels throughout 2002. The Bank's deposits were able to reprice in a higher proportion to the interest-earning assets, which repriced during this same time frame. The Company made a $60,000 provision for loan losses for the three months ended September 30, 2002 compared to $119,000 for three months ended September 30, 2001, or a decrease of $59,000. 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. Management continued to focus on increasing non-interest income and holding steady or reducing non-interest expenses during the quarter ended September 30, 2002. As a result of these efforts, non-interest income increased $185,000 or 63% from $296,000 for the three months ended September 30, 2001 to $481,000 for the three months ended September 30, 2002. This increase was primarily due to: 11 o Increased service charges on deposit accounts of $41,000 o Increased realized gain on sale of loans of $52,000 o Increased other operating income of $76,000 for the three months ended September 30, 2002. The increase in service charges on deposit accounts is attributable 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 $80,000 during the quarter ended September 30, 2002, when compared to the quarter ended September 30, 2001. The increase between periods was in primarily due to salaries and employee benefits expenses, which increased to $649,000 at for the quarter ending September 30, 2002 compared to $601,000 for the same period ending September 30, 2001. Data processing fees also increased to $188,000 for the three months ended September 30, 2002 from $168,000 for the three months ended September 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 increased $87,000 for the three months ended September 30, 2002, when compared to the same period in 2001 primarily due to an increase in pretax income over the same period last year. Results of Operations Comparison of Nine Months Ended September 30, 2002 and September 30, 2001 ----------------------------------------------------------------------------- The Company reported net income of $451,000 for the nine months ended September 30, 2002, a decrease of $213,000 or 32% from the $664,000 reported for the nine months ended September 30, 2001. Net interest income increased, $398,000, to $4.4 million for the nine months ended September 30, 2002, compared to $4.0 million for the nine months ended September 30, 2001. This represents a 10% increase between the two periods. The Company made a $922,000 provision for loan losses for the nine months ended September 30, 2002 compared to a $222,000 provision for the nine months ended September 30, 2001. An increased provision was taken during the second quarter and allocated to the commercial loan portfolio, which was necessary primarily 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. 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 $336,000 or 41% for the nine months ended September 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 nine months ended September 30, 2002 compared to the year ago period. This increased volume in deposit servicing, coupled with fee structural changes, have increased service charges collected on deposit accounts by $72,000. The Company also recognized gains on the sale of loans of $113,000 during the nine months ended September 30, 2002, compared to a gain on the sale of loans of $12,000 during the nine months ended September 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 $4.0 million for the nine months ended September 30, 2002, compared to $3.7 million during the nine months ended September 30, 2001. The Company has seen increases in salaries, 12 premises, data processing, printing and office supplies, legal, and other expenses while experiencing decreases in advertising, FDIC insurance, and telephone expenses during the comparable periods. The increased data processing fees can be attributed to servicing more demand, savings, and loan accounts. The primary increase in non-interest expense is in salaries and benefits expense, which increased $191,000 to $2.0 million during the nine months ended September 30, 2002, compared to $1.8 million during the nine months ended September 30, 2001. Management is continuing to monitor all expense areas and implementing systems or procedural changes when deemed beneficial to the Company. Income taxes decreased $89,000 for the nine months ended September 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 September 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 $1.3 million, or .98% of net loans receivable at September 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 $1.8 million at September 30, 2002 compared to $1.6 million at December 31, 2001. All non-accrual loans are considered substandard. 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 September 30, 2002, the Company's one-year cumulative interest-rate gap as a percent of total assets was a negative 4.9%. 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 1.79% at September 30, 2002 and 1.37% at December 31, 2001. 13 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, 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.

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, 14 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 fifteen percent (15%) to twenty percent (20%) 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 $13.5 million at September 30, 2002 and $15.5 million at December 31, 2001. At September 30, 2002, the Bank had a tier 1 leverage ratio of approximately 7.36% and a total risk-based capital ratio of approximately 10.22%. 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. Item 4. Controls and Procedures ------- ----------------------- (a) Evaluation of disclosure controls and procedures. The Company's chief executive officer and chief financial officer, after evaluating the effectiveness of the Company's disclosure controls and procedures (as defined in Sections 13a-14(c) and 15d-14(c) of the Securities Exchange Act of 1934, as amended), as of a date 15 (the "Evaluation Date") within 90 days before the filing date of this quarterly report, has concluded that as of the Evaluation Date, the Company's disclosure controls and procedures were adequate and are designed to ensure that material information relating to the Company is timely gathered, analyzed and disclosed to such officers within the Company, as appropriate, to allow timely decisions regarding required disclosure in the Company's reports filed under the Securities Exchange Act of 1934, as amended. (b) Changes in internal controls. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect the Company's internal controls subsequent to the Evaluation Date. 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, 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: November 14, 2002 By: /s/ Albert R. Jackson III ----------------- -------------------------------- Albert R. Jackson III Chief Executive Officer and Director Date: November 14, 2002 By: /s/ Brian D. Heilers ----------------- -------------------------------- Brian D. Heilers Vice President of Finance 16 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 November 14, 2002 CERTIFICATION OF PRINCIPAL EXECUTIVE AND FINANCIAL OFFICER Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, Albert R. Jackson III, certify that: 1. I have reviewed this quarterly report on Form 10-Q of First Community Bancshares, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; and 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report. 17 4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and (c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. I have disclosed, based on my most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. By: /s/ Albert R. Jackson, III --------------------------------------------------- Chief Executive Officer and Chief Financial Officer November 14, 2002 18

FIRST COMMUNITY BANCSHARES INC /IN 10-Q