UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT UNDERPURSUANT TO SECTION 13 OR 15(d)
OF THE
SECURITIES EXCHANGE ACT OF 1934 | | |
(Mark One) | | |
þ
| | QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| | |
| | For the Quarterly Period Ended: March 31, 2005 |
| | |
| | OR |
| | |
o
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from:to
quarter ended June 30, 2005
Commission File Number: 0-19297file number 000-19297
First Community Bancshares, Inc.FIRST COMMUNITY BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
| | | | |
Nevada | | 000-19297 | | 55-0694814 |
| | | | |
(State or other jurisdiction of | | (I.R.S.Commission File Number) | | (IRS Employer Identification No.) |
incorporation or organization)incorporation) | | | | Identification No.) |
| | |
One Community Place, P.O. Box 989 | | |
Bluefield, Virginia | | 2460524605-0989 |
| | |
(Address of principal executive offices) | | (Zip Code) |
(276) 326-9000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the
Registrantregistrant (1) has filed all reports required to be filed by Section 13
ofor 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrantregistrant was required to file such reports), and (2) has been subject to
the to such filing requirements for the past 90 days.
Yes
Indicate by check mark whether
Registrantthe registrant is an accelerated filer (as defined in
Rule 12b-2 of the Exchange
Act Rule 12b-2)Act).
Yes
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
| | |
Class | | Outstanding at April 30,Class — Common Stock, $1.00 Par Value; 11,277,415 shares outstanding as of July 29, 2005 |
Common Stock, $1 Par Value | | 11,272,051 |
First Community Bancshares, Inc.
FIRST COMMUNITY BANCSHARES, INC.
FORM 10-Q
For the quarter ended March 31,June 30, 2005
INDEX
- 2 -
PART I.
ITEM 1. Financial Statements FIRST COMMUNITY BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in Thousands, Except Share Data)
| | | | | | | | |
| | June 30, | | December 31, |
| | 2005 | | 2004 |
| | (Unaudited) | | (Note 1) |
Assets | | | | | | | | |
Cash and due from banks | | $ | 43,415 | | | $ | 37,294 | |
Interest-bearing balances with banks | | | 64,488 | | | | 17,452 | |
| | | | | | | | |
Total cash and cash equivalents | | | 107,903 | | | | 54,746 | |
Securities available for sale (amortized cost of $378,196 at June 30, 2005; $384,746 at December 31, 2004) | | | 381,540 | | | | 388,678 | |
Securities held to maturity (fair value of $30,878 at June 30, 2005; $35,610 at December 31, 2004) | | | 29,854 | | | | 34,221 | |
Loans held for sale | | | 1,075 | | | | 1,194 | |
Loans held for investment, net of unearned income | | | 1,296,728 | | | | 1,238,756 | |
Less allowance for loan losses | | | 15,984 | | | | 16,339 | |
| | | | | | | | |
Net loans held for investment | | | 1,280,744 | | | | 1,222,417 | |
Premises and equipment | | | 35,796 | | | | 37,360 | |
Other real estate owned | | | 975 | | | | 1,419 | |
Interest receivable | | | 9,476 | | | | 8,554 | |
Other assets | | | 26,496 | | | | 20,923 | |
Goodwill | | | 61,399 | | | | 61,310 | |
| | | | | | | | |
Total Assets | | $ | 1,935,258 | | | $ | 1,830,822 | |
| | | | | | | | |
| | | | | | | | |
Liabilities | | | | | | | | |
Deposits: | | | | | | | | |
Noninterest-bearing | | $ | 235,217 | | | $ | 221,499 | |
Interest-bearing | | | 1,162,682 | | | | 1,137,565 | |
| | | | | | | | |
Total Deposits | | | 1,397,899 | | | | 1,359,064 | |
Interest, taxes and other liabilities | | | 15,122 | | | | 14,313 | |
Federal funds purchased | | | — | | | | 32,500 | |
Securities sold under agreements to repurchase | | | 125,285 | | | | 109,857 | |
FHLB borrowings and other indebtedness | | | 207,231 | | | | 131,855 | |
| | | | | | | | |
Total Liabilities | | | 1,745,537 | | | | 1,647,589 | |
| | | | | | | | |
| | | | | | | | |
Stockholders’ Equity | | | | | | | | |
Preferred stock, par value undesignated; 1,000,000 shares authorized; no shares issued and outstanding in 2005 and 2004 | | | — | | | | — | |
Common stock, $1 par value; 25,000,000 and 15,000,000 shares authorized in 2005 and 2004; 11,495,570 and 11,472,311 issued in 2005 and 2004, and 11,274,391 and 11,250,927 outstanding in 2005 and 2004 | | | 11,496 | | | | 11,472 | |
Additional paid-in capital | | | 108,639 | | | | 108,263 | |
Retained earnings | | | 74,444 | | | | 68,019 | |
Treasury stock, at cost | | | (6,864 | ) | | | (6,881 | ) |
Accumulated other comprehensive income | | | 2,006 | | | | 2,360 | |
| | | | | | | | |
Total Stockholders’ Equity | | | 189,721 | | | | 183,233 | |
| | | | | | | | |
Total Liabilities and Stockholders’ Equity | | $ | 1,935,258 | | | $ | 1,830,822 | |
| | | | | | | | |
| | | | | | | | |
| | March 31, | | | December 31, | |
| | 2005 | | | 2004 | |
| | (Unaudited) | | | (Note 1) | |
Assets | | | | | | | | |
Cash and due from banks | | $ | 34,328 | | | $ | 37,294 | |
Interest-bearing balances with banks | | | 48,942 | | | | 17,452 | |
| | | | | | |
Total cash and cash equivalents | | | 83,270 | | | | 54,746 | |
Securities available for sale (amortized cost of $372,760 at March 31, 2005; $384,746 at December 31, 2004) | | | 372,585 | | | | 388,678 | |
Securities held to maturity (fair value of $33,132 at March 31, 2005; $35,610 at December 31, 2004) | | | 32,009 | | | | 34,221 | |
Loans held for sale | | | 1,182 | | | | 1,194 | |
Loans held for investment, net of unearned income | | | 1,282,546 | | | | 1,238,756 | |
Less allowance for loan losses | | | 16,543 | | | | 16,339 | |
| | | | | | |
Net loans held for investment | | | 1,266,003 | | | | 1,222,417 | |
Premises and equipment | | | 35,869 | | | | 37,360 | |
Other real estate owned | | | 1,389 | | | | 1,419 | |
Interest receivable | | | 9,124 | | | | 8,554 | |
Other assets | | | 23,895 | | | | 20,923 | |
Goodwill | | | 61,510 | | | | 61,310 | |
| | | | | | |
Total Assets | | $ | 1,886,836 | | | $ | 1,830,822 | |
| | | | | | |
| | | | | | | | |
Liabilities | | | | | | | | |
Deposits: | | | | | | | | |
Noninterest-bearing | | $ | 220,741 | | | $ | 221,499 | |
Interest-bearing | | | 1,181,131 | | | | 1,137,565 | |
| | | | | | |
Total Deposits | | | 1,401,872 | | | | 1,359,064 | |
Interest, taxes and other liabilities | | | 15,625 | | | | 14,313 | |
Federal funds purchased | | | — | | | | 32,500 | |
Securities sold under agreements to repurchase | | | 128,244 | | | | 109,857 | |
FHLB borrowings and other indebtedness | | | 156,822 | | | | 131,855 | |
| | | | | | |
Total Liabilities | | | 1,702,563 | | | | 1,647,589 | |
| | | | | | |
| | | | | | | | |
Stockholders’ Equity | | | | | | | | |
Preferred stock, par value undesignated; 1,000,000 shares authorized; no shares issued and outstanding in 2005 and 2004 | | | — | | | | — | |
Common stock, $1 par value; 15,000,000 shares authorized ; 11,490,835 and 11,472,311 issued in 2005 and 2004, and 11,271,835 and 11,250,927 outstanding in 2005 and 2004 | | | 11,491 | | | | 11,472 | |
Additional paid-in capital | | | 108,576 | | | | 108,263 | |
Retained earnings | | | 71,116 | | | | 68,019 | |
Treasury stock, at cost | | | (6,804 | ) | | | (6,881 | ) |
Accumulated other comprehensive income | | | (106 | ) | | | 2,360 | |
| | | | | | |
Total Stockholders’ Equity | | | 184,273 | | | | 183,233 | |
| | | | | | |
Total Liabilities and Stockholders’ Equity | | $ | 1,886,836 | | | $ | 1,830,822 | |
| | | | | | |
See Notes to Consolidated Financial Statements.
- 3 -
FIRST COMMUNITY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in Thousands Except Share and perPer Share Data) (Unaudited)
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | June 30, | | June 30, | | June 30, | | June 30, |
| | 2005 | | 2004 | | 2005 | | 2004 |
Interest Income | | | | | | | | | | | | | | | | |
Interest and fees on loans held for investment | | $ | 22,192 | | | $ | 19,112 | | | $ | 42,920 | | | $ | 36,242 | |
Interest on securities-taxable | | | 2,555 | | | | 3,433 | | | | 4,851 | | | | 6,699 | |
Interest on securities-nontaxable | | | 1,865 | | | | 1,707 | | | | 3,814 | | | | 3,343 | |
Interest on federal funds sold and deposits in banks | | | 178 | | | | 104 | | | | 393 | | | | 301 | |
| | | | | | | | | | | | | | | | |
Total interest income | | | 26,790 | | | | 24,356 | | | | 51,978 | | | | 46,585 | |
Interest Expense | | | | | | | | | | | | | | | | |
Interest on deposits | | | 5,547 | | | | 4,813 | | | | 10,509 | | | | 9,128 | |
Interest on borrowings | | | 2,721 | | | | 1,916 | | | | 5,194 | | | | 3,846 | |
| | | | | | | | | | | | | | | | |
Total interest expense | | | 8,268 | | | | 6,729 | | | | 15,703 | | | | 12,974 | |
| | | | | | | | | | | | | | | | |
Net interest income | | | 18,522 | | | | 17,627 | | | | 36,275 | | | | 33,611 | |
Provision for loan losses | | | 1,073 | | | | 723 | | | | 1,764 | | | | 1,255 | |
| | | | | | | | | | | | | | | | |
Net interest income after provision for loan losses | | | 17,449 | | | | 16,904 | | | | 34,511 | | | | 32,356 | |
| | | | | | | | | | | | | | | | |
Noninterest Income | | | | | | | | | | | | | | | | |
Fiduciary income | | | 589 | | | | 512 | | | | 1,127 | | | | 930 | |
Service charges on deposit accounts | | | 2,623 | | | | 2,301 | | | | 4,771 | | | | 4,261 | |
Other service charges, commissions and fees | | | 875 | | | | 713 | | | | 1,685 | | | | 1,272 | |
Gain on sale of securities | | | 121 | | | | 1,438 | | | | 143 | | | | 1,449 | |
Other operating income | | | 362 | | | | 610 | | | | 566 | | | | 905 | |
| | | | | | | | | | | | | | | | |
Total noninterest income | | | 4,570 | | | | 5,574 | | | | 8,292 | | | | 8,817 | |
| | | | | | | | | | | | | | | | |
Noninterest Expense | | | | | | | | | | | | | | | | |
Salaries and employee benefits | | | 7,452 | | | | 6,662 | | | | 14,770 | | | | 12,775 | |
Occupancy expense of bank premises | | | 968 | | | | 894 | | | | 1,911 | | | | 1,746 | |
Furniture and equipment expense | | | 813 | | | | 747 | | | | 1,597 | | | | 1,373 | |
Core deposit amortization | | | 111 | | | | 111 | | | | 221 | | | | 175 | |
Other operating expense | | | 3,957 | | | | 3,812 | | | | 7,298 | | | | 7,067 | |
| | | | | | | | | | | | | | | | |
Total noninterest expense | | | 13,301 | | | | 12,226 | | | | 25,797 | | | | 23,136 | |
| | | | | | | | | | | | | | | | |
Income from continuing operations before income taxes | | | 8,718 | | | | 10,252 | | | | 17,006 | | | | 18,037 | |
Income tax expense | | | 2,494 | | | | 2,666 | | | | 4,731 | | | | 4,849 | |
| | | | | | | | | | | | | | | | |
Income from continuing operations | | | 6,224 | | | | 7,586 | | | | 12,275 | | | | 13,188 | |
| | | | | | | | | | | | | | | | |
Loss from discontinued operations before income tax | | | (39 | ) | | | (2,374 | ) | | | (170 | ) | | | (4,265 | ) |
Income tax benefit | | | (15 | ) | | | (502 | ) | | | (66 | ) | | | (952 | ) |
| | | | | | | | | | | | | | | | |
Loss from discontinued operations | | $ | (24 | ) | | $ | (1,872 | ) | | $ | (104 | ) | | $ | (3,313 | ) |
| | | | | | | | | | | | | | | | |
Net income | | $ | 6,200 | | | $ | 5,714 | | | $ | 12,171 | | | $ | 9,875 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Basic earnings per common share | | $ | 0.55 | | | $ | 0.51 | | | $ | 1.08 | | | $ | 0.88 | |
| | | | | | | | | | | | | | | | |
Diluted earnings per common share | | $ | 0.55 | | | $ | 0.50 | | | $ | 1.07 | | | $ | 0.87 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Basic earnings per common share from continuing operations | | $ | 0.55 | | | $ | 0.67 | | | $ | 1.09 | | | $ | 1.17 | |
| | | | | | | | | | | | | | | | |
Diluted earnings per common share from continuing operations | | $ | 0.55 | | | $ | 0.67 | | | $ | 1.08 | | | $ | 1.16 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Dividends declared per common share | | $ | 0.255 | | | $ | 0.25 | | | $ | 0.51 | | | $ | 0.50 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Weighted average basic shares outstanding | | | 11,273,724 | | | | 11,228,956 | | | | 11,266,648 | | | | 11,237,225 | |
Weighted average diluted shares outstanding | | | 11,344,480 | | | | 11,320,415 | | | | 11,341,847 | | | | 11,334,096 | |
| | | | | | | | |
| | Three Months Ended | |
| | March 31 | | | March 31 | |
| | 2005 | | | 2004 | |
Interest Income | | | | | | | | |
Interest and fees on loans held for investment | | $ | 20,728 | | | $ | 17,130 | |
Interest on securities-taxable | | | 2,296 | | | | 3,266 | |
Interest on securities-nontaxable | | | 1,949 | | | | 1,636 | |
Interest on federal funds sold and deposits in banks | | | 215 | | | | 197 | |
| | | | | | |
Total interest income | | | 25,188 | | | | 22,229 | |
Interest Expense | | | | | | | | |
Interest on deposits | | | 4,962 | | | | 4,315 | |
Interest on short-term borrowings | | | 2,473 | | | | 1,930 | |
| | | | | | |
Total interest expense | | | 7,435 | | | | 6,245 | |
| | | | | | |
Net interest income | | | 17,753 | | | | 15,984 | |
Provision for loan losses | | | 691 | | | | 532 | |
| | | | | | |
Net interest income after provision for loan losses | | | 17,062 | | | | 15,452 | |
| | | | | | |
Noninterest Income | | | | | | | | |
Fiduciary income | | | 538 | | | | 418 | |
Service charges on deposit accounts | | | 2,148 | | | | 1,960 | |
Other service charges, commissions and fees | | | 810 | | | | 559 | |
Other operating income | | | 204 | | | | 295 | |
Gain on sale of securities | | | 22 | | | | 11 | |
| | | | | | |
Total noninterest income | | | 3,722 | | | | 3,243 | |
| | | | | | |
Noninterest Expense | | | | | | | | |
Salaries and employee benefits | | | 7,318 | | | | 6,113 | |
Occupancy expense of bank premises | | | 943 | | | | 852 | |
Furniture and equipment expense | | | 784 | | | | 626 | |
Core deposit amortization | | | 110 | | | | 64 | |
Other operating expense | | | 3,341 | | | | 3,255 | |
| | | | | | |
Total noninterest expense | | | 12,496 | | | | 10,910 | |
| | | | | | |
Income from continuing operations before income taxes | | | 8,288 | | | | 7,785 | |
Income tax expense | | | 2,237 | | | | 2,183 | |
| | | | | | |
Income from continuing operations | | | 6,051 | | | | 5,602 | |
| | | | | | |
Loss from discontinued operations before income tax | | | (131 | ) | | | (1,891 | ) |
Income tax benefit | | | (51 | ) | | | (450 | ) |
| | | | | | |
Loss from discontinued operations | | $ | (80 | ) | | $ | (1,441 | ) |
| | | | | | |
Net income | | $ | 5,971 | | | $ | 4,161 | |
| | | | | | |
| | | | | | | | |
Basic earnings per common share | | $ | 0.53 | | | $ | 0.37 | |
| | | | | | |
Diluted earnings per common share | | $ | 0.53 | | | $ | 0.37 | |
| | | | | | |
| | | | | | | | |
Basic earnings per common share from continuing operations | | $ | 0.54 | | | $ | 0.50 | |
| | | | | | |
Diluted earnings per common share from continuing operations | | $ | 0.53 | | | $ | 0.49 | |
| | | | | | |
| | | | | | | | |
Dividends declared per common share | | $ | 0.255 | | | $ | 0.25 | |
| | | | | | |
| | | | | | | | |
Weighted average basic shares outstanding | | | 11,259,494 | | | | 11,245,465 | |
Weighted average diluted shares outstanding | | | 11,339,136 | | | | 11,347,748 | |
See Notes to Consolidated Financial Statements.
- 4 -
FIRST COMMUNITY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Thousands) (Unaudited)
| | | | | | | | |
| | Six Months Ended |
| | June 30 |
| | 2005 | | 2004 |
Cash flows from operating activities-continuing operations: | | | | | | | | |
Net income from continuing operations | | $ | 12,275 | | | $ | 13,188 | |
Adjustments to reconcile net income from continuing operations to net cash (used in) operating activities: | | | | | | | | |
Provision for credit losses | | | 1,764 | | | | 1,255 | |
Depreciation and amortization of premises and equipment | | | 1,628 | | | | 1,386 | |
Core deposit amortization | | | 221 | | | | 175 | |
Net investment amortization and accretion | | | 781 | | | | 1,199 | |
Net (gain) loss on the sale of assets | | | 14 | | | | (1,544 | ) |
Mortgage loans originated for sale | | | (15,956 | ) | | | (11,206 | ) |
Proceeds from sale of mortgage loans | | | 16,075 | | | | 10,856 | |
Deferred income tax (benefit) expense | | | (379 | ) | | | 2 | |
Increase (decrease) in interest receivable | | | (922 | ) | | | 606 | |
Increase in other assets | | | (4,082 | ) | | | (2,569 | ) |
Increase (decrease) in other liabilities | | | 600 | | | | (1,693 | ) |
| | | | | | | | |
Net cash provided by operating activities from continuing operations | | | 12,019 | | | | 11,655 | |
| | | | | | | | |
| | | | | | | | |
Cash flows from investing activities-continuing operations: | | | | | | | | |
Proceeds from sales of securities available for sale | | | 16,707 | | | | 26,410 | |
Proceeds from maturities and calls of securities available for sale | | | 24,410 | | | | 78,633 | |
Proceeds from maturities and calls of securities held to maturity | | | 4,377 | | | | 2,347 | |
Purchase of securities available for sale | | | (35,218 | ) | | | (74,177 | ) |
Net (increase) in loans made to customers | | | (59,276 | ) | | | (32,045 | ) |
Purchase of premises and equipment | | | (1,577 | ) | | | (2,936 | ) |
Proceeds from sale of equipment | | | 760 | | | | 329 | |
Net cash (used in) acquisitions | | | — | | | | (26,272 | ) |
| | | | | | | | |
Net cash (used in) investing activities from continuing operations | | | (49,817 | ) | | | (27,711 | ) |
| | | | | | | | |
| | | | | | | | |
Cash flows from financing activities-continuing operations: | | | | | | | | |
Net (decrease) increase in demand and savings deposits | | | (21,242 | ) | | | 26,021 | |
Net increase (decrease) in time deposits | | | 60,077 | | | | (5,615 | ) |
Net proceeds from (repayments of) FHLB and other borrowings | | | 74,922 | | | | (11,103 | ) |
Net (decrease) in short-term borrowings | | | (32,500 | ) | | | — | |
Net increase in securities sold under agreement to repurchase | | | 15,428 | | | | 10,439 | |
Repayment of long-term debt | | | (10 | ) | | | (4 | ) |
Issuance of common stock | | | 255 | | | | 149 | |
Acquisition of treasury stock | | | (125 | ) | | | (1,192 | ) |
Dividends paid | | | (5,746 | ) | | | (5,616 | ) |
| | | | | | | | |
Net cash provided by financing activities from continuing operations | | | 91,059 | | | | 13,079 | |
| | | | | | | | |
|
Net increase in cash and cash equivalents from continuing operations | | $ | 53,261 | | | $ | (2,977 | ) |
| | | | | | | | |
Net cash used in discontinued operations | | $ | (104 | ) | | $ | 1,125 | |
| | | | | | | | |
| | | | | | | | |
Cash and cash equivalents at beginning of period-continuing operations | | $ | 54,746 | | | $ | 59,309 | |
Cash and cash equivalents at beginning of period-discontinued operations | | | — | | | | 2,243 | |
| | | | | | | | |
Cash and cash equivalents at beginning of period | | $ | 54,746 | | | $ | 61,552 | |
| | | | | | | | |
| | | | | | | | |
Cash and cash equivalents at end of period-continuing operations | | $ | 107,903 | | | $ | 56,332 | |
Cash and cash equivalents at end of period-discontinued operations | | | — | | | | 3,368 | |
| | | | | | | | |
Cash and cash equivalents at end of period | | $ | 107,903 | | | $ | 59,700 | |
| | | | | | | | |
| | | | | | | | |
| | Three Months Ended | |
| | March 31 | |
| | 2005 | | | 2004 | |
Cash flows from operating activities-continuing operations: | | | | | | | | |
Net income from continuing operations | | $ | 6,051 | | | $ | 5,602 | |
Adjustments to reconcile net income from continuing operations to net cash (used in) operating activities: | | | | | | | | |
Provision for loan losses | | | 691 | | | | 532 | |
Depreciation and amortization of premises and equipment | | | 797 | | | | 700 | |
Core deposit amortization | | | 110 | | | | 64 | |
Net investment amortization and accretion | | | 456 | | | | 619 | |
Net loss (gain) on the sale of assets | | | 124 | | | | (75 | ) |
Mortgage loans originated for sale | | | (7,010 | ) | | | (2,521 | ) |
Proceeds from sale of mortgage loans | | | 7,022 | | | | 2,688 | |
Deferred income tax (benefit) expense | | | (310 | ) | | | 114 | |
Increase in interest receivable | | | (570 | ) | | | (107 | ) |
Increase in other assets | | | (619 | ) | | | (2,156 | ) |
Increase in other liabilities | | | 1,452 | | | | 771 | |
| | | | | | |
Net cash provided by operating activities from continuing operations | | | 8,194 | | | | 6,231 | |
| | | | | | |
| | | | | | | | |
Cash flows from investing activities-continuing operations: | | | | | | | | |
Proceeds from sales of securities available for sale | | | 2,994 | | | | 1 | |
Proceeds from maturities and calls of securities available for sale | | | 13,199 | | | | 46,315 | |
Proceeds from maturities and calls of securities held to maturity | | | 2,211 | | | | 455 | |
Purchase of securities available for sale | | | (4,643 | ) | | | (43,424 | ) |
Net (increase) decrease in loans made to customers | | | (44,258 | ) | | | 5,271 | |
Purchase of premises and equipment | | | (807 | ) | | | (1,370 | ) |
Proceeds from sale of equipment | | | 760 | | | | 34 | |
| | | | | | |
Net cash (used in) provided by investing activities from continuing operations | | | (30,544 | ) | | | 7,282 | |
| | | | | | |
| | | | | | | | |
Cash flows from financing activities-continuing operations: | | | | | | | | |
Net (decrease) increase in demand and savings deposits | | | (16,771 | ) | | | 16,360 | |
Net increase in time deposits | | | 59,580 | | | | 760 | |
Net increase (decrease) in short-term debt | | | 10,860 | | | | (10,453 | ) |
Repayment of long-term debt | | | (6 | ) | | | (5 | ) |
Issuance of common stock | | | 169 | | | | 35 | |
Acquisition of treasury stock | | | (4 | ) | | | (159 | ) |
Dividends paid | | | (2,874 | ) | | | (2,814 | ) |
| | | | | | |
Net cash provided by financing activities from continuing operations | | | 50,954 | | | | 3,724 | |
| | | | | | |
| | | | | | | | |
Net increase in cash and cash equivalents from continuing operations | | $ | 28,604 | | | $ | 17,237 | |
| | | | | | |
Net cash used in discontinued operations | | $ | (80 | ) | | $ | (150 | ) |
| | | | | | |
Cash and cash equivalents at beginning of period-continuing operations | | $ | 54,746 | | | $ | 59,309 | |
Cash and cash equivalents at beginning of period-discontinued operations | | | — | | | | 2,243 | |
| | | | | | |
Cash and cash equivalents at beginning of period | | $ | 54,746 | | | $ | 61,552 | |
| | | | | | |
| | | | | | | | |
Cash and cash equivalents at end of period-continuing operations | | $ | 83,270 | | | $ | 76,546 | |
Cash and cash equivalents at end of period-discontinued operations | | | — | | | | 2,093 | |
| | | | | | |
Cash and cash equivalents at end of period | | $ | 83,270 | | | $ | 78,639 | |
| | | | | | |
See Notes to Consolidated Financial Statements.
- 5 -
FIRST COMMUNITY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Amounts in Thousands, Except Share and Per Share Information) (Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | Accumulated | | |
| | | | | | Additional | | | | | | | | | | Other | | |
| | Common | | Paid-in | | Retained | | Treasury | | Comprehensive | | |
| | Stock | | Capital | | Earnings | | Stock | | (Loss) Income | | Total |
Balance January 1, 2004 | | $ | 11,442 | | | $ | 108,128 | | | $ | 56,894 | | | $ | (6,407 | ) | | $ | 4,978 | | | $ | 175,035 | |
Comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | | — | | | | — | | | | 9,875 | | | | — | | | | — | | | | 9,875 | |
Other comprehensive income, net of tax: | | | | | | | | | | | | | | | | | | | | | | | | |
Net unrealized gain on securities available for sale | | | — | | | | — | | | | — | | | | — | | | | (6,089 | ) | | | (6,089 | ) |
Less reclassification adjustment for gains realized in net income | | | — | | | | — | | | | — | | | | — | | | | (865 | ) | | | (865 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Comprehensive income | | | — | | | | — | | | | 9,875 | | | | — | | | | (6,954 | ) | | | 2,921 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Common dividends declared ($.25 per share) | | | — | | | | — | | | | (5,616 | ) | | | — | | | | — | | | | (5,616 | ) |
Purchase 44,400 treasury shares | | | — | | | | — | | | | — | | | | (1,192 | ) | | | — | | | | (1,192 | ) |
Acquisition of Stone Capital 2,541 shares issued | | | 3 | | | | 85 | | | | — | | | | — | | | | — | | | | 88 | |
Option exercise 19,352 shares | | | 6 | | | | (135 | ) | | | — | | | | 278 | | | | — | | | | 149 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Balance June 30, 2004 | | $ | 11,451 | | | $ | 108,078 | | | $ | 61,153 | | | $ | (7,321 | ) | | $ | (1,976 | ) | | $ | 171,385 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Balance January 1, 2005 | | $ | 11,472 | | | $ | 108,263 | | | $ | 68,019 | | | $ | (6,881 | ) | | $ | 2,360 | | | $ | 183,233 | |
Comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | | — | | | | — | | | | 12,171 | | | | — | | | | — | | | | 12,171 | |
Other comprehensive income, net of tax: | | | | | | | | | | | | | | | | | | | | | | | | |
Unrealized loss on securities available for sale | | | — | | | | — | | | | — | | | | — | | | | (276 | ) | | | (276 | ) |
Less reclassification adjustment for gains realized in net income | | | — | | | | — | | | | — | | | | — | | | | (78 | ) | | | (78 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Comprehensive income | | | — | | | | — | | | | 12,171 | | | | — | | | | (354 | ) | | | 11,817 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Common dividends declared ($.51 per share) | | | — | | | | — | | | | (5,746 | ) | | | — | | | | — | | | | (5,746 | ) |
Net acquisition of 4,426 treasury shares | | | — | | | | — | | | | — | | | | (125 | ) | | | — | | | | (125 | ) |
Acquisition of Stone Capital 2,447 shares issued | | | 2 | | | | 85 | | | | — | | | | — | | | | — | | | | 87 | |
Stock awards | | | 2 | | | | 18 | | | | — | | | | — | | | | — | | | | 20 | |
Tax benefit from exercise of non- qualified stock options | | | — | | | | 180 | | | | — | | | | — | | | | — | | | | 180 | |
Option exercises 23,876 shares | | | 20 | | | | 93 | | | | — | | | | 142 | | | | — | | | | 255 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Balance June 30, 2005 | | $ | 11,496 | | | $ | 108,639 | | | $ | 74,444 | | | $ | (6,864 | ) | | $ | 2,006 | | | $ | 189,721 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | Accumulated | | | | |
| | | | | | Additional | | | | | | | | | | | Other | | | | |
| | Common | | | Paid-in | | | Retained | | | Treasury | | | Comprehensive | | | | |
| | Stock | | | Capital | | | Earnings | | | Stock | | | (Loss) Income | | | Total | |
Balance January 1, 2004 | | $ | 11,442 | | | $ | 108,128 | | | $ | 56,894 | | | $ | (6,407 | ) | | $ | 4,978 | | | $ | 175,035 | |
Comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | | — | | | | — | | | | 4,161 | | | | — | | | | — | | | | 4,161 | |
Other comprehensive income, net of tax: | | | | | | | | | | | | | | | | | | | | | | | | |
Net unrealized gain on securities available for sale | | | — | | | | — | | | | — | | | | — | | | | 1,695 | | | | 1,695 | |
Less reclassification adjustment for gains realized in net income, net of tax | | | | | | | | | | | | | | | | | | | (7 | ) | | | (7 | ) |
| | | | | | | | | | | | | | | | | | |
Comprehensive income | | | | | | | | | | | 4,161 | | | | | | | | 1,688 | | | | 5,849 | |
| | | | | | | | | | | | | | | | | | |
Common dividends declared ($.25 per share) | | | — | | | | — | | | | (2,814 | ) | | | — | | | | — | | | | (2,814 | ) |
Purchase 5,000 treasury shares | | | — | | | | — | | | | — | | | | (159 | ) | | | — | | | | (159 | ) |
Acquisition of Stone Capital 8,409 shares issued | | | 3 | | | | 85 | | | | | | | | | | | | | | | | 88 | |
Option exercise 4,953 shares | | | 5 | | | | 30 | | | | — | | | | — | | | | — | | | | 35 | |
| | | | | | | | | | | | | | | | | | |
Balance March 31, 2004 | | $ | 11,450 | | | $ | 108,243 | | | $ | 58,241 | | | $ | (6,566 | ) | | $ | 6,666 | | | $ | 178,034 | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Balance January 1, 2005 | | $ | 11,472 | | | $ | 108,263 | | | $ | 68,019 | | | $ | (6,881 | ) | | $ | 2,360 | | | $ | 183,233 | |
Comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | | — | | | | — | | | | 5,971 | | | | — | | | | — | | | | 5,971 | |
Other comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | |
Unrealized loss on securities available for sale, net of tax | | | — | | | | — | | | | — | | | | — | | | | (2,453 | ) | | | (2,453 | ) |
Less reclassification adjustment for gains realized in net income, net of tax | | | | | | | | | | | | | | | | | | | (13 | ) | | | (13 | ) |
| | | | | | | | | | | | | | | | | | |
Comprehensive income | | | | | | | | | | | 5,971 | | | | | | | | (2,466 | ) | | | 3,505 | |
| | | | | | | | | | | | | | | | | | |
Common dividends declared ($.255 per share) | | | — | | | | — | | | | (2,874 | ) | | | — | | | | — | | | | (2,874 | ) |
Net acquisition of 303 treasury shares | | | — | | | | — | | | | — | | | | (4 | ) | | | — | | | | (4 | ) |
Acquisition of Stone Capital 2,447 shares issued | | | 2 | | | | 85 | | | | — | | | | — | | | | — | | | | 87 | |
Stock awards | | | 2 | | | | 18 | | | | — | | | | | | | | — | | | | 20 | |
Tax benefit from exercise of non- qualified stock options | | | | | | | 137 | | | | | | | | | | | | | | | | 137 | |
Option exercises 17,197 shares | | | 15 | | | | 73 | | | | — | | | | 81 | | | | — | | | | 169 | |
| | | | | | | | | | | | | | | | | | |
Balance March 31, 2005 | | $ | 11,491 | | | $ | 108,576 | | | $ | 71,116 | | | $ | (6,804 | ) | | $ | (106 | ) | | $ | 184,273 | |
| | | | | | | | | | | | | | | | | | |
See Notes to Consolidated Financial Statements.
- 6 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Unaudited Financial Statements The unaudited consolidated balance sheet as of
March 31,June 30, 2005, the unaudited consolidated statements of income for the three
and six months ended
March 31,June 30, 2005 and 2004, and the
unaudited consolidated statements of cash flows and changes in stockholders’ equity for the
threesix months ended
March 31,June 30, 2005 and 2004, have been prepared by the management of First Community Bancshares, Inc. (“FCBI” or the “Company”). In the opinion of management, all adjustments (including normal recurring accruals) necessary to present fairly the financial position of FCBI and subsidiary at
March 31,June 30, 2005, and its results of operations, cash flows, and changes in stockholders’ equity for the three
and six months ended
March 31,June 30, 2005 and 2004, have been made. These results are not necessarily indicative of the results of consolidated operations that might be expected for the full calendar year.
The consolidated balance sheet as of December 31, 2004, has been derived from the audited financial statements included in the Company’s 2004 Annual Report to Stockholders on Form 10-K. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States have been omitted in accordance with standards for the preparation of interim financial statements. These financial statements should be read in conjunction with the financial statements and notes thereto included in the 2004 Annual Report of FCBI on Form 10-K.
Dollars are in thousands, except share and per share data.
A more complete and detailed description of FCBI’s significant accounting policies is included within Footnote 1 to the Company’s Annual Report on Form 10-K for December 31, 2004. Further discussion of the Company’s application of critical accounting policies is included within the “Application of Critical Accounting Policies” section of Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included herein.
The following is an update of certain required disclosures pursuant to
In June 2005, the requirements of Financial Accounting Standards Board (“FASB”) directed its staff to draft FSP FAS 115-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” FSP 115-1 will codify the guidance set forth in EITF Topic D-44 and clarify that an investor should recognize an impairment loss no later than when the impairment is deemed other than temporary, even if a decision to sell has not been made. FSP FAS 115-1 will be effective for other-than-temporary impairment analysis conducted in periods beginning after September 15, 2005. Management does not anticipate the issuance of the final consensus will have a material impact on financial condition, the results of operations, or liquidity.
In May 2005, the FASB issued Statement 148.No. 154, “Accounting Changes and Error Corrections,” which changes the accounting for and reporting of a change in accounting principle. This statement applies to all voluntary changes in accounting principle and changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. This statement requires retrospective application to prior period financial statements of changes in accounting principle, unless it is impractical to determine either the period-specific or cumulative effects of the change. Statement No. 154 is effective for accounting changes made in fiscal years beginning after December 15, 2005. The adoption of this standard is not expected to have a material effect on financial condition, the results of operations, or liquidity.
In December 2004, the FASB issued Statement No. 153, “Exchanges of Nonmonetary Assets,” an amendment of APB Opinion No. 29, “Accounting for Nonmonetary Transactions.” This Statement amends the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged and more broadly provides for exceptions regarding exchanges of nonmonetary assets that do not have commercial substance. This Statement is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The adoption of this standard is not expected to have a material impact on financial condition, results of operations, or liquidity.
In December 2004, the FASB issued Statement No. 123R, “Share-Based Payment,” which is an amendment of Statement No. 123. Statement 123R changes, among other things, the manner in which share-based compensation, such as stock options, will be accounted for by both public and non-public companies. For public companies, the cost of employee services received in exchange for equity instruments including options and restricted stock awards generally will be measured at fair value at the grant date. The grant date fair value will be estimated using option-pricing models adjusted for the unique characteristics of those options and instruments, unless observable market prices for the same or similar options are available. The cost will be recognized over the requisite service period, often the vesting period, and will be re-measured subsequently at each reporting date through settlement date. In March 2005, the Securities and Exchange Commission (“SEC”) staff
- 7 -
Stock-Based Compensation
issued Staff Accounting Bulletin No. 107, “Share-Based Payment” (SAB 107), which expresses the SEC staff’s views on Statement 123R. SAB 107 provides further discussion on various topics, including share-based payment transactions with non-employees, valuation methods, classification of expense in financial statements, and disclosures in management’s discussion and analysis. In April 2005, the SEC announced that it would provide for a phased-in implementation process for Statement 123R, and require registrants to adopt the standard’s fair-value method of accounting for share-based payments to employees no later than the beginning of the first fiscal year beginning after December 15, 2005.
The Company has stock option plans for certain executives and directors accounted for under the intrinsic value method. Because the exercise price of the Company’s
employee/director stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized.
The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123R, “Accounting for Stock-Based Compensation,” to stock-based employee compensation for the three and six month periods ended March 31,June 30, 2005 and 2004.
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | June 30, | | June 30, | | June 30, | | June 30, |
| | 2005 | | 2004 | | 2005 | | 2004 |
Net income as reported | | $ | 6,200 | | | $ | 5,714 | | | $ | 12,171 | | | $ | 9,875 | |
Less: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects | | | (47 | ) | | | (48 | ) | | | (91 | ) | | | (86 | ) |
| | | | | | | | | | | | | | | | |
Pro forma net income | | $ | 6,153 | | | $ | 5,666 | | | $ | 12,080 | | | $ | 9,789 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Income from continuing operations | | $ | 6,224 | | | $ | 7,586 | | | $ | 12,275 | | | $ | 13,188 | |
Less: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects | | | (47 | ) | | | (48 | ) | | | (91 | ) | | | (86 | ) |
| | | | | | | | | | | | | | | | |
Pro forma income from continuing operations | | $ | 6,177 | | | $ | 7,538 | | | $ | 12,184 | | | $ | 13,102 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Earnings per share: | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Basic as reported | | $ | 0.55 | | | $ | 0.51 | | | $ | 1.08 | | | $ | 0.88 | |
Basic pro forma | | $ | 0.55 | | | $ | 0.50 | | | $ | 1.07 | | | $ | 0.87 | |
| | | | | | | | | | | | | | | | |
Diluted as reported | | $ | 0.55 | | | $ | 0.50 | | | $ | 1.07 | | | $ | 0.87 | |
Diluted pro forma | | $ | 0.54 | | | $ | 0.50 | | | $ | 1.07 | | | $ | 0.86 | |
| | | | | | | | | | | | | | | | |
Earnings per share from continuing operations: | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Basic as reported | | $ | 0.55 | | | $ | 0.67 | | | $ | 1.09 | | | $ | 1.17 | |
Basic pro forma | | $ | 0.55 | | | $ | 0.67 | | | $ | 1.08 | | | $ | 1.17 | |
| | | | | | | | | | | | | | | | |
Diluted as reported | | $ | 0.55 | | | $ | 0.67 | | | $ | 1.08 | | | $ | 1.16 | |
Diluted pro forma | | $ | 0.54 | | | $ | 0.67 | | | $ | 1.07 | | | $ | 1.16 | |
7- 8 -
| | | | | | | | |
| | Three Months | | | Three Months | |
| | Ended | | | Ended | |
| | March 31 | | | March 31 | |
| | 2005 | | | 2004 | |
| | (Amounts in Thousands, | |
| | Except Per Share Data) | |
Net income as reported | | $ | 5,971 | | | $ | 4,161 | |
Less: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects | | | (44 | ) | | | (39 | ) |
| | | | | | |
Pro forma net income | | $ | 5,927 | | | $ | 4,122 | |
| | | | | | |
| | | | | | | | |
Income from continuing operations | | $ | 6,051 | | | $ | 5,602 | |
Less: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects | | | (44 | ) | | | (39 | ) |
| | | | | | |
Pro forma income from continuing operations | | $ | 6,007 | | | $ | 5,563 | |
| | | | | | |
| | | | | | | | |
Earnings per share: | | | | | | | | |
| | | | | | | | |
Basic as reported | | $ | 0.53 | | | $ | 0.37 | |
Basic pro forma | | $ | 0.53 | | | $ | 0.37 | |
| | | | | | | | |
Diluted as reported | | $ | 0.53 | | | $ | 0.37 | |
Diluted pro forma | | $ | 0.52 | | | $ | 0.36 | |
| | | | | | | | |
Earnings per share from continuing operations: | | | | | | | | |
| | | | | | | | |
Basic as reported | | $ | 0.54 | | | $ | 0.50 | |
Basic pro forma | | $ | 0.53 | | | $ | 0.49 | |
| | | | | | | | |
Diluted as reported | | $ | 0.53 | | | $ | 0.49 | |
Diluted pro forma | | $ | 0.53 | | | $ | 0.49 | |
Note 2. Discontinued Operations On August 18, 2004, the Company sold its United First Mortgage, Inc. (“UFM”) subsidiary headquartered in Richmond, Virginia. The transaction resulted in the sale of 100% of the stock of UFM for cash consideration of approximately $250,000. The transaction produced
a third quarteran after-tax gain of approximately
$380,000.$380,000 in the third quarter of 2004. This sale completed the previously announced plan to exit the mortgage banking business segment.
The business related to UFM is accounted for as discontinued operations and, therefore, the results of operations and cash flows have been removed from the Company’s results of continuing operations in accordance with Financial Accounting Standard
(“FAS”) 144 for all periods presented in this report. The results of UFM are presented, along with the after-tax gain on sale, as discontinued operations in a separate category on the income statement following results from continuing operations. The
Company continues to incur costs related to UFM in the form of non-cancelable leases. These leases, along with residual salaries expense, create a loss from discontinued operations in 2005. The results of discontinued operations for the three
and six months ended
March 31,June 30, 2005 and 2004, are as follows:
8
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | June 30, | | June 30, |
| | 2005 | | 2004 | | 2005 | | 2004 |
| | | | |
Interest Income | | | — | | | | 366 | | | | — | | | | 575 | |
Interest Expense | | | — | | | | 291 | | | | — | | | | 452 | |
| | | | | | | | | | | | | | | | |
Net interest income | | | — | | | | 75 | | | | — | | | | 123 | |
| | | | | | | | | | | | | | | | |
Other Income | | | — | | | | 343 | | | | — | | | | 850 | |
Other Expense | | | 39 | | | | 2,792 | | | | 170 | | | | 5,238 | |
| | | | | | | | | | | | | | | | |
Loss before income taxes | | | (39 | ) | | | (2,374 | ) | | | (170 | ) | | | (4,265 | ) |
Applicable income tax benefit | | | (15 | ) | | | (502 | ) | | | (66 | ) | | | (952 | ) |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Net Loss | | $ | (24 | ) | | $ | (1,872 | ) | | $ | (104 | ) | | $ | (3,313 | ) |
| | | | | | | | | | | | | | | | |
| | | | | | | | |
| | Three Months Ended | |
| | March 31, | |
| | 2005 | | | 2004 | |
| | (Amounts in Thousands) | |
Interest Income | | | | | | | | |
Interest & fees on loans held for sale | | $ | — | | | $ | 203 | |
Income on investments taxable | | | — | | | | 4 | |
Interest on fed funds and time deposits | | | — | | | | 2 | |
| | | | | | |
| | | — | | | | 209 | |
| | | | | | | | |
Interest Expense | | | | | | | | |
Interest on short term borrowings | | | — | | | | 161 | |
| | | | | | |
| | | — | | | | 161 | |
| | | | | | | | |
Net interest income | | | — | | | | 48 | |
| | | | | | | | |
Other Income | | | | | | | | |
Mortgage banking income | | | — | | | | 507 | |
| | | | | | |
| | | — | | | | 507 | |
| | | | | | | | |
Other Expense | | | | | | | | |
Salaries and benefits | | | 22 | | | | 1,100 | |
Occupancy expense | | | 98 | | | | 99 | |
Furniture and equipment expense | | | 11 | | | | 47 | |
Other operating expense | | | — | | | | 1,200 | |
| | | | | | |
| | | 131 | | | | 2,446 | |
| | | | | | | | |
Loss before income taxes | | | (131 | ) | | | (1,891 | ) |
Applicable income tax benefit | | | (51 | ) | | | (450 | ) |
| | | | | | |
| | | | | | | | |
Net Loss | | $ | (80 | ) | | $ | (1,441 | ) |
| | | | | | |
All assets and liabilities of UFM were disposed of in the third quarter of 2004. Accordingly, there were no assets or liabilities related to discontinued operations included in the March 31,June 30, 2005, consolidated balance sheet, or the December 31, 2004, consolidated balance sheet.
sheets.Note 3. Mergers, Acquisitions and Branch Development In December 2004, First Community Bank,
NAN.A. (the “Bank”)
, a wholly-owned subsidiary of the Company, opened its newest full-service branch in Princeton, West Virginia. The Company opened two
additional loan production offices during the first quarter of 2004 in Mount Airy and Charlotte, North Carolina. The Charlotte office has since been converted to a full-service branch although it does not currently
exercise paying and receiving privileges. Also inaccept deposits. In the second quarter of 2004, two
newadditional loan production offices were opened in Blacksburg and Norfolk, Virginia.
In the first half of 2005, two more loan production offices were opened in Clarksburg, West Virginia, and Richmond, Virginia.
After the close of business on March 31, 2004, PCB Bancorp, Inc., a Tennessee-chartered bank holding company (“PCB”) headquartered in Johnson City, Tennessee, was acquired by merger into the Company. PCB had five full service branch offices located in Johnson City, Kingsport and surrounding areas in Washington and Sullivan Counties in East Tennessee. At acquisition, PCB had total assets of $171.0 million, total net loans of $128.0 million and total deposits of $150.0 million. These resources were included in the Company’s financial statements beginning with the second quarter of 2004.
Under the terms of the merger agreement, shares of PCB common stock were purchased for $40.00 per share in cash. The total deal value, including the cash-out of outstanding stock options, was approximately $36.0 million. Concurrent with the PCB acquisition, Peoples Community Bank, the wholly-owned subsidiary of PCB, was merged into the Bank. As a result of
- 9 -
the acquisition and preliminary purchase price allocation, approximately $21.3 million in goodwill was recorded which represents the excess of the purchase price over the fair market value of the net assets acquired and identified intangibles.
9- 10 -
Note 4. Investment Securities As of
March 31,June 30, 2005, and December 31, 2004, the amortized cost and estimated fair value of
available for sale securities are as follows:
| | | | | | | | | | | | | | | | |
| | March 31, 2005 | |
| | Amortized | | | Unrealized | | | Unrealized | | | Fair | |
| | Cost | | | Gains | | | Losses | | | Value | |
| | | | | | (Amounts in Thousands) | | | | | |
U.S. Government agency securities | | $ | 45,972 | | | $ | 5 | | | $ | (1,374 | ) | | $ | 44,603 | |
States and political subdivisions | | | 141,609 | | | | 2,145 | | | | (1,127 | ) | | | 142,627 | |
Corporate Notes | | | 37,570 | | | | 389 | | | | — | | | | 37,959 | |
Mortgage-backed securities | | | 130,636 | | | | 602 | | | | (1,874 | ) | | | 129,364 | |
Equities | | | 16,973 | | | | 1,160 | | | | (101 | ) | | | 18,032 | |
| | | | | | | | | | | | |
Total | | $ | 372,760 | | | $ | 4,301 | | | $ | (4,476 | ) | | $ | 372,585 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | December 31, 2004 | | | | | | | | | | | | | | | | | |
| | Amortized | | Unrealized | | Unrealized | | Fair | | | June 30, 2005 |
| | Cost | | Gains | | Losses | | Value | | | Amortized | | Unrealized | | Unrealized | | Fair |
| | (Amounts in Thousands) | | | Cost | | Gains | | Losses | | Value |
U.S. Government agency securities | | $ | 46,541 | | $ | 20 | | $ | (615 | ) | | $ | 45,946 | | | $ | 66,953 | | $ | 243 | | $ | (336 | ) | | $ | 66,860 | |
States and political subdivisions | | 142,882 | | 2,647 | | | (383 | ) | | 145,146 | | | 139,896 | | 2,689 | | | (325 | ) | | 142,260 | |
Corporate Notes | | 37,589 | | 540 | | — | | 38,129 | | |
Corporate notes | | | 37,551 | | 312 | | — | | 37,863 | |
Mortgage-backed securities | | 142,427 | | 921 | | | (369 | ) | | 142,979 | | | 113,860 | | 411 | | | (951 | ) | | 113,320 | |
Equities | | 15,307 | | 1,188 | | | (17 | ) | | 16,478 | | | 19,936 | | 1,424 | | | (123 | ) | | 21,237 | |
| | | | | | | | | | | | | | | | | | |
Total | | $ | 384,746 | | $ | 5,316 | | $ | (1,384 | ) | | $ | 388,678 | | | $ | 378,196 | | $ | 5,079 | | $ | (1,735 | ) | | $ | 381,540 | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | December 31, 2004 |
| | Amortized | | Unrealized | | Unrealized | | Fair |
| | Cost | | Gains | | Losses | | Value |
U.S. Government agency securities | | $ | 46,541 | | | $ | 20 | | | $ | (615 | ) | | $ | 45,946 | |
States and political subdivisions | | | 142,882 | | | | 2,647 | | | | (383 | ) | | | 145,146 | |
Corporate notes | | | 37,589 | | | | 540 | | | | — | | | | 38,129 | |
Mortgage-backed securities | | | 142,427 | | | | 921 | | | | (369 | ) | | | 142,979 | |
Equities | | | 15,307 | | | | 1,188 | | | | (17 | ) | | | 16,478 | |
| | | | | | | | | | | | | | | | |
Total | | $ | 384,746 | | | $ | 5,316 | | | $ | (1,384 | ) | | $ | 388,678 | |
| | | | | | | | | | | | | | | | |
As of June 30, 2005, and December 31, 2004, the amortized cost and estimated fair value of held to maturity securities are as follows:
| | | | | | | | | | | | | | | | |
| | June 30, 2005 |
| | Amortized | | Unrealized | | Unrealized | | Fair |
| | Cost | | Gains | | Losses | | Value |
U.S. Government agency securities | | $ | 24 | | | $ | 1 | | | $ | — | | | $ | 25 | |
States and political subdivisions | | | 29,455 | | | | 1,023 | | | | — | | | | 30,478 | |
Mortgage-backed securities | | | — | | | | — | | | | — | | | | — | |
Other securities | | | 375 | | | | — | | | | — | | | | 375 | |
| | | | | | | | | | | | | | | | |
Total | | $ | 29,854 | | | $ | 1,024 | | | $ | — | | | $ | 30,878 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | December 31, 2004 |
| | Amortized | | Unrealized | | Unrealized | | Fair |
| | Cost | | Gains | | Losses | | Value |
U.S. Government agency securities | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
States and political subdivisions | | | 33,814 | | | | 1,388 | | | | — | | | | 35,202 | |
Mortgage-backed securities | | | 32 | | | | 1 | | | | — | | | | 33 | |
Other securities | | | 375 | | | | — | | | | — | | | | 375 | |
| | | | | | | | | | | | | | | | |
Total | | $ | 34,221 | | | $ | 1,389 | | | $ | — | | | $ | 35,610 | |
| | | | | | | | | | | | | | | | |
At March 31,June 30, 2005, the combined depreciation in value of the individual securities in an unrealized loss position for more than 12 months was less than 1% of the combined reported value of the aggregate securities portfolio. Management does not
- 11 -
believe any individual unrealized loss as of
March 31,June 30, 2005, represents an other-than-temporary impairment. The Company has the intent and ability to hold these securities until such time as the value recovers or the securities mature. Furthermore, the Company believes the
decline in value is attributable to changes in market interest rates and not the credit quality of the issuer.
The following table reflects those investments in
a continuousan unrealized loss position
for less than 12 months at
March 31,June 30, 2005, and December 31, 2004. There were no securities in a continuous unrealized loss position for 12 or more months for which the Company does not have the ability to hold until the security matures or recovers in value.
10
| | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2005 |
| | Less than 12 Months | | | 12 Months or longer | | | Total | |
| | | | | | Unrealized | | | | | | | Unrealized | | | | | | | Unrealized | |
Description of Securities | | Fair Value | | | Losses | | | Fair Value | | | Losses | | | Fair Value | | | Losses | |
| | | | | | | | | | (Amounts in Thousands) | | | | | | | | | |
U. S. Government agency securities | | $ | 16,499 | | | $ | (403 | ) | | $ | 27,636 | | | $ | (971 | ) | | $ | 44,135 | | | $ | (1,374 | ) |
States and political subdivisions | | | 56,172 | | | | (1,073 | ) | | | 1,853 | | | | (54 | ) | | $ | 58,025 | | | | (1,127 | ) |
Other Securities | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Mortgage-backed securities | | | 93,848 | | | | (1,573 | ) | | | 14,295 | | | | (301 | ) | | | 108,143 | | | | (1,874 | ) |
Equity securities | | | 1,244 | | | | (85 | ) | | | 158 | | | | (16 | ) | | | 1,402 | | | | (101 | ) |
| | | | | | | | | | | | | | | | | | |
Total | | $ | 167,763 | | | $ | (3,134 | ) | | $ | 43,942 | | | $ | (1,342 | ) | | $ | 211,705 | | | $ | (4,476 | ) |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2004 | | June 30, 2005 |
| | Less than 12 Months | | 12 Months or longer | | Total | | | Less than 12 Months | | 12 Months or longer | | Total |
| | Unrealized | | Unrealized | | Unrealized | | | Unrealized | | Unrealized | | Unrealized |
Description of Securities | | Fair Value | | Losses | | Fair Value | | Losses | | Fair Value | | Losses | | | Fair Value | | Losses | | Fair Value | | Losses | | Fair Value | | Losses |
| | (Amounts in Thousands) | | | |
U. S. Government agency securities | | $ | 12,357 | | $ | (101 | ) | | $ | 28,146 | | $ | (514 | ) | | $ | 40,503 | | $ | (615 | ) | | $ | 996 | | $ | (3 | ) | | $ | 30,222 | | $ | (333 | ) | | $ | 31,218 | | $ | (336 | ) |
States and political subdivisions | | 35,620 | | | (344 | ) | | 2,118 | | | (39 | ) | | 37,738 | | | (383 | ) | | 31,773 | | | (308 | ) | | 2,401 | | | (17 | ) | | $ | 34,174 | | | (325 | ) |
Other Securities | | — | | — | | — | | — | | — | | — | | |
Other securities | | | — | | — | | — | | — | | — | | — | |
Mortgage-backed securities | | 112,755 | | | (369 | ) | | — | | — | | 112,755 | | | (369 | ) | | 54,613 | | | (609 | ) | | 30,214 | | | (342 | ) | | 84,827 | | | (951 | ) |
Equity securities | | — | | — | | 136 | | | (17 | ) | | 136 | | | (17 | ) | | 1,259 | | | (108 | ) | | 107 | | | (15 | ) | | 1,366 | | | (123 | ) |
| | | | | | | | | | | | | | | |
Total | | $ | 160,732 | | $ | (814 | ) | | $ | 30,400 | | $ | (570 | ) | | $ | 191,132 | | $ | (1,384 | ) | | $ | 88,641 | | $ | (1,028 | ) | | $ | 62,944 | | $ | (707 | ) | | $ | 151,585 | | $ | (1,735 | ) |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2004 |
| | Less than 12 Months | | 12 Months or longer | | Total |
| | | | | | Unrealized | | | | | | Unrealized | | | | | | Unrealized |
Description of Securities | | Fair Value | | Losses | | Fair Value | | Losses | | Fair Value | | Losses |
| | |
U. S. Government agency securities | | $ | 12,357 | | | $ | (101 | ) | | $ | 28,146 | | | $ | (514 | ) | | $ | 40,503 | | | $ | (615 | ) |
States and political subdivisions | | | 35,620 | | | | (344 | ) | | | 2,118 | | | | (39 | ) | | | 37,738 | | | | (383 | ) |
Other securities | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Mortgage-backed securities | | | 112,755 | | | | (369 | ) | | | — | | | | — | | | | 112,755 | | | | (369 | ) |
Equity securities | | | — | | | | — | | | | 136 | | | | (17 | ) | | | 136 | | | | (17 | ) |
| | |
Total | | $ | 160,732 | | | $ | (814 | ) | | $ | 30,400 | | | $ | (570 | ) | | $ | 191,132 | | | $ | (1,384 | ) |
| | |
Loans net of unearned income consist of the following:
| | | | | | | | | | | | | | | | | |
| | March 31, 2005 | | December 31, 2004 | | | | | | | | | | | | | | | | | |
| | Amount | | Percent | | Amount | | Percent | | | June 30, 2005 | | December 31, 2004 |
| | (Dollars in Thousands) | | | Amount | | Percent | | Amount | | Percent |
Loans Held for Investment: | | |
Commercial and agricultural | | $ | 99,669 | | | 7.77 | % | | $ | 99,303 | | | 8.02 | % | | $ | 103,565 | | | 7.99 | % | | $ | 99,303 | | | 8.02 | % |
Commercial real estate | | 486,701 | | | 37.95 | % | | 453,899 | | | 36.64 | % | | 471,340 | | | 36.35 | % | | 453,899 | | | 36.64 | % |
Residential real estate | | 471,829 | | | 36.79 | % | | 457,386 | | | 36.92 | % | | 481,577 | | | 37.14 | % | | 457,386 | | | 36.92 | % |
Construction | | 112,340 | | | 8.76 | % | | 112,732 | | | 9.10 | % | | 126,678 | | | 9.77 | % | | 112,732 | | | 9.10 | % |
Consumer | | 110,141 | | | 8.59 | % | | 113,424 | | | 9.16 | % | | 111,654 | | | 8.61 | % | | 113,424 | | | 9.16 | % |
Other | | 1,866 | | | 0.14 | % | | 2,012 | | | 0.16 | % | | 1,914 | | | 0.14 | % | | 2,012 | | | 0.16 | % |
| | | | | | | | | | | | | | | | | | |
Total | | $ | 1,282,546 | | | 100.00 | % | | $ | 1,238,756 | | | 100.00 | % | | $ | 1,296,728 | | | 100.00 | % | | $ | 1,238,756 | | | 100.00 | % |
| | | | | | | | | | | | | | | | | | |
| | |
Loans Held for Sale | | $ | 1,182 | | $ | 1,194 | | | $ | 1,075 | | $ | 1,194 | |
| | | | | | | | | | |
- 12 -
The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit and financial guarantees. These instruments involve, to varying degrees, elements of credit and interest rate risk beyond the amount recognized on the balance sheet. The contractual amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments. The Company’s exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit and standby letters of credit and financial guarantees written is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.
11
Commitments to extend credit are agreements to lend to a customer as long as there is not a violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company, upon extension of credit is based on management’s credit evaluation of the counterparties. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties.
Standby letters of credit and written financial guarantees are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. To the extent deemed necessary, collateral of varying types and amounts is held to secure customer performance under certain of those letters of credit outstanding.
Financial instruments whose contract amounts represent credit risk at
March, 31,June 30, 2005, are commitments to extend credit (including availability of lines of credit) of
$188.7$197.4 million and standby letters of credit and financial guarantees written of
$11.1$12.7 million.
Note 6. BorrowingsAllowance for Credit Losses
At June 30, 2005, the Company split its allowance for loan losses into an allowance for loan losses and an allowance for lending-related commitments. Lending related commitments generally consist of unfunded loan commitments and letters of credit. The split resulted in a decrease in the allowance for loan losses of $392 thousand at June 30, 2005, and a corresponding increase in other liabilities, which includes the allowance for lending-related commitments. The combined allowance for loan losses and the allowance for lending-related commitments are now referred to as the allowance for credit losses. The allowance for credit losses was $16.6 million, $16.3 million, and $16.2 million at June 30, 2005, December 31, 2004, and June 30, 2004, respectively. Net income and prior period balances were not affected by this reclassification.
The allowance for credit losses is maintained at a level sufficient to absorb probable loan losses inherent in the loan portfolio and lending-related commitments. The allowance is increased by charges to earnings in the form of provisions for loan losses and lending-related commitments and recoveries of prior loan charge-offs, and decreased by loans charged off. The provisions are calculated to bring the allowance to a level which, according to a systematic process of measurement, reflects the amount management estimates is needed to absorb probable losses within the portfolio and lending-related commitments.
Management performs periodic assessments to determine the appropriate level of allowance. Differences between actual loan loss experience and estimates are reflected through adjustments that are made by either increasing or decreasing the loss provision based upon current measurement criteria. Commercial, consumer and mortgage loan portfolios are evaluated separately for purposes of determining the allowance. The specific components of the allowance include allocations to individual commercial credits and allocations to the remaining non-homogeneous and homogeneous pools of loans. Management’s allocations are based on judgment of qualitative and quantitative factors about both macro and micro economic conditions reflected within the portfolio of loans and the economy as a whole. Factors considered in this evaluation include, but are not necessarily limited to, probable losses from loan and other credit arrangements, general economic conditions, changes in credit concentrations or pledged collateral, historical loan loss experience, and trends in portfolio volume, maturities, composition, delinquencies, and non-accruals. While management has allocated the allowance for credit losses to various portfolio segments, the entire allowance is available for use against any type of loan loss deemed appropriate by management.
The following table details the Company’s allowance for credit loss activity for the three and six month periods ended June 30, 2005 and 2004.
- 13 -
| | | | | | | | | | | | | | | | |
| | For the Three Months Ended | | For the Six Months Ended |
| | June 30, | | June 30, |
| | 2005 | | 2004 | | 2005 | | 2004 |
Allowance for Loan Losses | | | | | | | | | | | | | | | | |
Beginning balance | | $ | 16,543 | | | $ | 14,536 | | | $ | 16,339 | | | $ | 14,624 | |
Provision | | | 1,073 | | | | 723 | | | | 1,764 | | | | 1,255 | |
Balance acquired in acquisiton | | | — | | | | 1,786 | | | | — | | | | 1,786 | |
Charge-offs | | | (1,638 | ) | | | (1,233 | ) | | | (2,482 | ) | | | (2,144 | ) |
Recoveries | | | 398 | | | | 348 | | | | 755 | | | | 639 | |
Reclassification of allowance for lending-related commitments | | | (392 | ) | | | — | | | | (392 | ) | | | — | |
| | | | | | | | | | | | | | | | |
Ending balance | | $ | 15,984 | | | $ | 16,160 | | | $ | 15,984 | | | $ | 16,160 | |
| | | | | | | | | | | | | | | | |
Allowance for Lending-Related Commitments | | | | | | | | | | | | | | | | |
Beginning balance | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Provision for lending-related commitments | | | 221 | | | | — | | | | 221 | | | | — | |
Reclassification of allowance for lending-related commitments | | | 392 | | | | — | | | | 392 | | | | — | |
| | | | | | | | | | | | | | | | |
| | $ | 613 | | | $ | — | | | $ | 613 | | | $ | — | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Allowance for Credit Losses | | $ | 16,597 | | | $ | 16,160 | | | $ | 16,597 | | | $ | 16,160 | |
| | | | | | | | | | | | | | | | |
Note 7. Borrowings
Federal Home Loan Bank (“FHLB”) borrowings and other indebtedness include $132.4$182.4 million in convertible and callable advances and $9.4 million of noncallable term advances from the FHLB of Atlanta.Atlanta at June 30, 2005. The callable advances may be redeemed at quarterly intervals after various lockout periods. These call options may substantially shorten the lives of these instruments. If these advances are called, the debt may be paid in full, converted to another FHLB credit product, or converted to an adjustable rate advance. Prepayment of the advances may result in substantial penalties based upon the differential between contractual note rates and current advance rates for similar remaining time periods. Advances from the FHLB are secured by stock in the FHLB of Atlanta, qualifying first mortgage loans, mortgage-backed securities, and certain other securities.
- 14 -
The following schedule details the contractual terms of outstanding FHLB advances, rates and corresponding final maturities at MarchJune 30, 2005 and December 31, 2005.2004. Also in the table are the fair value adjustments related to acquired debt obligations acquired in the CommonWealth Bank and People’s Community Bank acquisitions.obligations. The unamortized premium of approximately $194,000$168,000 and $207,000 at June 30, 2005 and December 31, 2004, respectively, is being amortized as interest expense over the anticipated life of the borrowings and is reflected as an adjustment to the effective rate paid.
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | June 30, 2005 |
| | March 31, 2005 | | | Principal | | |
| | Principal Amount | | Next Call | | | Amount | | Next Call |
| | of Advance | | Rate | | Maturity | | Date | | | of Advance | | Rate | | Maturity | | Date |
| | (Dollars in Thousands) | | | |
Callable advances: | | | $ | 1,275 | | | 4.14 | % | | 5/2/07 | | 11/2/05 | |
| | |
| | $ | 1,283 | | | 4.14 | % | | 05/02/07 | | 05/02/05 | | | 25,000 | | | 5.71 | % | | 3/17/10 | | 12/17/05 | |
| | 25,000 | | | 5.71 | % | | 03/17/10 | | 06/17/05 | | | 25,000 | | | 6.11 | % | | 5/5/10 | | 11/5/05 | |
| | 25,000 | | | 6.11 | % | | 05/05/10 | | 05/05/05 | | | 25,000 | | | 6.02 | % | | 5/5/10 | | 11/5/05 | |
| | 25,000 | | | 6.02 | % | | 05/05/10 | | 05/05/05 | | | 25,000 | | | 5.47 | % | | 10/4/10 | | 10/4/05 | |
| | 25,000 | | | 5.47 | % | | 10/04/10 | | 04/04/05 | | | 25,000 | | | 2.77 | % | | 2/14/08 | | 8/14/06 | |
| | 25,000 | | | 2.29 | % | | 02/14/08 | | 02/14/06 | | | 6,118 | | | 4.75 | % | | 1/31/11 | | 10/30/05 | |
| | 6,125 | | | 4.75 | % | | 01/31/11 | | 04/30/05 | | | 50,000 | | | 3.64 | % | | 6/27/12 | | 6/27/08 | |
| | | | | | |
| | $ | 132,408 | | | $ | 182,393 | |
| | | | | | |
| |
Noncallable advances: | | 917 | | | 4.55 | % | | 11/23/05 | | N/A | | | 911 | | | 4.55 | % | | 11/23/05 | | N/A | |
| | 413 | | | 5.01 | % | | 12/11/06 | | N/A | | | 403 | | | 5.01 | % | | 12/11/06 | | N/A | |
| | 5,000 | | | 2.73 | % | | 01/30/07 | | N/A | | | 5,000 | | | 3.19 | % | | 1/30/07 | | N/A | |
| | 2,000 | | | 6.27 | % | | 09/22/08 | | N/A | | | 2,000 | | | 6.27 | % | | 9/22/08 | | N/A | |
| | 1,071 | | | 2.95 | % | | 07/01/13 | | N/A | | | 1,051 | | | 2.95 | % | | 7/1/13 | | N/A | |
| | | | | | |
| | 9,401 | | | 9,365 | |
| | | | | | |
| | |
Total advances | | $ | 141,809 | | | $ | 191,758 | |
| | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | December 31, 2004 |
| | Principal | | | | | | | | | | | | | | |
| | Amount | | | | | | | | | | | | | | Next Call |
| | of Advance | | | | | | Rate | | Maturity | | Date |
| | |
Callable advances: | | $ | 1,290 | | | | | | | | 4.14 | % | | | 5/2/07 | | | | 5/2/05 | |
| | | 25,000 | | | | | | | | 5.71 | % | | | 3/17/10 | | | | 3/17/05 | |
| | | 25,000 | | | | | | | | 6.11 | % | | | 5/5/10 | | | | 2/5/05 | |
| | | 25,000 | | | | | | | | 6.02 | % | | | 5/5/10 | | | | 2/5/05 | |
| | | 25,000 | | | | | | | | 5.47 | % | | | 10/4/10 | | | | 1/4/05 | |
| | | 6,133 | | | | | | | | 4.75 | % | | | 1/31/11 | | | | 1/30/05 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | $ | 107,423 | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
|
Noncallable advances: | | | 924 | | | | | | | | 4.55 | % | | | 11/23/05 | | | | N/A | |
| | | 422 | | | | | | | | 5.01 | % | | | 12/11/06 | | | | N/A | |
| | | 5,000 | | | | | | | | 1.68 | % | | | 1/30/07 | | | | N/A | |
| | | 2,000 | | | | | | | | 6.27 | % | | | 9/22/08 | | | | N/A | |
| | | 1,067 | | | | | | | | 2.95 | % | | | 7/1/13 | | | | N/A | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | 9,413 | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Total advances | | | | | | $ | 116,836 | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
12- 15 -
Also included in other indebtedness is $15 million of junior subordinated debentures (the “Debentures”) issued by the Company in October 2003 to an unconsolidated trust subsidiary, FCBI Capital Trust (the “Trust”) with an interest rate of
three monththree-month LIBOR plus 2.95%. The Trust was able to purchase the Debentures through the issuance of trust preferred securities which had substantially identical terms as the Debentures. The Debentures mature on October 8, 2033, and are callable beginning October 8, 2008. The net proceeds from the offering were contributed as capital to the Bank to support further growth.
The Company has committed to irrevocably and unconditionally
guarantee, and has the resources to guarantee, the following payments or distributions with respect to the preferred securities to the holders thereof to the extent that the Trust has not made such payments or
distributions and has the funds therefore:distributions: (i) accrued and unpaid distributions, (ii) the redemption price, and (iii) upon a dissolution or termination of the trust, the lesser of the liquidation amount including all accrued and unpaid distributions or the amount of assets of the trust remaining available for distribution.
In March 2005, the Federal Reserve Board (“FRB”) issued a final rule regarding trust preferred securities and the definition of capital. In general, the FRB will allow the continued inclusion of outstanding and prospective issuances of trust preferred securities as Tier 1 capital of bank holding companies, subject to stricter quantitative limits and qualitative standards. The quantitative limits would become effective after a five-year transition period.
Note 7.8. Commitments and Contingencies In the normal course of business, the Company is a defendant in various legal actions and asserted claims, most of which involve lending, collection and employment matters. While the Company and legal counsel are unable to assess the ultimate outcome of each of these matters with certainty, they are of the belief that the resolution of these actions, singly or in the aggregate, should not have a material adverse effect on the financial condition, results of operations or cash flows of the Company.
The Company is engaged in a state tax audit involving state income, franchise and sales tax in one of its state tax jurisdictions. While the Company has received early indications of the state tax department’s estimates of potential additional state income,
sales and franchise tax liabilities, the Company’s review of the potential assessments revealed a position which favors the Company and which, if sustained, could result in state income and franchise tax refunds to the Company. The Company and tax counsel continue to evaluate possible exposure under the state tax audit as well as the advancement of the referenced favorable tax position and believe that the Company has established appropriate provisions for state income and franchise taxes, consistent with the uncertainty of the state tax audit and changes in the Company’s state tax filings.
Pursuant to the August 2004 sale of UFM, the Company agreed to indemnify the purchaser of UFM from various losses or claims arising from certain defaults on loans sold through August 2005, and as to specific litigation and certain contracts, pursuant to indemnification agreements with national investors and the Department of Housing and Urban Development, and as to certain employment related claims, if any, all as more specifically set forth in the stock purchase agreement. The Company estimates that its obligations under this agreement will not materially impact its financial statements.
Note 8. Recent Accounting Developments
In December 2004, the FASB issued SFAS No. 123R, “Share-Based Payment,” which is an amendment of SFAS No. 123. SFAS No. 123R changes, among other things, the manner in which share-based compensation, such as stock options, will be accounted for by both public and non-public companies. For public companies, the cost of employee services received in exchange for equity instruments including options and restricted stock awards generally will be measured at fair value at the grant date. The grant date fair value will be estimated using option-pricing models adjusted for the unique characteristics of those options and instruments, unless observable market prices for the same or similar options are available. The cost will be recognized over the requisite service period, often the vesting period, and will be re-measured subsequently at each reporting date through settlement date. In April 2005, the SEC announced that it would provide for a phased-in implementation process for FASB Statement No. 123R, and require registrants to adopt the standard’s fair-value method of accounting for share-based payments to employees no later than the beginning of the first fiscal year beginning after December 15, 2005.
The changes in accounting will replace existing requirements under SFAS No. 123, “Accounting for Stock-Based Compensation,” and will eliminate the ability to account for share-based compensation transactions using APB Opinion No, 25, “Accounting for Stock Issued to Employees,” which does not require companies to expense options if the exercise price is equal to the trading price at the date of grant. The accounting for similar transactions involving parties other than employees or the accounting for stock ownership plans that are subject to American Institute of Certified Public Accounts (“AICPA”) Statement of Position 93-6, “Employer’s Accounting for Employee Stock Ownership Plans,” would remain unchanged. The expected impact of this standard on options issued under the Company’s 1999 Plan and options currently issued under the 2004 Plan will be realized in periods beginning after December 15, 2005.
13- 16 -
On March 9, 2004, the SEC issued SAB 105, “Application of Accounting Principles to Loan Commitments” to inform registrants of the SEC Staff’s view that the fair value of the recorded loan commitments, that are required to follow derivative accounting under Statement 133,Accounting for Derivative Instruments and Hedging Activities, should not consider the expected future cash flows related to the associated servicing of the future loan. The provisions of SAB 105 must be applied to loan commitments accounted for as derivatives that are entered into after March 31, 2004. Though the Company sold its loans through the discontinued segment on a servicing released basis, the Company adopted the provisions of SAB 105 on January 1, 2004 and this had the impact of reducing the fair value of such instruments by $252,000 at March 31, 2004.
In December 2003, the AICPA issued Statement of Position (“SOP”) 03-3Accounting for Certain Loans or Debt Securities Acquired in a Transfer. This statement, which is effective for loans acquired in fiscal years beginning after December 15, 2004, addresses accounting differences between contractual cash flows and cash flows expected to be collected from an investor’s initial investment in loans or debt securities (loans) acquired in a transfer if those differences are attributable, at least in part, to credit quality. This standard will require a fair value measure of loans acquired and as such no corresponding allowance for loans losses will be permitted to be transferred on loans acquired in a transfer that are within the scope of SOP 03-3. The impact of the statement is prospective and will require new recognition and measurement techniques upon adoption. Management does not expect the adoption of this statement to have a material impact on the Company’s consolidated financial statements.
Note 9. Earnings per Share The following schedule details earnings and shares used in computing basic and diluted earnings per share for the three and six months ended March 31,June 30, 2005 and 2004.
| | | | | | | | | |
| | For the Three Months Ended | | | | | | | | | | | | | | | | | |
| | March 31 | | March 31 | | | For the Three Months Ended | | For the Six Months Ended |
| | 2005 | | 2004 | | | June 30, | | June 30, | | June 30, | | June 30, |
| | (Amounts in Thousands, Except Per Share Data) | | | 2005 | | 2004 | | 2005 | | 2004 |
Basic: | | |
Income (in thousands) continuing operations | | $ | 6,051 | | $ | 5,602 | | |
Loss (in thousands) discontinued operations | | | (80 | ) | | | (1,441 | ) | |
Income continuing operations | | | $ | 6,224 | | $ | 7,586 | | $ | 12,275 | | $ | 13,188 | |
Loss discontinued operations | | | | (24 | ) | | | (1,872 | ) | | | (104 | ) | | | (3,313 | ) |
| | | | | | | | | | | | | | |
Net income (in thousands) | | $ | 5,971 | | $ | 4,161 | | |
Net income | | | $ | 6,200 | | $ | 5,714 | | $ | 12,171 | | $ | 9,875 | |
| | | | | | | | | | | | | | |
| | |
Weighted average shares outstanding | | 11,259,494 | | 11,245,465 | | | 11,273,724 | | 11,228,956 | | 11,266,648 | | 11,237,225 | |
Dilutive shares for stock options | | 78,418 | | 97,786 | | | 68,532 | | 88,918 | | 72,975 | | 94,330 | |
Contingently issuable shares for acquisition | | 1,224 | | 4,497 | | | 2,224 | | 2,541 | | 2,224 | | 2,541 | |
Weighted average dilutive shares outstanding | | 11,339,136 | | 11,347,748 | | | 11,344,480 | | 11,320,415 | | 11,341,847 | | 11,334,096 | |
| | |
Basic: | | |
Earnings per share continuing operations | | $ | 0.54 | | $ | 0.50 | | |
(Loss) earnings per share discontinued operations | | | (0.01 | ) | | | (0.13 | ) | |
Earnings per share | | 0.53 | | 0.37 | | |
Basic earnings per share continuing operations | | | $ | 0.55 | | $ | 0.67 | | $ | 1.09 | | $ | 1.17 | |
Basic (loss) earnings per share discontinued operations | | | — | | | (0.16 | ) | | | (0.01 | ) | | | (0.29 | ) |
Basic earnings per share | | | 0.55 | | 0.51 | | 1.08 | | 0.88 | |
| | |
Diluted: | | |
Diluted earnings per share continuing operations | | $ | 0.53 | | $ | 0.49 | | | $ | 0.55 | | $ | 0.67 | | $ | 1.08 | | $ | 1.16 | |
Diluted (loss) earnings per share discontinued operations | | — | | | (0.12 | ) | |
Diluted (loss) earnings per share discontined operations | | | — | | | (0.17 | ) | | — | | | (0.29 | ) |
Diluted earnings per share | | 0.53 | | 0.37 | | | 0.55 | | 0.50 | | 1.07 | | 0.87 | |
14
Note 10. ProvisionSubsequent Events
Subsequent to quarter end, the Company executed a non-binding letter of intent for the sale of one of its non-strategic branches. Under the terms of the non-binding agreement, deposits would be sold at a premium of approximately 3% and
Allowance for Loan Lossesthe real property would be sold at its fair market value. The completion of the sale of the branch currently under letter of intent would result in an approximate pre-tax gain on disposal of $278 thousand. Additionally, the Company is considering the possible sale of two additional branches. The following table details the Company’s allowance for loan loss activityis a schedule of assets and liabilities as of June 30, 2005, for the three month periods ended March 31, 2005 and 2004:branches currently under consideration for sale.
| | | | | | | | |
| | For the Three Months Ended | |
| | March 31, | |
| | 2005 | | | 2004 | |
| | (Amounts in Thousands) | |
Beginning balance | | $ | 16,339 | | | $ | 14,624 | |
Provision | | | 691 | | | | 532 | |
Charge-offs | | | (844 | ) | | | (911 | ) |
Recoveries | | | 357 | | | | 291 | |
| | | | | | |
Ending balance | | $ | 16,543 | | | $ | 14,536 | |
| | | | | | |
| | | | |
Total Loans | | | $13,961 | |
Total Deposits and Repurchase Agreements | | | 74,438 | |
15- 17 -
Report of Independent Registered Public Accounting Firm
The Board of Directors
First Community Bancshares, Inc.
We have reviewed the condensed consolidated balance sheet of First Community Bancshares, Inc. and subsidiary (the Company) as of
March 31,June 30, 2005, and the related condensed consolidated statements of income for the
three monththree- and six-month periods ended
March 31,June 30, 2005 and 2004 and the condensed consolidated statements of cash flows and changes in stockholders’ equity for the
three monthsix-month periods ended
March 31,June 30, 2005 and 2004. These financial statements are the responsibility of the Company’s management.
We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with U. S. generally accepted accounting principles.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) the consolidated balance sheet of the Company as of December 31, 2004, and the related consolidated statements of income, cash flows and changes in stockholders’ equity for the year then ended (not presented herein) and in our report dated March 11, 2005, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2004, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
Charleston, West Virginia
MayAugust 5, 2005
16- 18 -
First Community Bancshares, Inc.
PART I. ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis is provided to address information about the Company’s financial condition and results of operations. This discussion and analysis should be read in conjunction with the 2004 Annual Report to Shareholders on Form 10-K and the other financial information included in this report.
The Company is a multi-state bank holding company headquartered in Bluefield, Virginia, with total assets of
$1.89$1.94 billion at
March 31,June 30, 2005. Through its community bank subsidiary, First Community Bank,
NA,N.A., the company provides financial, trust and investment advisory services to individuals and commercial customers through
53fifty-three full-service banking locations, six loan production offices and two trust and investment management offices located in the four states of Virginia, West Virginia, North Carolina and Tennessee. The First Community Bank,
NAN.A. is the parent of Stone Capital, a SEC registered investment advisory firm that offers wealth management and investment advice. The Company’s common stock is traded on the
NasdaqNASDAQ National Market under the symbol “FCBC”.
FORWARD LOOKING STATEMENTS The Company may from time to time make written or oral “forward-looking statements”, including statements contained in its filings with the SEC (including this Quarterly Report on Form 10-Q and the Exhibits hereto and thereto), in its reports to stockholders and in other communications which are made in good faith by the Company pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995.
These forward-looking statements include, among others, statements with respect to the Company’s beliefs, plans, objectives, goals, guidelines, expectations, anticipations, estimates and intentions that are subject to significant risks and uncertainties and are subject to change based on various factors (many of which are beyond the Company’s control). The words “may”, “could”, “should”, “would”, “believe”, “anticipate”, “estimate”, “expect”, “intend”, “plan” and similar expressions are intended to identify forward-looking statements. The following factors, among others, could cause the Company’s financial performance to differ materially from that expressed in such forward-looking statements: the strength of the United States economy in general and the strength of the local economies in which the Company conducts operations; the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System; inflation, interest rate, market and monetary fluctuations; the timely development of competitive new products and services of the Company and the acceptance of these products and services by new and existing customers; the willingness of customers to substitute competitors’ products and services for the Company’s products and services and vice versa; the impact of changes in financial services’ laws and regulations (including laws concerning taxes, banking, securities and insurance); technological changes; the effect of acquisitions, including, without limitation, the failure to achieve the expected revenue growth and/or expense savings from such acquisitions; the growth and profitability of the Company’s non-interest or fee income being less than expected; unanticipated regulatory or judicial proceedings; changes in consumer spending and saving habits; and the success of the Company at managing the risks involved in the foregoing.
The Company cautions that the foregoing list of important factors is not exclusive. The Company does not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of the Company.
APPLICATION OF CRITICAL ACCOUNTING POLICIES The Company’s consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles and conform to general practices within the banking industry. The Company’s financial position and results of operations are affected by management’s application of accounting policies, including judgments made to arrive at the carrying value of assets and liabilities and amounts reported for revenues, expenses and related disclosures. Different assumptions in the application of these policies could result in material changes in the Company’s consolidated financial position and/or consolidated results of operations.
Estimates, assumptions, and judgments are necessary principally when assets and liabilities are required to be recorded at estimated fair value, when a decline in the value of an asset carried on the financial statements at fair value warrants an impairment write-down or valuation reserve to be established, or when an asset or liability needs to be recorded based upon the probability of occurrence of a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. The fair values and the information used to record valuation adjustments for certain assets and liabilities are based either on quoted market prices or are provided by third party sources, when available. When third party information
- 19 -
is not available, valuation adjustments are estimated in good faith by management primarily through the use of internal modeling techniques and/or appraisal estimates.
17
The Company’s accounting policies are fundamental to understanding Management’s Discussion and Analysis of Financial Condition and Results of Operations. The following is a summary of the Company’s more subjective and complex “critical accounting policies.” In addition, the disclosures presented in the Notes to the Consolidated Financial Statements and in management’s discussion and analysis provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, management has identified i.) the determination of the allowance for loancredit losses, ii.) accounting for acquisitions and intangible assets, and iii.) accounting for income taxes as the accounting areas that require the most subjective or complex judgments. Derivatives hedging practices were previously included, but were eliminated in August 2004 with the disposition of UFM.
Allowance for LoanCredit Losses The allowance for
loancredit losses is established and maintained at levels management deems adequate to cover losses inherent in the portfolio
as of the balance sheet date and is based on management’s evaluation of the risks in the loan portfolio and changes in the nature and volume of loan activity.
The allowance for credit losses is comprised of the allowance for loan losses and the allowance for lending-related commitments. Estimates for
loancredit losses are determined by analyzing historical loan losses, current trends in delinquencies and charge-offs, plans for problem loan resolution, the opinions of FCBI’s regulators, changes in the size and composition of the loan portfolio and industry information. Also included in management’s estimates for
loancredit losses are considerations with respect to the impact of economic events, the outcome of which are uncertain. These events may include, but are not limited to, a general slowdown in the economy, fluctuations in overall lending rates, political conditions, legislation that may directly or indirectly affect the banking industry, and economic conditions affecting specific geographic areas in which
First Communitythe Company conducts business.
As more fully described in the management’s discussion and analysis, the
The Company determines the allowance for
loancredit losses by making specific allocations to impaired loans and loan pools that exhibit inherent weaknesses and various credit risk factors. Allocations to loan pools are developed giving weight to risk ratings, historical loss trends and management’s judgment concerning those trends and other relevant factors. These factors may include, among others, actual versus estimated losses, regional and national economic conditions, business segment and portfolio concentrations, industry competition and consolidation, and the impact of government regulations. The foregoing analysis is performed by
the Company’s credit administration departmentmanagement to evaluate the portfolio and calculate an estimated valuation allowance through a quantitative and qualitative analysis that applies risk factors to those identified risk areas.
This risk management evaluation is applied at both the portfolio level and the individual loan level for commercial loans and credit relationships while the level of consumer and residential mortgage loan allowance is determined primarily on a total portfolio level based on a review of historical loss percentages and other qualitative factors including concentrations, industry specific factors and economic conditions. The commercial and commercial real estate portfolios require more specific analysis of individually significant loans and the borrower’s underlying cash flow, business conditions, capacity for debt repayment and the valuation of secondary sources of payment,
(collateral).such as collateral. This analysis may result in specifically identified weaknesses and corresponding specific impairment allowances.
The use of various estimates and judgments in the Company’s ongoing evaluation of the required level of allowance can significantly impact the Company’s results of operations and financial condition and may result in either greater provisions against earnings to increase the allowance or reduced provisions based upon management’s current view of portfolio and economic conditions and the application of revised estimates and assumptions.
Acquisitions and Intangible Assets As part of its growth plan, the Company engages in business combinations with other companies. The acquisition of a business is generally accounted for under purchase accounting rules promulgated by the FASB.Financial Accounting Standards Board (“FASB”). Purchase accounting requires the recording of underlying assets and liabilities of the entity acquired at their fair market value. Any excess of the purchase price of the business over the net assets acquired and any identified intangibles is recorded as goodwill. Fair values are assigned based on quoted prices for similar assets, if readily available, or appraisal by qualified independent parties for relevant asset and liability categories. Financial assets and liabilities are typically valued using discount models which apply current discount rates to streams of cash flow. All of these valuation methods require the use of assumptions which can result in alternate valuations and varying levels of goodwill and, in some cases, amortization expense or accretion income.
- 20 -
Management must also make estimates of useful or economic lives of certain acquired assets and liabilities. These lives are used in establishing amortization and accretion of some intangible assets and liabilities, such as the intangible associated with core deposits acquired in the acquisition of a commercial bank.
Goodwill is recorded as the excess of the purchase price, if any, over the fair value of the revalued net assets. Goodwill is tested at least annually in the month of November for possible impairment. This testing again uses a discounted cash flow model applied to the anticipated stream of cash flows from operations of the business or segment being tested. Impairment
18
testing necessarily uses estimates in the form of growth and attrition rates, and anticipated rates of return.return, and discount rates. These estimates have a direct bearing on the results of the impairment testing and serve as the basis for management’s conclusions as to impairment.
The establishment of provisions for federal and state income taxes is a complex area of accounting which also involves the use of judgments and estimates in applying relevant tax statutes. The Company operates in multiple state tax jurisdictions and this requires the appropriate allocation of income and expense to each state based on a variety of apportionment or allocation bases. Management strives to keep abreast of changes in tax law and the issuance of regulations which may impact tax reporting and provisions for income tax expense. The Company is also subject to audit by federal and state tax authorities. Results of these audits may produce indicated liabilities which differ from Company estimates and provisions. The Company continually evaluates its exposure to possible tax assessments arising from audits and records its estimate of possible exposure based on current facts and circumstances.
The Company is presently undergoing a state tax audit as discussed more fully under the heading “Income Tax Expense”.
First Community Bancshares is a full service commercial bank holding company which operates within the
four statefour-state region of Virginia, West Virginia, North Carolina and Tennessee. The Company operates through its community bank subsidiary, First Community Bank, N.A. and offers a wide range of financial services. The Company presently reports total assets of
$1.89$1.94 billion and operates through
53fifty-three full service banking offices and six commercial loan production offices in addition to its two Trust and Wealth Management offices.
The Company funds its lending activities primarily through the retail deposit operations of its branch banking network.
At March 31, 2005 total customer deposits and repurchase agreements were $1.53 billion, an increase of 4.17% from December 31, 2004. Borrowings from the Federal Home Loan Bank provide additional funding
and totaled $156.8 million at March 31, 2005, upas needed from
$131.9 million at year end 2004.time to time. The Company invests its funds primarily in loans to retail and commercial customers. Total loans held for investment, net of unearned income, at March 31, 2005 were $1.28 billion, an increase of 3.53% from December 31, 2004. In addition to loans, the Company also invests a portion of its funds in various debt securities, including those of United States agencies, and state and political subdivisions. Total securities available for sale at March 31, 2005 were $372.6 million.subdivisions, and certain corporate notes and debt instruments. The Company also maintains overnight interest-bearing balances with the FHLB and correspondent banks totaling $48.9 millionbanks.
Net interest income is the difference between interest earned on assets and
other securities held to maturity of $32.0 million at March 31, 2005.Consolidated net income for the first quarter of 2005 was $6.0 million, a 43.5% increase over the corresponding quarter in 2004. The significant increase in net income between the two quarters relates primarily to the reduction ininterest paid on liabilities, and is the Company’s lossprimary source of earnings. In August 2004, the Company divested itself of its mortgage subsidiary. Small losses from discontinued operations between the two quarters. The discontinued operationsin 2005 stem from the Company’s ownership of a mortgage banking subsidiary which was sold in August 2004. The loss from discontinued operations was reduced from $1.44 million in the first quarter of 2004 to $80,000 in the first quarter of 2005. The 2005 quarterly loss from discontinued operations includes residual costs of remaining leases and trailing personnel costs associated with the divested mortgage subsidiary.
Net interest income, the Company’s primary source of earnings, increased $1.77 million between the first quarter of 2004 and 2005. This 11.06% increase includes the effect of the Company’s acquisition of People’s Community Bank (PCB) on March 31, 2004. PCB contributed an additional $128 million in loans held for investment and substantially increased average earning assets over the comparable periods.
Basic and diluted earnings per share for the first quarter of 2005 were $0.53 per share compared with $0.37 per share in the first quarter of 2004. Basic earnings per share from continuing operations for the first quarter of 2005 were $0.54 per share, up from $0.50 per share in the first quarter of 2004. Diluted earnings per share from continuing operations also increased to $0.53 per share, up from $0.49 per share for the corresponding quarter of 2004. Return on equity for the first quarter of 2005 was 13%, up from 9.4% in the corresponding quarter of 2004. Return on equity from continuing operations also increased to 13.17% in the first quarter of 2005, up from 12.66% in the corresponding quarter of 2004.
Other improvements during the first quarter of 2005 relate to stronger net revenues and fee income, including the effect of the PCB acquisition. Non-interest expense increased at a higher rate between the two quarters due to a $1.2 million increase in salaries and benefits, which included not only the addition of PCB salaries, but also the costs of office expansion in Virginia and North Carolina as well as increases in support salaries and increased health care costs.
19
RECENT ACQUISITIONS AND BRANCHING ACTIVITY
In July of 2005, the Company moved toward the possible sale of several non-strategic branch offices. Total loans and deposits for the branches currently under consideration for sale are $14.0 million and $74.4 million, respectively.
The Company has executed a non-binding letter of intent for the sale of one of those branches. Under the terms of the non-binding agreement, deposits would be sold at a premium of approximately 3% and the real property would be sold at its fair market value. The completion of the sale of the branch currently under letter of intent would result in an approximate pre-tax gain on disposal of $278 thousand.
The possible branch sales are part of a strategic review of the branch network and are designed to relocate available resources to markets which offer improved growth and developmental opportunities. The Company is in the process of identifying replacement branches in growth markets, and plans include deferral of income tax gain on branch sales through Internal Revenue Code section 1031 like-kind exchanges.
In December 2004, First Community Bank, NAN.A. opened its newest full-service branch in Princeton, West Virginia. The new branch is the first of its type for the Company, and is designed to deliver retail and commercial financial services in a
- 21 -
comfortable atmosphere. The branch also houses offices of the Trust and Financial Services Division and Stone Capital Management.
The Company opened two loan production offices during the first quarter of 2004 in Mount Airy and Charlotte, North Carolina. The Charlotte office has since been converted to a full-service branch although it does not currently accept deposits. In the second quarter of 2004, two additional loan production offices were opened in Blacksburg and Norfolk, Virginia. In the first half of 2005, two more loan production offices were opened in Clarksburg and Teays Valley, West Virginia. As of June 30, 2005, the majority of the operation of the loan production offices are either break-even or profitable.
The Company acquired PCB Bancorp, Inc., a Tennessee-chartered bank holding company (“PCB Bancorp”) after the close of business on March 31, 2004. PCB Bancorp had five full service branch offices located in Johnson City, Kingsport and surrounding areas in Washington and Sullivan Counties in East Tennessee. PCB Bancorp had total assets of $171 million, loans of $128 million and total deposits of $150 million as of the date of the merger. The assets, liabilities and results of operations have been included in the Company’s financial statements beginning with the second quarter 2004.
Under the terms of the acquisition agreement, shares of PCB Bancorp common stock were purchased for $40.00 per share in cash. The total deal value, including the cash-out of outstanding stock options, was approximately $36.0 million. Concurrent with the PCB Bancorp acquisition, Peoples Community Bank, the wholly-owned subsidiary of PCB Bancorp, was merged into First Community Bank,
N. A.N.A., a wholly-owned subsidiary of the Company.
Net income for the
threesix months ended
March 31,June 30, 2005, was
$6.0$12.2 million or
$0.53$1.08 per basic and
$1.07 per diluted share, compared with
$4.2$9.9 million or
$0.37$0.88 per basic and
$0.87 per diluted share for the
threesix months ended
March 31,June 30, 2004. Return on average equity for the
threesix months ended
March 31,June 30, 2005 was
13.00%13.09% compared to
9.40%11.22% for the
threesix months ended
March 31,June 30, 2004. Return on average assets was
1.30%1.31% for the
threesix months ended
March 31,June 30, 2005, compared to
1.00%1.12% for the
threesix months ended
March 31,June 30, 2004. Income from continuing operations for the
threesix months ended
March 31,June 30, 2005, was
$6.1$12.3 million, versus
$5.6$13.2 million for the
threesix months ended
March 31,June 30, 2004. Return on average equity from continuing operations for the first
threesix months of 2005 was
13.17%13.21% compared to
12.66%14.98% for the first
threesix months of last year. Return on average assets from continuing operations was 1.32% compared to
1.36%1.52% for the first
threesix months of 2004.
Net income for the three months ended June 30, 2005, was $6.2 million or $0.55 per basic and diluted share, compared with $5.7 million or $0.51 per basic and $0.50 per diluted share for the three months ended June 30, 2004. Return on average equity for the quarter ended June 30, 2005, was 13.19% compared to 13.06% for the same period of 2004. Return on average assets was 1.31% for the three months ended June 30, 2005, compared to 1.22% for the comparable period of 2004.
Income from continuing operations for the three months ended June 30, 2005, was $6.2 million, versus $7.6 million for the three months ended June 30, 2004. Return on average equity from continuing operations for the second quarter of 2005 was 13.24% compared to 17.33% for the same period last year and return on average assets from continuing operations was 1.32% in 2005, compared to 1.65% for 2004.
In August 2004, the Company sold its UFM subsidiary. The transaction resulted in the sale of 100% of the stock of UFM for cash consideration of approximately $250,000. In connection with the exit from the mortgage banking business and as previously reported, the Company recorded impairment charges of $452,000 in the first quarter of 2004, and $933,000 in the second quarter of 2004. Exiting the mortgage business eliminated the Company’s exposure to risk associated with the large fluctuations previously experienced in the volume-driven, wholesale business and its hedged interest rate lock commitments and closed loans. The change in strategic direction and exit of the mortgage business permitted the Company to focus its resources on its core community banking business. The loss from discontinued operations was
$80,000$104,000 for the first
quarterhalf of 2005, compared to
$1.4$3.3 million or
$0.13$0.29 per basic and
$0.12 per diluted share
respectively, for the
threesix months ended
March 31,June 30, 2004.
Net Interest Income –Quarterly Comparison (See Table I) Net interest income for the largest contributorquarter ended June 30, 2005 was $18.5 million compared to earnings, was $17.8$17.6 million for the three months ended March 31, 2005 compared to $16.0same period in 2004, an increase of $895,000. Likewise, tax-equivalent net interest income increased $962,000, or 5.2%, from $18.6 million for the corresponding period in 2004.quarter ended June 30, 2004, to $19.5 million for the quarter ended June 30, 2005, (refer to Table I). For purposes of the following discussion, comparison of net interest income is donediscussions, comparisons are made on a tax equivalenttax-equivalent basis, which provides a common basis for comparing yields on earning assets exempt from federal income taxes to those which are fully taxable. The yield on earning
- 22 -
assets increased 42 basis points to 6.41%, while the cost of interest-bearing liabilities increased 38 basis points to 2.27%. The result was a four basis point increase in the net interest rate spread for the quarter compared to 2004, and an 11 basis point increase to tax-equivalent net interest margin. Net interest margin for the second quarter of 2005 was 4.51%, while the net interest spread was 4.14%.
In this time of continuing industry-wide margin compression, FCBI’s margin has been increasing. The Company’s loan portfolio continues to produce increasing yields, while increases to deposit and borrowing costs have been managed to lower levels through the Company’s asset/liability and pricing management processes. The maintenance of lower borrowing costs in the rising rate environment has been, and continues to be, dependent on control of interest-bearing demand and savings interest rates, which are influenced by market and competitive forces.
Average earning assets increased $39.9 million in the second quarter of 2005 compared to the second quarter of 2004, contributing to the improvements noted in net interest income. The largest increase in average earning assets was in average loans held for investment of $127.8 million. Securities available for sale decreased $85.7 million while the tax-equivalent yield increased 47 basis points.
The increase in average interest-bearing liabilities was smaller at $28.7 million, and was mostly driven by increases in repurchase agreements of $14.6 million and short-term borrowings of $19.5 million. Total deposits decreased slightly, but due to the continuing customer shift from certain transaction accounts to time deposits, the cost on total deposits increased 25 basis points.
The $962,000 increase in tax-equivalent net interest income was achieved through the combined effect of changes in volume and corresponding rates on the underlying assets and liabilities. Earnings attributable to the net volume increase in earning assets over paying liabilities was approximately $1.0 million while the effect of declining rates represented an offsetting net reduction of approximately $74,000 for a combined effect on net interest income of an additional $962,000.
Net Interest Income-Year to Date Comparison (See Table II)
Net interest income, the largest contributor to earnings, was $36.3 million for the six months ended June 30, 2005, compared to $33.6 million for the corresponding period in 2004. As indicated in Table
I, tax equivalentII, tax-equivalent net interest income totaled
$18.8$38.4 million for the
threesix months ended
March 31,June 30, 2005, an increase of
$1.9$2.9 million from the
$16.9$35.5 million
reported infor the first
threesix months of 2004.
This $1.9 millionThe increase reflects a
$3.1$4.2 million increase due to increased volume, which was partially offset by a
$1.2$1.3 million decrease due to rate changes on the underlying assets and liabilities.
In comparing the periods, assets were added during the first quarter of 2005 at slightly lower rates while liabilities were added or replaced at slightly higher rates than were paid at the end of the first quarter 2004. During the first
quartersix months of 2005, average earning assets increased
$165.1$104.3 million while interest-bearing liabilities increased
$154.5$91.9 million over the comparable period.
As indicated in Table I, theThe yield on average earning assets increased
2131 basis points
to 6.33% from
6.03%6.02% for the
threesix months ended
March 31, 2004 to 6.24% for the three months ended March 31, 2005. However, this increase was partially offset by a 14 basis point increase in theJune 30, 2004. Total cost of
fundsinterest-bearing liabilities increased 27 basis points during the same period leaving the net interest rate spread (the difference between interest income on earning assets and expense on interest bearing liabilities)
75 basis points higher at 4.14% compared to
4.07%4.09% for the same period last year. The Company’s
tax equivalenttax-equivalent net interest margin of
4.47%4.49% for the
threesix months ended
March 31,June 30, 2005, increased
79 basis points from 4.40% in 2004.
The largest contributor to the increase in the yield on average earning assets in 2005, on a volume-weighted basis, was the
$244.0$187.7 million increase in loans held for
investment ($126.3 million attributable to PCB).investment. The loan portfolio contributed
20
approximately $3.6$6.7 million to the change in net interest income, even thoughwhile the portfolio’s average yield decreased 11increased 9 basis points from the prior year to 6.68%6.77%. The current interest rate environment continues to create refinancing or repricing incentives for fixed rate borrowers to lower their current borrowing costs. In addition, due to the volume of variable rate loans directly tied to prime and other indices that are either adjustable incrementally or are variable rate advances, certain loan yields have declinedincreased in response to the current rate environment.
recent increases in short-term interest rates.
During the
threesix months ended
March 31,June 30, 2005, the
taxable equivalenttax-equivalent yield on securities available for sale increased
1029 basis points to
4.89%4.94% while the average balance decreased by
$41.8$63.8 million. Although the total portfolio
at March 31, 2005 decreased
from March 31, 2004,through the period, the average
tax equivalenttax-equivalent yield increased
because ofdue to the addition of
approximately $41.8 million in tax free municipalhigher-rate securities
while taxable securities inand the
portfolio decreased by $83.5 million.reduction of lower-rate securities. Funds received from the paydowns, maturities,
calls, and
callssales of investment securities helped fund the loan growth.
The March 31, 2005 average balance of investment securities held to maturity decreased by $4.8 million to $32.8 million as a result of maturities and calls, while the yield increased 60 basis points to 8.25% versus March 31, 2004 yield of 7.65%.
Compared to
March 31,the first half of 2004, average interest-bearing balances with banks decreased
$32.5$14.0 million to
$30.8$27.1 million
at March 31,through June 30, 2005, while the yield increased
156145 basis points to
2.81%2.92%.
The Company actively manages its product pricing by staying abreast of the current economic climate and competitive forces in order to enhance repricing opportunities available with respect to the liability side of its balance sheet. In doing so, the
- 23 -
cost of interest-bearing liabilities increased
slightly by
1427 basis points from
1.96%1.92% for the
threesix months ended
March 31,June 30, 2004, to
2.10%2.19% for the same period of 2005 while the average volume increased
$154.5 million.$92 thousand.
The average balance of
short-termFHLB borrowings
decreasedincreased slightly by
$2.8$8.7 million in 2005 to
$127.6$134.8 million, while the rate increased
8366 basis points. These changes were due to the combined effects of the addition of balances added from the PCB acquisition, the allocation of FHLB borrowings to the discontinued segment in 2004, the call of a $25.0 million advance at the end of the fourth quarter of 2004, and the subsequent
take-downtake-downs of
an additional $25.0 million
and $50.0 million FHLB
advance mid firstadvances in mid-first quarter
2005.and the end of the second quarter 2005, respectively.
Compared to the same period in 2004, average fedfederal funds purchased and repurchase agreements increased $32.0$23.3 million at March 31,June 30, 2005, while the average rate increased 5570 basis points. In addition, the average balances of interest-bearing demand and savings deposits increased $17.0$10.4 million and $81.8$21.6 million, respectively, for the threesix months ended March 31, 2005, again, largely due to the PCB acquisition. While theJune 30, 2005. The average rate paid on interest-bearing demand deposits remained consistent, increasing only 21 basis points,point, while the average rate paid on savings increased 2714 basis points due in part to the higher rate paid on certain money market accounts acquired with PCB.points. Average time deposits increased $26.5$28.0 million (almost entirely attributable to PCB) while the average rate paid increased 722 basis points from 2.49%2.46% in 2004 to 2.56%2.68% in 2005. The level of average non-interest-bearing demand deposits increased $33.7$19.8 million ($17.5 million attributable to PCB) to $219.7$224.0 million at March 31,June 30, 2005, compared to the corresponding period of the prior year.
21- 24 -
Table I
AVERAGE BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Three Months Ended | | | Three Months Ended | | Three Months Ended |
| | March 31, 2005 | | March 31, 2004 | | | June 30, 2005 | | June 30, 2004 |
| | Average | | Interest | | Yield/Rate | | Average | | Interest | | Yield/Rate | | | Average | | Interest | | Yield/Rate | | Average | | Interest | | Yield/Rate |
| | Balance | | (1) | | (1) | | Balance | | (1) | | | (1) | | | Balance | | (1) | | (1) | | Balance | | (1) | | (1) |
| | (Dollars in Thousands) | | | (Dollars in Thousands) |
ASSETS | | |
Earning Assets: | | |
Loans (2): | | |
Held for Investment: | | |
Loans Held for Investment: (2) | | |
Taxable | | $ | 1,256,095 | | $ | 20,673 | | | 6.67 | % | | $ | 1,011,915 | | $ | 17,084 | | | 6.79 | % | | $ | 1,296,274 | | $ | 22,175 | | | 6.86 | % | | $ | 1,166,605 | | $ | 19,064 | | | 6.57 | % |
Tax-Exempt | | 4,426 | | 83 | | | 7.60 | % | | 4,557 | | 70 | | | 6.18 | % | | 3,084 | | 28 | | | 3.64 | % | | 4,957 | | 75 | | | 6.09 | % |
| | | | | | | | | | | | | | | | |
Total | | 1,260,521 | | 20,756 | | | 6.68 | % | | 1,016,472 | | 17,154 | | | 6.79 | % | | 1,299,358 | | 22,203 | | | 6.85 | % | | 1,171,562 | | 19,139 | | | 6.57 | % |
Securities Available for Sale: | | |
Taxable | | 240,158 | | 2,295 | | | 3.88 | % | | 323,609 | | 3,261 | | | 4.05 | % | | 243,680 | | 2,548 | | | 4.19 | % | | 361,184 | | 3,426 | | | 3.82 | % |
Tax-Exempt | | 143,419 | | 2,333 | | | 6.60 | % | | 101,718 | | 1,806 | | | 7.14 | % | | 141,932 | | 2,247 | | | 6.35 | % | | 110,116 | | 1,868 | | | 6.82 | % |
| | | | | | | | | | | | | | | | |
Total | | 383,577 | | 4,628 | | | 4.89 | % | | 425,327 | | 5,067 | | | 4.79 | % | | 385,612 | | 4,795 | | | 4.99 | % | | 471,300 | | 5,294 | | | 4.52 | % |
Securities Held to Maturity: | | |
Taxable | | 406 | | 4 | | | 4.00 | % | | 495 | | 5 | | | 4.06 | % | | 401 | | 4 | | | 4.00 | % | | 423 | | 7 | | | 6.66 | % |
Tax-Exempt | | 32,439 | | 664 | | | 8.31 | % | | 37,146 | | 711 | | | 7.70 | % | | 30,266 | | 624 | | | 8.27 | % | | 36,606 | | 758 | | | 8.33 | % |
| | | | | | | | | | | | | | | | |
Total | | 32,845 | | 668 | | | 8.25 | % | | 37,641 | | 716 | | | 7.65 | % | | 30,667 | | 628 | | | 8.21 | % | | 37,029 | | 765 | | | 8.31 | % |
Interest-Bearing Deposits | | 30,767 | | 213 | | | 2.81 | % | | 63,220 | | 197 | | | 1.25 | % | | 23,510 | | 180 | | | 3.07 | % | | 19,088 | | 104 | | | 2.19 | % |
Federal Funds Sold | | | — | | — | | | 0.00 | % | | 239 | | — | | | 0.00 | % |
| | | | | | | | | | | | | | | | |
Total Earning Assets | | 1,707,710 | | 26,265 | | | 6.24 | % | | 1,542,660 | | 23,134 | | | 6.03 | % | | 1,739,147 | | 27,806 | | | 6.41 | % | | 1,699,218 | | 25,302 | | | 5.99 | % |
Other Assets (5) | | 149,935 | | 111,459 | | |
Other Assets (3) | | | 152,186 | | 147,554 | |
Assets Related to Discontinued Operations | | — | | 19,466 | | | — | | 31,228 | |
| | | | | | | | | | |
Total | | $ | 1,857,645 | | $ | 1,673,585 | | |
TOTAL ASSETS | | | $ | 1,891,333 | | $ | 1,878,000 | |
| | | | | | | | | | |
| | |
LIABILITIES | | |
Interest-Bearing Liabilities: | | |
Demand Deposits | | $ | 153,323 | | $ | 92 | | | 0.24 | % | | $ | 136,360 | | $ | 76 | | | 0.22 | % | | $ | 155,841 | | $ | 98 | | | 0.25 | % | | $ | 152,099 | | $ | 95 | | | 0.25 | % |
Savings Deposits (6) | | 376,218 | | 869 | | | 0.94 | % | | 294,439 | | 489 | | | 0.67 | % | |
Savings Deposits (4) | | | 358,811 | | 836 | | | 0.93 | % | | 397,351 | | 892 | | | 0.90 | % |
Time Deposits | | 632,689 | | 4,001 | | | 2.56 | % | | 606,177 | | 3,750 | | | 2.49 | % | | 662,127 | | 4,613 | | | 2.79 | % | | 632,861 | | 3,826 | | | 2.43 | % |
| | | | | | | | | | | | | | | | |
Total Deposits | | 1,162,230 | | 4,962 | | | 1.73 | % | | 1,036,976 | | 4,315 | | | 1.67 | % | | 1,176,779 | | 5,547 | | | 1.89 | % | | 1,182,311 | | 4,813 | | | 1.64 | % |
Fed Funds Purchased & Repurchase Agreements | | 129,352 | | 561 | | | 1.76 | % | | 97,316 | | 292 | | | 1.21 | % | | 125,415 | | 645 | | | 2.06 | % | | 110,834 | | 333 | | | 1.21 | % |
Short-term Borrowings (7) | | 127,598 | | 1,648 | | | 5.24 | % | | 130,403 | | 1,430 | | | 4.41 | % | |
Short-term Borrowings (5) | | | 141,978 | | 1,780 | | | 5.03 | % | | 122,474 | | 1,374 | | | 4.51 | % |
Other Borrowings | | 17,015 | | 261 | | | 6.22 | % | | 17,012 | | 208 | | | 4.92 | % | | 17,169 | | 299 | | | 6.99 | % | | 17,009 | | 209 | | | 4.94 | % |
| | | | | | | | | | | | | | | | |
Total Interest-Bearing liabilities | | 1,436,195 | | 7,432 | | | 2.10 | % | | 1,281,707 | | 6,245 | | | 1.96 | % | | 1,461,341 | | 8,271 | | | 2.27 | % | | 1,432,628 | | 6,729 | | | 1.89 | % |
| | | | | | |
Demand Deposits | | 219,699 | | 185,995 | | | 228,307 | | 222,759 | |
Other Liabilities | | 15,419 | | 12,318 | | | 13,153 | | 17,786 | |
Liabilities Related to Discontinued Operations | | — | | 19,466 | | | — | | 28,793 | |
Stockholders’ Equity | | 186,332 | | 174,099 | | | 188,532 | | 176,034 | |
| | | | | | | | | | |
Total | | $ | 1,857,645 | | $ | 1,673,585 | | |
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | | | $ | 1,891,333 | | $ | 1,878,000 | |
| | | | | | | | | | | | | | |
Net Interest Income, Tax Equivalent | | $ | 18,833 | | $ | 16,889 | | | $ | 19,535 | | $ | 18,573 | |
| | | | | | | | | | |
Net Interest Rate Spread (3) | | | 4.14 | % | | | 4.07 | % | |
Net Interest Rate Spread (6) | | | | 4.14 | % | | | 4.10 | % |
| | | | | | | | | | |
Net Interest Margin (4) | | | 4.47 | % | | | 4.40 | % | |
Net Interest Margin (7) | | | | 4.51 | % | | | 4.40 | % |
| | | | | | | | | | |
| | |
(1) | | Fully Taxable Equivalent (“FTE”) at the rate of 35%. The FTE basis adjusts for the tax benefits of income on certain tax-exempt loans and investments using the federal statutory rate of 35% for each period presented. The Company believes this measure to be the preferred industry measurement of net interest income and provides relevant comparison between taxable and non-taxable amounts. |
|
(2) | | Non-accrual loans are included in average balances outstanding but with no related interest income during the period of non-accrual. |
|
(3) | | Represents the difference between the yield on earning assets and cost of funds. |
|
(4) | | Represents tax equivalent net interest income divided by average interest earning assets. |
|
(5) | | In previous years, the Allowance for LoanCredit Losses was netted against loans in the earning asset section. In 2005, the Allowance was netted against other assets and the comparable prior periods were adjusted accordingly.period was reclassified to conform to the 2005 presentation. |
|
(6)(4) | | In previous years, certain interest-bearing Money Market Demand accounts were included in the interest-bearing demand category in the earning asset section. In 2005, these accounts were reclassified to savings and the comparable prior periods were adjusted accordingly.period was reclassified to conform to the 2005 presentation. |
|
(7)(5) | | FHLB advances are included in short-term borrowings due to quarterly call options. |
|
(6) | | Represents the difference between the yield on earning assets and cost of funds. |
|
(7) | | Represents tax equivalent net interest income divided by average interest-earning assets. |
22- 25 -
Table II
AVERAGE BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended | | Six Months Ended |
| | June 30, 2005 | | June 30, 2004 |
| | Average | | Interest | | Yield/Rate | | Average | | Interest | | Yield/Rate |
| | Balance | | (1) | | (1) | | Balance | | (1) | | (1) |
| | | | | | | | | | (Dollars in Thousands) | | | | | | | | |
ASSETS | | | | | | | | | | | | | | | | | | | | | | | | |
Earning Assets: | | | | | | | | | | | | | | | | | | | | | | | | |
Loans Held for Investment: (2) | | | | | | | | | | | | | | | | | | | | | | | | |
Taxable | | $ | 1,276,295 | | | $ | 42,848 | | | | 6.77 | % | | $ | 1,087,558 | | | $ | 36,148 | | | | 6.68 | % |
Tax-Exempt | | | 3,751 | | | | 111 | | | | 5.97 | % | | | 4,757 | | | | 145 | | | | 6.13 | % |
| | | | | | | | | | | | |
Total | | | 1,280,046 | | | | 42,959 | | | | 6.77 | % | | | 1,092,315 | | | | 36,293 | | | | 6.68 | % |
Securities Available for Sale: | | | | | | | | | | | | | | | | | | | | | | | | |
Taxable | | | 241,929 | | | | 4,843 | | | | 4.04 | % | | | 342,468 | | | | 6,687 | | | | 3.93 | % |
Tax-Exempt | | | 142,672 | | | | 4,580 | | | | 6.47 | % | | | 105,917 | | | | 3,674 | | | | 6.98 | % |
| | | | | | | | | | | | |
Total | | | 384,601 | | | | 9,423 | | | | 4.94 | % | | | 448,385 | | | | 10,361 | | | | 4.65 | % |
Securities Held to Maturity: | | | | | | | | | | | | | | | | | | | | | | | | |
Taxable | | | 404 | | | | 8 | | | | 3.99 | % | | | 426 | | | | 12 | | | | 5.66 | % |
Tax-Exempt | | | 31,346 | | | | 1,288 | | | | 8.29 | % | | | 36,838 | | | | 1,469 | | | | 8.02 | % |
| | | | | | | | | | | | |
Total | | | 31,750 | | | | 1,296 | | | | 8.23 | % | | | 37,264 | | | | 1,481 | | | | 7.99 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
Interest-Bearing Deposits | | | 27,119 | | | | 393 | | | | 2.92 | % | | | 41,154 | | | | 301 | | | | 1.47 | % |
Federal Funds Sold | | | — | | | | — | | | | 0.00 | % | | | 120 | | | | — | | | | 0.00 | % |
| | | | | | | | | | | | |
Total Earning Assets | | | 1,723,516 | | | | 54,071 | | | | 6.33 | % | | | 1,619,238 | | | | 48,436 | | | | 6.02 | % |
Other Assets (3) | | | 151,065 | | | | | | | | | | | | 130,841 | | | | | | | | | |
Assets Related to Discontinued Operations | | | — | | | | | | | | | | | | 25,356 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
TOTAL ASSETS | | $ | 1,874,581 | | | | | | | | | | | $ | 1,775,435 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
LIABILITIES | | | | | | | | | | | | | | | | | | | | | | | | |
Interest-Bearing Liabilities: | | | | | | | | | | | | | | | | | | | | | | | | |
Demand Deposits | | $ | 154,589 | | | $ | 190 | | | | 0.25 | % | | $ | 144,230 | | | $ | 171 | | | | 0.24 | % |
Savings Deposits (4) | | | 367,467 | | | | 1,705 | | | | 0.94 | % | | | 345,895 | | | | 1,381 | | | | 0.80 | % |
Time Deposits | | | 647,489 | | | | 8,614 | | | | 2.68 | % | | | 619,519 | | | | 7,576 | | | | 2.46 | % |
| | | | | | | | | | | | |
Total Deposits | | | 1,169,545 | | | | 10,509 | | | | 1.81 | % | | | 1,109,644 | | | | 9,128 | | | | 1.65 | % |
Fed Funds Purchased & Repurchase Agreements | | | 127,373 | | | | 1,206 | | | | 1.91 | % | | | 104,087 | | | | 625 | | | | 1.21 | % |
Short-term Borrowings (5) | | | 134,828 | | | | 3,428 | | | | 5.13 | % | | | 126,172 | | | | 2,804 | | | | 4.47 | % |
Other Borrowings | | | 17,093 | | | | 560 | | | | 6.61 | % | | | 17,010 | | | | 417 | | | | 4.93 | % |
| | | | | | | | | | | | |
Total Interest-Bearing liabilities | | | 1,448,839 | | | | 15,703 | | | | 2.19 | % | | | 1,356,913 | | | | 12,974 | | | | 1.92 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
Demand Deposits | | | 224,028 | | | | | | | | | | | | 204,264 | | | | | | | | | |
Other Liabilities | | | 14,260 | | | | | | | | | | | | 15,053 | | | | | | | | | |
Liabilities Related to Discontinued Operations | | | — | | | | | | | | | | | | 22,173 | | | | | | | | | |
Stockholders’ Equity | | | 187,454 | | | | | | | | | | | | 177,032 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | | $ | 1,874,581 | | | | | | | | | | | $ | 1,775,435 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net Interest Income, Tax Equivalent | | | | | | $ | 38,368 | | | | | | | | | | | $ | 35,462 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net Interest Rate Spread (6) | | | | | | | | | | | 4.14 | % | | | | | | | | | | | 4.09 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net Interest Margin (7) | | | | | | | | | | | 4.49 | % | | | | | | | | | | | 4.40 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | |
(1) | | Fully Taxable Equivalent (“FTE”) at the rate of 35%. The FTE basis adjusts for the tax benefits of income on certain tax-exempt loans and investments using the federal statutory rate of 35% for each period presented. The Company believes this measure to be the preferred industry measurement of net interest income and provides relevant comparison between taxable and non-taxable amounts. |
|
(2) | | Non-accrual loans are included in average balances outstanding but with no related interest income during the period of non-accrual. |
|
(3) | | In previous years, the Allowance for Credit Losses was netted against loans in the earning asset section. In 2005, the Allowance was netted against other assets and the comparable prior period was reclassified to conform to the 2005 presentation. |
|
(4) | | In previous years, certain interest-bearing Money Market Demand accounts were included in the interest-bearing demand category in the earning asset section. In 2005, these accounts were reclassified to savings and the comparable prior period was reclassified to conform to the 2005 presentation. |
|
(5) | | FHLB advances are included in short-term borrowings due to quarterly call options. |
|
(6) | | Represents the difference between the yield on earning assets and cost of funds. |
|
(7) | | Represents tax equivalent net interest income divided by average interest-earning assets. |
- 26 -
The following table summarizes the changes in interest earned and paid resulting from changes in the volume of earning assets and paying liabilities and changes in their interest rates. The changes in interest due to both rate and volume have been allocated to the volume and rate columns in proportion to absolute dollar amounts. The principal themes or trends which are evident in this table include:
| • | | The increase in net interest income through the first half of 2005 resulted largely from growth in earning assets resulting from growth of loans, branch and loan production office growth, as well as the acquisition of PCB |
|
| • | | The resulting higher margin in 2005 as a result of increasing volumes |
| | | | | | | | | | | | | | | | | | | | | | | | |
(Amounts in Thousands) | | Three Months Ended June 30, 2005, | | Six Months Ended June 30, 2005, |
| | Compared to 2004 | | Compared to 2004 |
| | $ Increase/(Decrease) due to | | $ Increase/(Decrease) due to |
| | Volume | | Rate | | Total | | Volume | | Rate | | Total |
Interest Earned On (1): | | | | | | | | | | | | | | | | | | | | | | | | |
Loans | | $ | 2,206 | | | $ | 858 | | | $ | 3,064 | | | $ | 6,207 | | | $ | 459 | | | $ | 6,666 | |
Securities available for sale | | | (680 | ) | | | 181 | | | | (499 | ) | | | (838 | ) | | | (100 | ) | | | (938 | ) |
Securities held to maturitiy | | | (129 | ) | | | (8 | ) | | | (137 | ) | | | (228 | ) | | | 43 | | | | (185 | ) |
Interest-bearing deposits with other banks | | | 28 | | | | 48 | | | | 76 | | | | (129 | ) | | | 221 | | | | 92 | |
Federal funds sold | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total interest-earning assets | | | 1,425 | | | | 1,079 | | | | 2,504 | | | | 5,012 | | | | 623 | | | | 5,635 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Interest Paid On: | | | | | | | | | | | | | | | | | | | | | | | | |
Demand deposits | | | 3 | | | | — | | | | 3 | | | | 12 | | | | 7 | | | | 19 | |
Savings deposits | | | (87 | ) | | | 31 | | | | (56 | ) | | | 89 | | | | 235 | | | | 324 | |
Time deposits | | | 186 | | | | 601 | | | | 787 | | | | 344 | | | | 694 | | | | 1,038 | |
Short-term borrowings (2) | | | 285 | | | | 433 | | | | 718 | | | | 359 | | | | 846 | | | | 1,205 | |
Long-term debt | | | 2 | | | | 88 | | | | 90 | | | | 2 | | | | 141 | | | | 143 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total interest-bearing liabilities | | | 389 | | | | 1,153 | | | | 1,542 | | | | 806 | | | | 1,923 | | | | 2,729 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Change in net interest income | | $ | 1,036 | | | $ | (74 | ) | | $ | 962 | | | $ | 4,206 | | | $ | (1,300 | ) | | $ | 2,906 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | |
(1) | | Fully taxable equivalent using a rate of 35%. |
|
(2) | | Includes FHLB borrowings callable within one year |
- 27 -
Provision and Allowance for LoanCredit LossesThe
As discussed in the Allowance for Credit Losses footnote to the unaudited financial statements, the Company split its allowance for loan losses
is maintainedinto two separate components at
a level sufficient to absorb probable loan losses inherent in the loan portfolio.June 30, 2005. The
allowance is increased by charges to earnings in the formportion of
provisions for loan losses and recoveries of prior loan charge-offs, and decreased by loans charged off. The provision for loan losses is calculated to bring the allowance to a level, which, according to a systematic process of measurement, reflects the amount management estimates is needed to absorb probable losses within the portfolio.Management performs quarterly assessments to determine the appropriate level of allowance. Differences between actual loan loss experience and estimates are reflected through adjustments that are made by either increasing or decreasing the loss provision based upon current measurement criteria. Commercial, consumer and mortgage loan portfolios are evaluated separately for purposes of determining the allowance. The specific components of the allowance include allocations to individual commercial credits and allocations to the remaining non-homogeneous and homogeneous pools of loans. Management’s allocations are based on judgment of qualitative and quantitative factors about both macro and micro economic conditions reflected within the portfolio of loans and the economy as a whole. Factors considered in this evaluation include, but are not necessarily limited to, probable losses from loan and other credit arrangements, general economic conditions, changes in credit concentrations or pledged collateral, historical loan loss experience, and trends in portfolio volume, maturities, composition, delinquencies, and non-accruals. While management has attributed the allowance for loan losses attributable to various portfolio segments,lending-related commitments, such as unfunded loan commitments and letters of credit, was reclassified as the allowance is available for the entire portfolio.
lending-related commitments. The split resulted in a decrease to allowance for loan losses, and an increase to other liabilities, which includes the allowance for lending-related commitments. The combination of the two allowances is now referred to as the allowance for credit losses.
The allowance for credit losses was
$16.5$16.6 million on
March 31,June 30, 2005, compared to $16.3 million at December 31, 2004 and
$14.5$16.2 million at
March 31,June 30, 2004. The allowance for
loancredit losses represents
258%402% of non-performing loans at
March 31,June 30, 2005, versus 316% and
405%614% at December 31, 2004, and
March 31,June 30, 2004, respectively. When other real estate and repossessions are combined with non-performing loans, the allowance equals
211%323% of non-performing assets at
March 31,June 30, 2005, versus 248% and
234%331% at December 31, 2004, and
March 31,June 30, 2004, respectively.
The increase in the allowance since March 2004 is primarily attributable to the acquisition of PCB, new loan volume and changes in various qualitative risk factors reflecting current portfolio and market conditions. The allowance attributable to the PCB portfolio at the date of acquisition was $1.8 million. The Company’s allowance for loancredit loss activity for the three and six month periods ended March 31,June 30, 2005 and 2004, are as follows:
| | | | | | | | | | | | | | | | | |
(Amounts in thousands) | | | For the Three Months Ended | | For the Six Months Ended |
| | | June 30, | | June 30, |
| | | 2005 | | 2004 | | 2005 | | 2004 |
Allowance for Loan Losses | | |
Beginning balance | | | $ | 16,543 | | $ | 14,536 | | $ | 16,339 | | $ | 14,624 | |
Provision | | | 1,073 | | 723 | | 1,764 | | 1,255 | |
Balance acquired in acquisiton | | | — | | 1,786 | | — | | 1,786 | |
Charge-offs | | | | (1,638 | ) | | | (1,233 | ) | | | (2,482 | ) | | | (2,144 | ) |
Recoveries | | | 398 | | 348 | | 755 | | 639 | |
Reclassification of allowance for lending-related commitments | | | | (392 | ) | | — | | | (392 | ) | | — | |
| | | | | | | | | | |
Ending balance | | | $ | 15,984 | | $ | 16,160 | | $ | 15,984 | | $ | 16,160 | |
| | |
Allowance for Lending-Related Commitments | | |
Beginning balance | | | $ | — | | $ | — | | $ | — | | $ | — | |
Provision for lending-related commitments | | | 221 | | — | | 221 | | — | |
Reclassification of allowance for lending-related commitments | | | 392 | | — | | 392 | | — | |
| | | | | | | | | | | | | | | | | |
| | For the Three Months Ended | | | $ | 613 | | $ | — | | $ | 613 | | $ | — | |
| | March 31, | | | | | | | | | | |
| | 2005 | | 2004 | | |
Allowance for Credit Losses | | | $ | 16,597 | | $ | 16,160 | | $ | 16,597 | | $ | 16,160 | |
| | (Amounts in Thousands) | | | | | | | | | | |
Beginning balance | | $ | 16,339 | | $ | 14,624 | | |
Provision | | 691 | | 532 | | |
Charge-offs | | | (844 | ) | | | (911 | ) | |
Recoveries | | 357 | | 291 | | |
| | | | | | |
Ending balance | | $ | 16,543 | | $ | 14,536 | | |
| | | | | | |
The
Total allowance
for credit losses to loans held for investment ratio was
1.29%1.28% at
March 31,June 30, 2005, 1.32% at December 31, 2004, and
1.43%1.36% for
March 31,June 30, 2004. Management considers the allowance adequate based upon its analysis of the portfolio as of
March 31,June 30, 2005.
However, no assurances can be made that future adjustments will not be necessary as a result of increases in non-performing loans and other factors.
The provision for loan losses for the three monthsix-month period ended March 31,June 30, 2005, increased to $691,000$1.8 million when compared to the threesix month period ending March 31,June 30, 2004, of $532,000.$1.3 million. The increase in loss provisions between the periods is primarily attributable to new, or increased, specific allocations, including several in the new PCB portfolio, newincreased commercial and residential real estate loan volume, and changes in various qualitative risk factors. Net charge-offs for the first quartersix months of 2005 were $487,000, down 21.5% from $620,000$1.7 million, compared to $1.5 million for the corresponding period in 2004. Expressed as a percentage of average loans held for investment, net charge-offs decreased from 0.06%0.14% for the threesix months ended March 31,June 30, 2004, to 0.04%0.13% for the same period of 2005.
- 28 -
The provision for loan losses for the three month period ended June 30, 2005, was $1.1 million compared to $723 thousand for the same quarter of 2004. Net charge offs were $1.2 million in the second quarter of 2005, versus $885 thousand for the second quarter of 2004.
Non-interest income consists of all revenues which are not included in interest and fee income related to earning assets.assets, and continues to be a focus of management. Non-interest income from continuing operations for the firstsecond quarter of 2005 improvedwas $4.6 million compared to $5.6 million in the same period of 2004. The second quarter of 2004 included securities gains which were $1.3 million greater than those recognized in 2005. The remaining components of non-interest income increased by $479,000$313 thousand, or 14.8%7.6%, in the second quarter of 2005 compared to the firstsame period of 2004.
Second quarter
of 2004, $237,000 of which is attributable to the PCB acquisition in 2004. The remaining increase in non-interest income was due to continued improvement in the areas of2005 trust
services, service charges on deposit accounts, and other service charges, commissions and fees.23
Trust services income increased $120,000,$77 thousand, or 28.7%15%, compared to 2004 as a result of growth in trust accounts, trust assets and the related fees generated by such growth in all areas, including estates, employee benefits and investment related accounts. Service charges on deposit accounts increased $188,000,$322 thousand or 9.6%, $117,000 of which was attributable to the PCB acquisition.14%. All other service charges, commissions and fees increased $251,000,$162 thousand, or 44.9%23%, compared to the firstsecond quarter of 2004.
Year-to-date non-interest income was $8.3 million compared to $8.8 million for the first six months of 2004. As previously discussed, 2004 results included gains of which $57,000 can be attributedsecurities sales of $1.4 million compared to $143 thousand for the first six months of 2005. All other components of non-interest income increased by $781 thousand, or 11%, in the first half of 2005 compared to the PCB acquisition, while ATM servicesame period of 2004.
Year-to-date 2005 trust services income increased by $197 thousand, or 21%, compared to 2004. Service charges
on deposit accounts increased
$98,000. Also included in$510 thousand, or 12%, and other service charges, commissions and fees
were additional fees of $66,000 generated by Stone Capital, the Company’s investment advisory service, which has added investment representatives and expanded its offices.During the first quarter of 2005, the Company completed the planned sale of a tract of land to a charitable foundation, reducing its overall land cost by approximately $750,000. The sale resulted in a pre-tax loss of $232,000,increased $413 thousand, or $.01 per share on an after-tax basis, and allowed the Bank to acquire a prime branch location in a southern West Virginia market. Without this charge, all other operating income would have increased $141,00032%, for the first quarter of 2005 compared to the first quarter of 2004 ($63,000 attributable to PCB.)
same comparable periods.
Non-interest expense totaled
$12.5$13.3 million for the
three monthsquarter ended
March 31,June 30, 2005, increasing
$1.6$1.1 million, or
14.5%8.8%, over the same period of 2004.
ThisYear-to-date non-interest expense was $25.8 million, an increase
isof $2.7 million, or 12%, over the same period in 2004. The increases over the second quarter and year-to-date periods in 2004 are primarily attributable to
a $1.2 million increaseincreases in salaries and benefits
as a result of
the acquisition of PCB$790 thousand and $2.0 million, respectively. The increases are due to increases in
the second quarter of 2004, as well as a general increase in salaries and benefits as well as staffing to support added corporate services and continued branch
growth. Other increases included in the overall increase in salariesgrowth and
benefits included $120,000 in employeeincreased health benefits
and $278,000 in retirement savings and profit-sharing plans.For the three months ended March 31, 2005, year-to-date occupancy and furniture and equipment expense increased by $249,000, or 16.8%, compared to 2004. The general level of occupancy cost grew largely as a result of the PCB Bancorp acquisition and depreciation associated with continued investment in operating equipment and technology infrastructure.costs. All other operatingcomponents of non-interest expense accounts remained relatively stable at $3.3 million forbetween the first quarter 2005.
two periods.
Income tax expense is comprised of federal and state current and deferred income taxes on pre-tax earnings of the Company. Income taxes as a percentage of pre-tax income may vary significantly from statutory rates due to items of income and expense which are excluded, by law, from the calculation of taxable income. These items are commonly referred to as permanent differences. The most significant permanent differences for the Company include i) income on state and municipal securities which are exempt from federal income tax, ii) certain dividend payments which are deductible by the Company, iii) tax credits generated by investments in low income housing and iv) for 2004, goodwill impairment expense which is not deductible.
Goodwill impairment expense is infrequent
For the second quarter of 2005, the consolidated income taxes were $2.5 million compared to $2.2 million for the second quarter of 2004. For the quarters ended June 30, 2005 and
has historically been related to the UFM subsidiary, which was sold in August 2004. Because those charges (expenses) were not deductible, they resulted in permanent differences which increased2004, the effective tax
rate in 2003rates were 28.56% and
27.47%, respectively. For the first
two quarterssix months of
2004. Goodwill expense, by nature, is2005, consolidated income taxes were $4.7 million, a
permanent difference. As a result, these expenses reduced the carrying basis of the mortgage subsidiary and created a permanent difference tax benefit of approximately $950,000 in the third quarter of 2004 realized upon the sale of the entity. This benefit reduced the combined27.71% effective tax rate,
in 2004compared to
25.6% from 29.1% in 2003. Income$3.9 million, an effective tax
expense is classified according to continuing operations and discontinued operations. The company continues to incur costs related torate of 28.30%, for the
UFM subsidiary in the formfirst six months of
non-cancelable leases. These leases created a loss from discontinued operations of approximately $130,000 and an associated tax benefit of $51,000.2004.
The Company is engaged in a state tax audit involving state income, franchise and sales tax in one of its state tax jurisdictions. While the Company has received indications of the state tax department’s estimates of potential additional state income and franchise tax liabilities, the Company’s review of the potential assessments revealed a position which favors the Company and which, if sustained, could result in the Company receiving state income and franchise tax refunds. The Company and tax counsel continue to evaluate possible exposure under the state tax audit as well as the advancement of the referenced favorable tax position and believe that the Company has established appropriate provisions for state income and franchise taxes consistent with the uncertainty of the state tax audit and the potential for changes in the Company’s state tax filings.
24- 29 -
Total assets
At March 31,at June 30, 2005, increased
$56.0$104.4 million
to $1.94 billion from December 31,
2004.2004, an annualized growth rate of 11%. The
increase wasincreases in the balance sheet were primarily driven by the addition of
$43.8$58.0 million in loans,
largely generated by the recently established loan production offices, and
$47.0 million in interest-bearing deposits with banks, which was funded primarily through increases of
$42.8$38.8 million in deposits,
and $18.4$15.4 million in
customer repurchase
agreements.agreements, and borrowings of $75.4 million.
Securities available for sale were
$372.6$381.5 million at
March 31,June 30, 2005, compared to $388.7 million at December 31, 2004, a
decrease of $16.1 million.slight decrease. This change reflects the purchase of
$4.6$35.2 million in securities,
$1.7$3.4 million in maturities and calls, proceeds from sales of
$3.0$16.5 million, a market value decrease of approximately
$4.1 million,$588 thousand, the continuation of larger pay-downs of
$11.5$21.0 million on mortgage-backed securities and collateralized mortgage obligations triggered by the low interest rate environment and approximately
$456,000 million$781 thousand in bond premium amortization. Securities available for sale are recorded at their estimated fair market value. The unrealized gain or loss, which is the difference between amortized cost and estimated market value, net of related deferred taxes, is recognized in the stockholders’ equity section of the balance sheet as either accumulated other comprehensive income or loss. The unrealized
lossgain after taxes of
$106,000$2.0 million at
March 31,June 30, 2005, represents a decrease of
$2.5 million$353 thousand from the $2.4 million gain at December 31, 2004, the result of market value changes in reaction to rate movements on similar instruments.
Although substantial reinvestment has been made in the available for sale security portfolio, the
The Company has attempted to maintain a shorter portfolio duration (the cash-weighted term to maturity of the portfolio) to reduce the sensitivity of the portfolio’s price to changes in interest rates and lessen interest rate risk. The longer the duration, the greater the impact of changing market rates for similar instruments. At
March 31,June 30, 2005, the average estimated life of the investment portfolio was
4.53.9 years,
(reflective of currently anticipated prepayments) updown slightly from 4.2 years at December 31, 2004.
The Company’s available-for-sale securities portfolio is reported at fair value. The fair value of a security is determined based on quoted market prices. If quoted market prices are not available, fair value is determined based on quoted prices of similar instruments. Available-for-sale and held to maturity securities are reviewed quarterly for possible other-than-temporary impairment. This review includes an analysis of the facts and circumstances of each individual investment such as the length of time the fair value has been below cost, the expectation for that security’s performance, the credit worthiness of the issuer and the Company’s intent and ability to hold the security to recovery or maturity.
At June 30, 2005, the combined depreciation in value of the individual securities in an unrealized loss position for more than 12 months was less than 1% of the combined reported value of the aggregate securities portfolio. Management does not believe any individual unrealized loss as of June 30, 2005, represents an other-than-temporary impairment. The Company has the intent and ability to hold these securities until such time as the value recovers or the securities mature. Furthermore, the Company believes the value is attributable to changes in market interest rates and not the credit quality of the issuer.
Securities held to maturity totaled
$32.0$29.9 million at
March 31,June 30, 2005,
reflective of a
continuing decrease
of $2.2 million from December 31, 2004. The decrease is due primarily to
continuing paydowns, maturities and calls within the
portfolio during the first quarter of 2005.portfolio. The market value of investment securities held to maturity was
103.5%103.4% and 104.1% of book value at
March 31,June 30, 2005, and December 31, 2004, respectively. Recent trends in interest rates have had little effect on the portfolio market value since December 31, 2004, due to its larger percentage of municipal securities which display less price sensitivity to rate changes.
Loans Held for Sale:As mentioned previously in this report, UFM was sold during the third quarter 2004. The loans held for sale by UFM in prior periods are carried as assets related to discontinued operations on the balance sheet and have been removed from continuing operations. The
$1.2$1.1 million balance of loans held for sale at
March 31,June 30, 2005, is held by the
Bank,Company, largely through the newly acquired branches in Tennessee. These longer-term loans are sold to investors on a best efforts
basis,basis; accordingly, the Company does not retain the interest rate risk involved in the commitment. The gross notional amount of outstanding commitments at
March 31,June 30, 2005, was
$5.8$2.7 million on
6224 loans.
Loans Held for Investment:Total loans held for investment increased
$43.8$58.0 million to
$1.28$1.30 billion at
March 31,June 30, 2005, from the $1.24 billion level at December 31, 2004, and increased
$262.7$109.8 million from
March 31,June 30, 2004, largely the result of
the PCB acquisition and increased loan production. Considering the
$42.8$38.8 million increase in deposits during the first
quartersix months of 2005, the loan to deposit ratio increased slightly to
91.5%92.8% at
March 31,June 30, 2005, compared to 91.2% at December 31,
2004, and 85.1% at June 30, 2004.
The 91.5% loan to deposit ratio for the first quarter of 2005
reflected increased loans and deposits of $262.7 million and $159.2 million, respectively, compared to the first quarter of 2004 ratio of 82.1%.2005 year–to-dateyear-to-date average loans held for investment of $1.26$1.28 billion increased $244.2$187.7 million when compared to the average for the first quarterhalf of 2004 of $1.02$1.09 billion. The increase was largely due to the PCB acquisition and loan growth from the new branch and loan production offices.
- 30 -
The held for investment loan portfolio continues to be diversified among loan types and industry segments. The following table presents the various loan categories and changes in composition as of
March 31,June 30, 2005, December 31, 2004 and
March 31,June 30, 2004.
25
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Loan Portfolio Overview |
| | June 30, 2005 | | December 31, 2004 | | June 30, 2004 |
(Dollars in Thousands) | | Amount | | Percent | | Amount | | Percent | | Amount | | Percent |
Loans Held for Investment: | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial and agricultural | | $ | 103,565 | | | | 7.99 | % | | $ | 99,303 | | | | 8.02 | % | | $ | 64,768 | | | | 5.46 | % |
Commercial real estate | | | 471,340 | | | | 36.35 | % | | | 453,899 | | | | 36.64 | % | | | 445,446 | | | | 37.53 | % |
Residential real estate | | | 481,577 | | | | 37.14 | % | | | 457,386 | | | | 36.92 | % | | | 436,364 | | | | 36.76 | % |
Construction | | | 126,678 | | | | 9.77 | % | | | 112,732 | | | | 9.10 | % | | | 113,314 | | | | 9.55 | % |
Consumer | | | 111,654 | | | | 8.61 | % | | | 113,424 | | | | 9.16 | % | | | 124,742 | | | | 10.51 | % |
Other | | | 1,914 | | | | 0.14 | % | | | 2,012 | | | | 0.16 | % | | | 2,320 | | | | 0.20 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 1,296,728 | | | | 100.00 | % | | $ | 1,238,756 | | | | 100.00 | % | | $ | 1,186,954 | | | | 100.00 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Loans Held for Sale | | $ | 1,075 | | | | | | | $ | 1,194 | | | | | | | $ | 774 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Loans Held for Sale Included in Assets Related to Discontinued Operations | | $ | — | | | | | | | $ | — | | | | | | | $ | 18,384 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Loan Portfolio Overview | |
| | March 31, 2005 | | | December 31, 2004 | | | March 31, 2004 | |
| | Amount | | | Percent | | | Amount | | | Percent | | | Amount | | | Percent | |
| | | | | | | | | | (Dollars in Thousands) | | | | | | | | | |
Loans Held for Investment: | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial and agricultural | | $ | 99,669 | | | | 7.77 | % | | $ | 99,303 | | | | 8.02 | % | | $ | 63,322 | | | | 6.21 | % |
Commercial real estate | | | 486,701 | | | | 37.95 | % | | | 453,899 | | | | 36.64 | % | | | 332,409 | | | | 32.59 | % |
Residential real estate | | | 471,829 | | | | 36.79 | % | | | 457,386 | | | | 36.92 | % | | | 412,373 | | | | 40.44 | % |
Construction | | | 112,340 | | | | 8.76 | % | | | 112,732 | | | | 9.10 | % | | | 93,842 | | | | 9.20 | % |
Consumer | | | 110,141 | | | | 8.59 | % | | | 113,424 | | | | 9.16 | % | | | 115,631 | | | | 11.34 | % |
Other | | | 1,866 | | | | 0.14 | % | | | 2,012 | | | | 0.16 | % | | | 2,252 | | | | 0.22 | % |
| | | | | | | | | | | | | | | | | | |
Total | | $ | 1,282,546 | | | | 100.00 | % | | $ | 1,238,756 | | | | 100.00 | % | | $ | 1,019,829 | | | | 100.00 | % |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Loans Held for Sale | | $ | 1,182 | | | | | | | $ | 1,194 | | | | | | | $ | 257 | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Loans Held for Sale Included in Assets Related to Discontinued Operations | | $ | — | | | | | | | $ | — | | | | | | | $ | 28,399 | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Non-Performing Assets
Non-performing assets include loans on non-accrual status, loans contractually past due 90 days or more and still accruing interest, other real estate owned (“OREO”) and repossessions. Non-performing assets were
$7.8$5.1 million at
March 31,June 30, 2005, $6.6 million at December 31, 2004, and
$6.2$4.9 million at
March 31,June 30, 2004. The percentage of non-performing assets to total loans, OREO and repossessions was
0.6% for the first quarter0.40% at June 30, 2005, consistent with the
third and fourth quarterssecond quarter of 2004
and down from December 31, 2004, at
0.5% and 0.6%, respectively.0.53%.
The following schedule details non-performing assets by category at the close of each of the last fivethree quarters:
| | | | | | | | | | | | | | | | | | | | | |
| | March 31 | | December 31 | | September 30 | | June 30 | | March 31 | | | | | | | | | | | | | |
| | 2005 | | 2004 | | 2004 | | 2004 | | 2004 | | | June 30, | | December 31, | | June 30, |
| | (Amounts in Thousands) | | | 2005 | | 2004 | | 2004 |
| | | (Amounts in Thousands) |
Non-accrual | | $ | 6,419 | | $ | 5,168 | | $ | 3,679 | | $ | 2,630 | | $ | 3,588 | | | $ | 4,132 | | $ | 5,168 | | $ | 2,630 | |
Ninety days past due and accruing | | — | | — | | — | | — | | — | | | — | | — | | — | |
Other real estate owned | | 1,389 | | 1,419 | | 1,636 | | 2,166 | | 2,571 | | | 975 | | 1,419 | | 2,166 | |
Repossessions | | 26 | | 1 | | 40 | | 92 | | 60 | | | 29 | | 1 | | 92 | |
| | | | | | | | | | | | | | | | | | |
Total non-performing assets | | | $ | 5,136 | | $ | 6,588 | | $ | 4,888 | |
| | $ | 7,834 | | $ | 6,588 | | $ | 5,355 | | $ | 4,888 | | $ | 6,219 | | | | | | | | |
| | | | | | | | | | | | |
Restructured loans performing in accordance with modified terms | | $ | 344 | | $ | 354 | | $ | 368 | | $ | 382 | | $ | 392 | | | $ | 327 | | $ | 354 | | $ | 382 | |
| | | | | | | | | | | | | | | | | | |
At March 31,June 30, 2005, non-accrual loans increased $1.3decreased $1.0 million from December 31, 2004, while ninety day past due and accruing loans remained at zero. The increase in non-accrual is primarily attributable to the acquisition of PCB. Ongoing activity within the classification and categories of non-performing loans continues to include collections on delinquencies, foreclosures and movements into or out of the non-performing classification as a result of changing customer business conditions. OREO of $1.4 million remained consistent with the fourth quarter of 2004 but$975 thousand was down $1.2 million or 46.0%a decrease from the Marchboth December 31, 2004, level of $2.6 millionand June 30, 2004, and is carried at the lesser of estimated net realizable value or cost.
Deposits and Other Borrowings
In addition to loans which are classified as non-performing, the Company closely monitors certain loans which could develop into problem loans. These potential problem loans present characteristics of weakness or concentrations of credit to one borrower. Among these loans at March- 31 2005 was a loan of $12.2 million which warrants close monitoring of a borrower within the hospitality industry. The loan represents the retained portion of a $16 million total loan shared with a participating bank. The loan is secured by real estate improved with a national franchise hotel and parking building in a major southeast city. The loan is further secured by the guarantee of the principals of the borrowing entity certain of which are considered to be substantial. This loan, which was originated in 1999, performed according to terms until it displayed delinquency in February and March 2003 and was subsequently brought current. The loan remains current as to principal and interest at March 31, 2005. This loan does, however, represent one of the Company’s largest credits and is within an industry which has suffered from declining performance in recent years. This loan was appropriately considered in evaluating the adequacy
26-
of the allowance for loan losses and there were no specific allocations of the allowance for loan losses for the foregoing potential problem loan as of March 31, 2005.
Deposits and Other Borrowings
Total deposits grew by
$42.8$38.8 million or
3.2%2.9% during the first
quartersix months of 2005. Non interest-bearing demand deposits
remained stable, decreasing slightlyincreased by
$758,000$13.7 million, while interest-bearing demand deposits
increased $4.2 million.remained stable. Savings decreased
$20.2$34.9 million
andas time deposits increased
$59.6$60.1 million, or
9.9%10.0%. The attrition from savings and the increase in time deposits
reflectreflects the continued migration of customer funds in response to the upward movement in time deposit interest rates.
An additional advance in
Additional advances of $50 million at the
firstend of the second quarter of 2005 increased the Company’s FHLB convertible and callable borrowings at
March 31,June 30, 2005, to
$132.4$182.4 million.
The most recent advances allow the Company to fund increasing loan demand, lock in current low-cost funding, and increase the asset-sensitive position of the Company. Noncallable term advances remained the same at $9.4 million. For further discussion of FHLB borrowings, see the Borrowings Note to the unaudited consolidated financial statements included in this report. Securities sold under repurchase agreements increased
$18.4$15.4 million in the first
quartersix months of 2005. There were no federal funds purchased outstanding at
March 31,June 30, 2005, as the Company experienced increased liquidity in the first
quartersix months of 2005.
Total stockholders’ equity increased
$1.0$6.5 million from December 31, 2004, as the Company continued to balance capital adequacy and returns to stockholders. The increase in equity was due mainly to net earnings of
$6.0 million, a decrease in other comprehensive income of $2.5$12.2 million and dividends paid to stockholders of
$2.9$5.7 million.
The FRB’sFederal Reserve Bank’s risk based capital guidelines and leverage ratio measure capital adequacy of banking institutions. Risk-based capital guidelines weight balance sheet assets and off-balance sheet commitments based on inherent risks associated with the respective asset types. At March 31,June 30, 2005, the Company’s total risk adjusted capital-to-asset ratio was 11.63%11.60% versus 12.09% at December 31, 2004. The Company’s leverage ratio at March 31,June 30, 2005, was 7.70%7.74% compared with 7.62% at December 31, 2004. Both the risk adjusted capital-to-asset ratio and the leverage ratio exceed the current well-capitalized levels prescribed for banks of 10% and 5%, respectively.
PART I. ITEM 3. Quantitative and Qualitative Disclosures about Market Risk Liquidity and Capital ResourcesThe
At June 30, 2005, the Company
maintainsmaintained a significant level of liquidity in the form of cash and cash equivalent balances of
$83.3$107.9 million, investment securities available for sale of
$372.6$381.5 million, and FHLB credit availability of approximately
$421.6$193.3 million. Cash and cash equivalents as well as advances from the FHLB are immediately available for satisfaction of deposit withdrawals, customer credit needs and operations of the Company. Investment securities available for sale represent a secondary level of liquidity available for conversion to liquid funds in the event of extraordinary needs. The Company also maintains approved lines of credit with correspondent banks as backup liquidity sources.
The Company maintains a liquidity policy as a means to manage the liquidity risk process and associated risk. The policy includes a Liquidity Contingency Plan (“Liquidity Plan”) that is designed as a tool for the Company to detect liquidity issues promptly in order to protect depositors, creditors and shareholders. The Liquidity Plan includes monitoring various internal and external indicators such as changes in core deposits and changes in market conditions. It provides for timely responses to a wide variety of funding scenarios ranging from changes in loan demand to a decline in the Company’s quarterly earnings to a decline in the market price of the Company’s stock. The Liquidity Plan calls for specific responses designed to meet a wide range of liquidity needs based upon assessments on a recurring basis by management and the Board of Directors.
Interest Rate Risk (IRR) and Asset/Liability ManagementWhile the Company continues to strive to decrease its dependence on net interest income, the Bank’s
The Company’s profitability is dependent to a large extent upon its ability to manage its net interest margin.income (“NII”), which is the difference between its interest income on interest-earning assets, such as loans and securities, and its interest expense on interest-bearing liabilities, such as deposits and borrowings. The Bank,Company, like other financial institutions, is subject to interest rate risk to the degree that its interest-earning assets reprice differently than its interest-bearing liabilities. The BankCompany manages its mix of assets and liabilities with the goals of limiting its exposure to interest rate risk, ensuring adequate liquidity, and coordinating its sources and uses of funds. funds while maintaining an acceptable level of NII given the current interest rate environment.
The Company’s primary component of operational revenue, NII, is subject to variation as a result of changes in interest rate environments in conjunction with unbalanced repricing opportunities on earning assets and interest-bearing liabilities. Interest rate risk has four primary components including repricing risk, basis risk, yield curve risk and option risk. Repricing
- 32 -
risk occurs when earning assets and paying liabilities reprice at differing times as interest rates change. Basis risk occurs when the underlying rates on the assets and liabilities the institution holds change at different levels or in varying degrees. Yield curve risk is the risk of adverse consequences as a result of unequal changes in the spread between two or more rates for different maturities for the same instrument. Lastly, option risk is due to “embedded options,” often put or call options, given or sold to holders of financial instruments.
In order to mitigate the effect of changes in the general level of interest rates, the Company manages repricing opportunities and thus, its interest rate sensitivity. The Company seeks to control its IRR exposure to insulate NII and net earnings from fluctuations in the general level of interest rates. To measure its exposure to IRR, quarterly simulations of NII are performed using financial models that project NII through a range of possible interest rate environments including rising, declining, most likely and flat rate scenarios. The simulation model used by the Company captures all earning assets, interest-bearing liabilities and all off-balance sheet financial instruments and combines the various factors affecting rate sensitivity into an earnings outlook. The results of these simulations indicate the existence and severity of IRR in each of those rate environments based upon the current balance sheet position, assumptions as to changes in the volume and mix of interest-earning assets and interest-paying liabilities and management’s estimate of yields to be attained in those future rate environments and rates that will be paid on various deposit instruments and borrowings. These assumptions are inherently uncertain and, as a result, the model cannot precisely predict the impact of fluctuations in interest rates on NII. Actual results will differ from simulated results due to timing, magnitude, and frequency of interest rate changes, as well as changes in market conditions and management’s strategies. However, the earnings simulation model is currently the best tool available to management for managing IRR.
Specific strategies for management of IRR have included shortening the amortized maturity of
new fixed-rate loans,
and increasing the volume of
adjustable rateadjustable-rate loans to reduce the average maturity of the
Bank’sCompany’s interest-earning
assets.The Company’s risk profile continuesassets and monitoring the term structure of liabilities to reflectmaintain a positionbalanced mix of maturity and re-pricing structures to mitigate the potential exposure. Based upon the latest simulation, the Company believes that it is biased toward an asset sensitive. The substantial level of prepayments and calls on loans and securities are consistent with the extended lowsensitive position. Absent adequate management, asset sensitive positions can negatively impact net interest income in a falling rate environment or, alternatively, positively impact net interest income in a rising rate environment.
The Company has established policy limits for tolerance of interest rate risk that
has prevailed.allow for no more than a 10% reduction in projected NII based on quarterly income simulations compared to forecasted results. In addition, the
success of deposit funding campaigns has ledpolicy addresses exposure limits to
a strong liquidity position as reflectedchanges in the
levelEconomic Value of
cash reserves and due27
from balances of approximately $34.3 million at March 31, 2005.Equity (“EVE”) according to predefined policy guidelines. The Company continuesmost recent simulation indicates that current exposure to reinvest the funds generated from asset paydowns and prepayments within a framework that attempts to maintain an acceptable net interest margin in the current interest rate environment.
The Company’s earnings sensitivity measurements completed on a quarterly basis indicate that the performance criteria, against which sensitivityrisk is measured, are currently within the Company’s defined policy limits whichas short-term rates are triggered atanticipated to continue moving upward throughout 2005.
The following table summarizes the impact on NII and the EVE as of June 30, 2005, and December 31, 2004, of immediate and sustained rate shocks in the interest rate environment of plus and minus 100 basis points and plus 200 basis points from the base simulation, assuming no remedial measures are effected.
- 33 -
| | | | | | | | | | | | | | | | |
Rate Sensitivity Analysis |
| | June 30, 2005 |
| | Change in | | | | | | Change in | | |
Increase (Decrease) in | | Net Interest | | % | | Market Value | | % |
Interest Rates (Basis Points) | | Income | | Change | | of Equity | | Change |
| | (Dollars in Thousands) |
200 | | $ | 3,606 | | | | 4.9 | | | $ | 7,403 | | | | 2.8 | |
100 | | | 2,248 | | | | 3.0 | | | | 8,622 | | | | 3.3 | |
(100) | | | (3,361 | ) | | | (4.5 | ) | | | (1,544 | ) | | | (0.6 | ) |
| | | | | | | | | | | | | | | | |
| | December 31, 2004 |
| | Change in | | | | | | Change in | | |
Increase (Decrease) in | | Net Interest | | % | | Market Value | | % |
Interest Rates (Basis Points) | | Income | | Change | | of Equity | | Change |
| | (Dollars in Thousands) |
200 | | $ | 2,768 | | | | 4.0 | | | $ | (6,497 | ) | | | (2.5 | ) |
100 | | | 1,622 | | | | 2.4 | | | | (2,495 | ) | | | (1.0 | ) |
(100) | | | (2,770 | ) | | | (4.0 | ) | | | (10,114 | ) | | | (3.9 | ) |
When comparing the impact of the rate shock analysis between June 30, 2005, and December 31, 2004, the changes in NII reflect relatively similar results and the impact of the balance sheet composition of assets and liabilities as the profile continues to reflect asset sensitivity. As a 10% reductionresult, the simulation scenario in projecteda falling rate environment depicts net interest income. A more complete discussionincome declining and the opposite occurs in a rising environment. The asset sensitivity is reflected in on-hand liquidity of $64.5 million (interest-bearing balances held with other banks) and in the loan portfolio which includes adjustable or variable rates on roughly 50% of the overall interestportfolio at June 30, 2005. Combined with the relatively short duration of the investment portfolio this creates an asset-sensitive position favoring a rising rate riskenvironment.
The market value of equity is included ina measure which reflects the impact of changing rates of the underlying values of the Company’s Annual Reportassets and liabilities in various rate scenarios. The scenarios illustrate the potential estimated impact of instantaneous rate shocks on Form 10-K for December 31, 2004.the underlying value of equity. The value of the equity is based on the present value of all the future cash flows under the different rate scenarios.
PART I. ITEM 4. Controls and Procedures As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer along with the Company’s Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to the Securities Exchange Act of 1934 (“Exchange Act”) Rule 13a-15(b). Based uponon that evaluation, the Company’s Chief Executive Officer along with the Company’s Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s periodic SEC filings.
The Company’s management, including the CEO and CFO, does not expect that the Company’s disclosure controls and internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls.
- 34 -
There have not been any changes in the Company’s internal controls over financial reporting during the most recent fiscal quarter ended June 30, 2005 that have materially affected, or are reasonably likely to materially affect the Company’s internal controls over financial reporting.
Disclosure controls and procedures are Company controls and other procedures that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
28- 35 -
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings The Company is currently a defendant in various legal actions and asserted claims involving lending and collection activities and other matters in the normal course of business. While the Company and legal counsel are unable to assess the ultimate outcome of each of these matters with certainty, they are of the belief that the resolution of these actions should not have a material adverse affect on the financial position, results of operations, or cash flows of the Company.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds | (a) | | Not Applicable |
|
| (b) | | Not Applicable |
|
| (c) | | Issuer Purchases of Equity Securities |
The following table sets forth purchases by the Company (on the open market) of its equity securities during the quartersix months ended March 31,June 30, 2005.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Maximum | | | Maximum |
| | Number of | | | Number of |
| | Total Number of | | Shares that | | | Total Number of | | Shares that |
| | Total # of | | Average | | Shares Purchased | | May yet be | | | Total # of | | Average | | Shares Purchased | | May yet be |
| | Shares | | Price Paid | | as Part of Publicly | | Purchased | | | Shares | | Price Paid | | as Part of Publicly | | Purchased |
| | Purchased | | per Share | | Announced Plan | | Under the Plan | | | Purchased | | per Share | | Announced Plan | | Under the Plan |
January 1-31, 2005 | | 303 | | $ | 32.63 | | 303 | | 281,000 | | | 303 | | $ | 32.63 | | 303 | | 281,000 | |
February 1-28, 2005 | | — | | $ | — | | — | | 281,000 | | | — | | $ | — | | — | | 281,000 | |
March 1-31, 2005 | | — | | $ | — | | — | | 281,000 | | | — | | $ | — | | — | | 281,000 | |
April 1-30, 2005 | | | — | | $ | — | | — | | 281,216 | |
May 1-31, 2005 | | | 2,000 | | $ | 28.12 | | 2,000 | | 330,080 | |
June 1-30, 2005 | | | 2,123 | | $ | 29.46 | | 2,123 | | 328,821 | |
| | | | | | | | | | | | | | |
Total | | 303 | | $ | 32.63 | | 303 | | | 4,426 | | $ | 28.35 | | 4,426 | |
| | | | | | | | | | | | | | |
The Company’s stock repurchase plan, allowingas amended, allows the purchase of up to 436,000 shares was announced September 18, 2001, amended by the Board of Directors to 500,000 shares on March 18, 2003 and again on May 18, 2004 to purchaseretention of up to 550,000 shares. The plan has no expiration date and remains open.
ITEM 3. Defaults Upon Senior Securities Not Applicable
ITEM 4. Submission of Matters to a Vote of Security Holders
| (a) | | The Annual Meeting of Stockholders was held on April 25, 2005. |
|
| (b) | | The following directors were elected to serve a three-year term through the date of the 2008 Annual Meeting of Stockholders: |
|
| | | Harold V. Groome, Jr., Robert E. Perkinson, Jr., and William P. Stafford |
|
| (c) | | Three proposals were voted upon at the annual meeting, which included: 1) the election of the aforementioned directors as the Class of 2008; 2) amendment of the Articles of Incorporation to increase the authorized common stock to 25,000,000 shares, and 3) ratification of the selection of Ernst & Young, Charleston, West Virginia, as independent registered public accountants for the year ending December 31, 2005. The results of the proposals and voting are as follows: |
- 36 -
Not Applicable
Proposal 1. Election of Directors:
| | | | | | | | |
| | Votes For | | Votes Withheld |
Harold V. Groome, Jr. | | | 8,325,020 | | | | 273,415 | |
Robert E. Perkinson, Jr. | | | 8,315,339 | | | | 283,096 | |
William P. Stafford | | | 8,266,334 | | | | 332,101 | |
| | |
Proposal 2. | | Amendment of the Articles of Incorporation to increase the authorized common stock to 25,000,000 shares: |
| | | | |
Votes For | | | 8,218,575 | |
Votes Against | | | 330,331 | |
Votes Abstained | | | 49,529 | |
Broker Non-Vote | | | — | |
| | |
Proposal 3. | | Ratification of the selection of Ernst & Young LLP as independent registered public accountants: |
| | | | |
Votes For | | | 8,577,647 | |
Votes Against | | | 11,867 | |
Votes Abstained | | | 8,921 | |
ITEM 5. Other Information Not Applicable
29- 37 -
(a) Exhibits
| | | | | |
|
| Exhibit No. | | | Exhibit | |
| 3(i) | | | Articles of Incorporation of First Community Bancshares, Inc., as amended. (1) |
| | |
| 3(ii) | | | Bylaws of First Community Bancshares, Inc., as amended. (1) |
| | |
| 4.1 | | | Specimen stock certificate of First Community Bancshares, Inc. (6) |
| | |
| 4.2 | | | Indenture Agreement dated September 25, 2003. (10) |
| | |
| 4.3 | | | Amended and Restated Declaration of Trust of FCBI Capital Trust dated September 25, 2003. (10) |
| | |
| 4.4 | | | Preferred Securities Guarantee Agreement dated September 25, 2003. (10) |
| | |
| 10.1 | | | First Community Bancshares, Inc. 1999 Stock Option Contracts (1) and Plan. (2)* |
| | |
| 10.1.1 | | | Amendment to the First Community Bancshares, Inc. 1999 Stock Option Plan (11)* |
| | |
| 10.2 | | | First Community Bancshares, Inc. 2001 Non-Qualified Directors Stock Option Plan. (3)* |
| | |
| 10.3 | | | Employment Agreement dated January 1, 2000, and amended October 17, 2000, between First Community Bancshares, Inc. and John M. Mendez. (1)(4)* |
| | |
| 10.4 | | | First Community Bancshares, Inc. 2000 Executive Retention Plan. (2)* |
| | |
| 10.5 | | | First Community Bancshares, Inc. Split Dollar Plan and Agreement. (2)* |
| | |
| 10.6 | | | First Community Bancshares, Inc. 2001 Directors Supplemental Retirement Plan. Second Amendment (B. W. Harvey, Sr.-October 19, 2004). (1)* |
| | |
| 10.6.1 | | | First Community Bancshares, Inc. 2001 Directors Supplemental Retirement Plan. (1)* |
| | |
| 10.7 | | | First Community Bancshares, Inc. Wrap Plan. (6)* |
| | |
| 10.8 | | | Employment Agreement between First Community Bancshares, Inc. and J. E. Causey Davis. (7)* |
| | |
| 10.9 | | | Form of Indemnification Agreement between First Community Bancshares, Inc., its Directors and Certain Executive Officers. (8)* |
| | |
| 10.10 | | | Form of Indemnification Agreement between First Community Bank, N. A.N.A., its Directors and Certain Executive Officers. (8)* |
| | |
| 10.12 | | | First Community Bancshares, Inc. 2004 Omnibus Stock Option Plan-Stock Award Agreement (12)* |
| | |
| 11.0 | | | Statement regarding computation of earnings per share. (5) |
| | |
| 15.0 | | | Acknowledgement of Independent Registered Public Accounting Firm. |
| | |
| 31.1 | | | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer. |
| | |
| 31.2 | | | Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer. |
| | |
| 32 | | | Certification of Chief Executive and Chief Financial Officer Section 1350. | |
|
| | |
* | | Management contract or compensatory plan or arrangement. |
30- 38 -
(1) | | Incorporated by reference from the Quarterly Report on Form 10-Q for the period ended June 30, 2002 filed on August 14, 2002. |
|
(2) | | Incorporated by reference from the Annual Report on Form 10-K for the period ended December 31, 1999 filed on March 30, 2000, as amended April 13, 2000. |
|
(3) | | The option agreements entered into pursuant to the 1999 Stock Option Plan and the 2001 Non-Qualified Directors Stock Option Plan are incorporated by reference from the Quarterly Report on Form 10-Q for the period ended June 30, 2002, filed on August 14, 2002. |
|
(4) | | First Community Bancshares, Inc. has entered into substantially identical agreements with Messrs.Robert L. Buzzo and E. Stephen Lilly, with the only differences being with respect to title, salary and the use of a vehicle. |
|
(5) | | Incorporated by reference from Footnote 9the Earnings per Share footnote of the Notes to Consolidated Financial Statements included herein. |
|
(6) | | Incorporated by reference from the Annual Report on Form 10-K for the period ended December 31, 2002, filed on March 25, 2003, as amended on March 31, 2003. |
|
(7) | | Incorporated by reference from S-4 Registration Statement filed on March 28, 2003. The Company has entered into a substantially identical contract with Phillip R. Carriger dated March 31, 2004. |
|
(8) | | Form of indemnification agreement entered into by the Corporation and by First Community Bank, N. A.N.A. with their respective directors and certain officers of each including, for the registrant and Bank: John M. Mendez, Robert L. Schumacher, Robert L. Buzzo, Kenneth P. Mulkey, E. Stephen Lilly and at the Bank level: Samuel L. Elmore. Incorporated by reference from the Annual Report on Form 10-K for the period ended December 31, 2002, filed on March 25, 2003, as amended on March 31, 2003. |
|
(9) | | Incorporated by reference from the 2004 First Community Bancshares, Inc. Definitive Proxy filed on March 19, 2004. |
|
(10) | | Incorporated by reference from the Quarterly Report on Form 10-Q for the period ended September 30, 2003 filed on November 10, 2003. |
|
(11) | | Incorporated by reference from the Quarterly Report on Form 10-Q for the period ended March 31, 2004 filed on May 7, 2004. |
|
(12) | | Incorporated by reference from the Quarterly Report on Form 10-Q for the period ended June 30, 2004 filed on August 6, 2004. |
|
(13) | | Amendments in substantially similar form were executed for Directors Clark, Kantor, Hamner, Modena, Perkinson, Stafford and Stafford II but are not filed herewith. |
31- 39 -
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
First Community Bancshares, Inc.
DATE: May 10, 2005
| | |
/s/ John M. MendezFirst Community Bancshares, Inc. | | |
| | |
DATE: August 5, 2005 | | |
| | |
/s/ John M. Mendez | | |
President & Chief Executive Officer | | |
(DulyJohn M. Mendez President & Chief Executive Officer (Duly Authorized Officer) | | |
| | |
DATE: May 10,August 5, 2005 | | |
| | |
/s//s/ Robert L. Schumacher | | |
| | |
Robert L. Schumacher | | |
Chief Financial Officer | | |
(Principal (Principal Accounting Officer) | | |
32- 40 -
Index to ExhibitsExhibit No.
| | |
Exhibit No. | | Exhibit |
3(i) | | Articles of Incorporation of First Community Bancshares, Inc., as amended. |
| | |
15.0 | | Acknowledgement of Independent Registered Public Accounting Firm.Firm |
| | |
31.1 | | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.Officer |
| | |
31.2 | | Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.Officer |
| | |
32.0 | | Certification of Chief Executive and Chief Financial Officer pursuant to 18 USC Section 1350.1350 |
33- 41 -