FIRST COMMUNITY BANCSHARES, INC. 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended March 31, 2008
Commission file number 000-19297
FIRST COMMUNITY BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
|
|
|
Nevada
|
|
55-0694814 |
|
|
|
(State or other jurisdiction of incorporation)
|
|
(IRS Employer Identification No.) |
|
|
|
P.O. Box 989
Bluefield, Virginia
|
|
24605-0989 |
|
|
|
(Address of principal executive offices)
|
|
(Zip Code) |
(276) 326-9000
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been subject to the to such filing requirements for the past 90 days.
þ Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
a non-accelerated filer, or a smaller reporting company.
See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
|
|
|
|
|
|
|
Large accelerated filer o
|
|
Accelerated filer þ
|
|
Non-accelerated filer o
|
|
Smaller reporting company o |
|
|
|
|
(Do not check if a smaller reporting company) |
|
|
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o Yes þ No
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date.
Class Common Stock, $1.00 Par Value; 11,008,474 shares outstanding as of April 30, 2008
FIRST COMMUNITY BANCSHARES, INC.
FORM 10-Q
For the quarter ended March 31, 2008
INDEX
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Item 1. Financial Statements |
|
|
|
|
|
|
|
3 |
|
|
|
|
4 |
|
|
|
|
5 |
|
|
|
|
6 |
|
|
|
|
7 |
|
|
|
|
|
|
|
|
|
16 |
|
|
|
|
|
|
|
|
|
24 |
|
|
|
|
|
|
|
|
|
26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27 |
|
|
|
|
|
|
|
|
|
27 |
|
|
|
|
|
|
|
|
|
27 |
|
|
|
|
|
|
|
|
|
27 |
|
|
|
|
|
|
|
|
|
27 |
|
|
|
|
|
|
|
|
|
28 |
|
|
|
|
|
|
|
|
|
28 |
|
|
|
|
|
|
|
|
|
31 |
|
|
|
|
|
|
|
|
|
32 |
|
EX-31.1 |
EX-31.2 |
EX-32 |
- 2 -
PART I. ITEM 1. Financial Statements
FIRST COMMUNITY BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
(Dollars in Thousands, Except Per Share Data) |
|
(Unaudited) |
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
Cash and due from banks |
|
$ |
44,004 |
|
|
$ |
50,051 |
|
Interest-bearing balances with banks |
|
|
33,111 |
|
|
|
2,695 |
|
|
|
|
|
|
|
|
Total cash and cash equivalents |
|
|
77,115 |
|
|
|
52,746 |
|
Securities available-for-sale (amortized cost of $622,696 at
March 31, 2008; $674,937 at December 31, 2007) |
|
|
598,853 |
|
|
|
664,120 |
|
Securities held-to-maturity (fair value of $12,323 at
March 31, 2008; $12,298 at December 31, 2007) |
|
|
12,075 |
|
|
|
12,075 |
|
Loans held for sale |
|
|
2,116 |
|
|
|
811 |
|
Loans held for investment, net of unearned income |
|
|
1,179,504 |
|
|
|
1,225,502 |
|
Less allowance for loan losses |
|
|
12,862 |
|
|
|
12,833 |
|
|
|
|
|
|
|
|
Net loans held for investment |
|
|
1,166,642 |
|
|
|
1,212,669 |
|
Premises and equipment |
|
|
49,444 |
|
|
|
48,383 |
|
Other real estate owned |
|
|
400 |
|
|
|
545 |
|
Interest receivable |
|
|
9,742 |
|
|
|
12,465 |
|
Goodwill and other intangible assets |
|
|
71,239 |
|
|
|
70,056 |
|
Other assets |
|
|
77,487 |
|
|
|
75,968 |
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
2,065,113 |
|
|
$ |
2,149,838 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
Noninterest-bearing |
|
$ |
224,097 |
|
|
$ |
224,087 |
|
Interest-bearing |
|
|
1,134,856 |
|
|
|
1,169,356 |
|
|
|
|
|
|
|
|
Total Deposits |
|
|
1,358,953 |
|
|
|
1,393,443 |
|
Interest, taxes and other liabilities |
|
|
22,293 |
|
|
|
21,454 |
|
Federal funds purchased |
|
|
|
|
|
|
18,500 |
|
Securities sold under agreements to repurchase |
|
|
208,000 |
|
|
|
207,427 |
|
FHLB borrowings and other indebtedness |
|
|
266,889 |
|
|
|
291,916 |
|
|
|
|
|
|
|
|
Total Liabilities |
|
|
1,856,135 |
|
|
|
1,932,740 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders Equity |
|
|
|
|
|
|
|
|
Preferred stock, par value undesignated; 1,000,000 shares authorized; none issued |
|
|
|
|
|
|
|
|
Common stock, $1 par value; 25,000,000 shares authorized; 11,499,018 shares
issued at March 31, 2008, and December 31, 2007, including 486,444
and 429,372 shares in treasury, respectively |
|
|
11,499 |
|
|
|
11,499 |
|
Additional paid-in capital |
|
|
108,896 |
|
|
|
108,825 |
|
Retained earnings |
|
|
120,087 |
|
|
|
117,670 |
|
Treasury stock, at cost |
|
|
(15,457 |
) |
|
|
(13,613 |
) |
Accumulated other comprehensive loss |
|
|
(16,047 |
) |
|
|
(7,283 |
) |
|
|
|
|
|
|
|
Total Stockholders Equity |
|
|
208,978 |
|
|
|
217,098 |
|
|
|
|
|
|
|
|
Total Liabilities and
Stockholders Equity |
|
$ |
2,065,113 |
|
|
$ |
2,149,838 |
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
- 3 -
FIRST COMMUNITY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
(Dollars in Thousands, Except Per Share Data) |
|
2008 |
|
|
2007 |
|
Interest Income |
|
|
|
|
|
|
|
|
Interest and fees on loans held for investment |
|
$ |
21,237 |
|
|
$ |
23,519 |
|
Interest on securities-taxable |
|
|
6,067 |
|
|
|
4,981 |
|
Interest on securities-nontaxable |
|
|
2,063 |
|
|
|
1,912 |
|
Interest on deposits in banks |
|
|
180 |
|
|
|
274 |
|
|
|
|
|
|
|
|
Total interest income |
|
|
29,547 |
|
|
|
30,686 |
|
Interest Expense |
|
|
|
|
|
|
|
|
Interest on deposits |
|
|
8,741 |
|
|
|
9,300 |
|
Interest on borrowings |
|
|
4,446 |
|
|
|
4,371 |
|
|
|
|
|
|
|
|
Total interest expense |
|
|
13,187 |
|
|
|
13,671 |
|
|
|
|
|
|
|
|
Net interest income |
|
|
16,360 |
|
|
|
17,015 |
|
Provision for loan losses |
|
|
323 |
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for loan losses |
|
|
16,037 |
|
|
|
17,015 |
|
|
|
|
|
|
|
|
Noninterest Income |
|
|
|
|
|
|
|
|
Wealth management income |
|
|
899 |
|
|
|
1,018 |
|
Service charges on deposit accounts |
|
|
3,099 |
|
|
|
2,409 |
|
Other service charges, commissions and fees |
|
|
1,121 |
|
|
|
870 |
|
Insurance commissions |
|
|
1,344 |
|
|
|
|
|
Gain on sale of securities |
|
|
1,820 |
|
|
|
129 |
|
Other operating income |
|
|
858 |
|
|
|
789 |
|
|
|
|
|
|
|
|
Total noninterest income |
|
|
9,141 |
|
|
|
5,215 |
|
|
|
|
|
|
|
|
Noninterest Expense |
|
|
|
|
|
|
|
|
Salaries and employee benefits |
|
|
7,790 |
|
|
|
6,411 |
|
Occupancy expense of bank premises |
|
|
1,164 |
|
|
|
1,057 |
|
Furniture and equipment expense |
|
|
901 |
|
|
|
823 |
|
Intangible amortization |
|
|
160 |
|
|
|
103 |
|
Prepayment penalty on FHLB advance |
|
|
1,647 |
|
|
|
|
|
Other operating expense |
|
|
4,621 |
|
|
|
3,764 |
|
|
|
|
|
|
|
|
Total noninterest expense |
|
|
16,283 |
|
|
|
12,158 |
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
8,895 |
|
|
|
10,072 |
|
Income tax expense |
|
|
2,583 |
|
|
|
2,948 |
|
|
|
|
|
|
|
|
Net income |
|
$ |
6,312 |
|
|
$ |
7,124 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share |
|
$ |
0.57 |
|
|
$ |
0.63 |
|
|
|
|
|
|
|
|
Diluted earnings per common share |
|
$ |
0.57 |
|
|
$ |
0.63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per common share |
|
$ |
0.28 |
|
|
$ |
0.27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average basic shares outstanding |
|
|
11,029,931 |
|
|
|
11,259,375 |
|
Weighted average diluted shares outstanding |
|
|
11,107,610 |
|
|
|
11,346,828 |
|
See Notes to Consolidated Financial Statements.
- 4 -
FIRST COMMUNITY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
(In Thousands) |
|
2008 |
|
|
2007 |
|
Operating activities: |
|
|
|
|
|
|
|
|
Net Income |
|
$ |
6,312 |
|
|
$ |
7,124 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Provision for loan losses |
|
|
323 |
|
|
|
|
|
Depreciation and amortization of premises and equipment |
|
|
889 |
|
|
|
800 |
|
Intangible amortization |
|
|
160 |
|
|
|
103 |
|
Net investment amortization and accretion |
|
|
(340 |
) |
|
|
145 |
|
Net gain on the sale of assets |
|
|
(1,781 |
) |
|
|
(122 |
) |
Mortgage loans originated for sale |
|
|
(13,280 |
) |
|
|
(9,212 |
) |
Proceeds from sales of mortgage loans |
|
|
12,058 |
|
|
|
8,993 |
|
Gain on sales of loans |
|
|
(83 |
) |
|
|
(68 |
) |
Deferred income tax (benefit) expense |
|
|
(149 |
) |
|
|
122 |
|
Decrease in interest receivable |
|
|
2,723 |
|
|
|
306 |
|
Other operating activities, net |
|
|
3,543 |
|
|
|
(309 |
) |
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
10,375 |
|
|
|
7,882 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
|
Proceeds from sales of securities available-for-sale |
|
|
30,797 |
|
|
|
769 |
|
Proceeds from maturities and calls of securities available-for-sale |
|
|
37,723 |
|
|
|
6,414 |
|
Proceeds from maturities and calls of securities held-to-maturity |
|
|
|
|
|
|
755 |
|
Purchase of securities available-for-sale |
|
|
(14,118 |
) |
|
|
(111,116 |
) |
Net decrease in loans held for investment |
|
|
45,809 |
|
|
|
25,627 |
|
Purchase of premises and equipment |
|
|
(1,952 |
) |
|
|
(2,296 |
) |
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
98,259 |
|
|
|
(79,847 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities: |
|
|
|
|
|
|
|
|
Net (decrease) increase in demand and savings deposits |
|
|
(2,662 |
) |
|
|
13,416 |
|
Net (decrease) increase in time deposits |
|
|
(31,828 |
) |
|
|
11,397 |
|
Net (decrease) increase in federal funds purchased |
|
|
(18,500 |
) |
|
|
37,300 |
|
Net increase in securities sold under agreement to repurchase |
|
|
573 |
|
|
|
19,013 |
|
Net decrease in FHLB and other borrowings |
|
|
(26,674 |
) |
|
|
(5,017 |
) |
Proceeds from the exercise of stock options |
|
|
66 |
|
|
|
488 |
|
Excess tax benefit from stock-based compensation |
|
|
10 |
|
|
|
128 |
|
Acquisition of treasury stock |
|
|
(2,168 |
) |
|
|
|
|
Dividends paid |
|
|
(3,082 |
) |
|
|
(3,043 |
) |
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities |
|
|
(84,265 |
) |
|
|
73,682 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in cash and cash equivalents |
|
|
24,369 |
|
|
|
1,717 |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period |
|
|
52,746 |
|
|
|
57,759 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
77,115 |
|
|
$ |
59,476 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental information Noncash items |
|
|
|
|
|
|
|
|
Transfer of loans to other real estate |
|
$ |
282 |
|
|
$ |
590 |
|
See Notes to Consolidated Financial Statements.
- 5 -
FIRST COMMUNITY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
Common |
|
|
Paid-in |
|
|
Retained |
|
|
Treasury |
|
|
Comprehensive |
|
|
|
|
(Dollars in Thousands) |
|
Stock |
|
|
Capital |
|
|
Earnings |
|
|
Stock |
|
|
Income (Loss) |
|
|
Total |
|
Balance January 1, 2007 |
|
$ |
11,499 |
|
|
$ |
108,806 |
|
|
$ |
100,117 |
|
|
$ |
(7,924 |
) |
|
$ |
232 |
|
|
$ |
212,730 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
7,124 |
|
|
|
|
|
|
|
|
|
|
|
7,124 |
|
Other comprehensive income, net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on securities
available for sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
471 |
|
|
|
471 |
|
Less reclassification adjustment for
gains realized in net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(56 |
) |
|
|
(56 |
) |
Unrealized loss on cash flow hedge |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(152 |
) |
|
|
(152 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
7,124 |
|
|
|
|
|
|
|
263 |
|
|
|
7,387 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common dividends declared |
|
|
|
|
|
|
|
|
|
|
(3,043 |
) |
|
|
|
|
|
|
|
|
|
|
(3,043 |
) |
Equity-based compensation expense |
|
|
|
|
|
|
10 |
|
|
|
|
|
|
|
86 |
|
|
|
|
|
|
|
96 |
|
Tax benefit from exercise of stock options |
|
|
|
|
|
|
179 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
179 |
|
Option exercises - 22,810 shares |
|
|
|
|
|
|
(226 |
) |
|
|
|
|
|
|
714 |
|
|
|
|
|
|
|
488 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance March 31, 2007 |
|
$ |
11,499 |
|
|
$ |
108,769 |
|
|
$ |
104,198 |
|
|
$ |
(7,124 |
) |
|
$ |
495 |
|
|
$ |
217,837 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance January 1, 2008 |
|
$ |
11,499 |
|
|
$ |
108,825 |
|
|
$ |
117,670 |
|
|
$ |
(13,613 |
) |
|
$ |
(7,283 |
) |
|
$ |
217,098 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
6,312 |
|
|
|
|
|
|
|
|
|
|
|
6,312 |
|
Other comprehensive income, net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on securities
available-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,348 |
) |
|
|
(8,348 |
) |
Less reclassification adjustment for
gains realized in net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
534 |
|
|
|
534 |
|
Unrealized loss on cash flow hedge |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(950 |
) |
|
|
(950 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
|
|
|
|
|
|
|
|
|
6,312 |
|
|
|
|
|
|
|
(8,764 |
) |
|
|
(2,452 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect of change in
accounting principle |
|
|
|
|
|
|
|
|
|
|
(813 |
) |
|
|
|
|
|
|
|
|
|
|
(813 |
) |
Common dividends declared |
|
|
|
|
|
|
|
|
|
|
(3,082 |
) |
|
|
|
|
|
|
|
|
|
|
(3,082 |
) |
Acquisition of 67,300 treasury shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,168 |
) |
|
|
|
|
|
|
(2,168 |
) |
Acquisition of GreenPoint Insurance Group -
7,728 shares issued |
|
|
|
|
|
|
22 |
|
|
|
|
|
|
|
245 |
|
|
|
|
|
|
|
267 |
|
Equity-based compensation expense |
|
|
|
|
|
|
52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52 |
|
Tax benefit from exercise of stock options |
|
|
|
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10 |
|
Option exercises - 2,500 shares |
|
|
|
|
|
|
(13 |
) |
|
|
|
|
|
|
79 |
|
|
|
|
|
|
|
66 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance March 31, 2008 |
|
$ |
11,499 |
|
|
$ |
108,896 |
|
|
$ |
120,087 |
|
|
$ |
(15,457 |
) |
|
$ |
(16,047 |
) |
|
$ |
208,978 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
- 6 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. General
Unaudited Consolidated Financial Statements
The accompanying unaudited consolidated financial statements of First Community Bancshares, Inc.
and subsidiaries (First Community or the Company) have been prepared in accordance with United
States generally accepted accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, all
adjustments, including normal recurring accruals, necessary for a fair presentation 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, 2007, has been derived from the audited
consolidated financial statements included in the Companys 2007 Annual Report on Form 10-K.
Certain information and footnote disclosures normally included in annual consolidated 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 consolidated
financial statements. These consolidated financial statements should be read in conjunction with
the consolidated financial statements and notes thereto included in the Companys 2007 Annual
Report on Form 10-K.
A more complete and detailed description of First Communitys significant accounting policies is
included within Footnote 1 of Item 8, Financial Statements and Supplementary Data in the
Companys Annual Report on Form 10-K for December 31, 2007. Further discussion of the Companys
application of critical accounting policies is included within the Application of Critical
Accounting Policies section of Part I, Item 2, Managements Discussion and Analysis of Financial
Condition and Results of Operations, included herein.
The
Company includes interest and penalties related to income tax
liabilities in income tax expense. The Company and its
subsidiaries tax filings for the years ended December 31,
2003 through 2006 are currently open to audit under statutes of
limitation by the Internal Revenue Service and various state tax
departments.
Effective January 1, 2008, the Company operates within two business segments, community banking and
insurance services.
Recent Accounting Pronouncements
In March 2008, the FASB issued Statement No. 161, Disclosures about Derivative Instruments and
Hedging Activities an amendment of FASB Statement No. 133. This statement requires enhanced
disclosures about an entitys derivative and hedging activities and thereby improves the
transparency of financial reporting. Entities are required to provide enhanced disclosures about
(a) how and why an entity uses derivative instruments, (b) how derivative instruments and related
hedged items are accounted for under Statement 133 and its related interpretations, and (c) how
derivative instruments and related hedged items affect an entitys financial position, financial
performance, and cash flows. This statement is effective for fiscal years and interim periods
beginning after November 15, 2008. The Company is currently evaluating the impact of SFAS 161 on
its financial condition, results of operations and disclosures.
In December 2007, the FASB revised Statement No. 141, Business Combinations. This statement
requires an acquirer to recognize the assets acquired, the liabilities assumed, and any
non-controlling interest in the acquiree at the acquisition date, measured at their fair values as
of that date. This statement recognizes and measures the goodwill acquired in the business
combination or a gain from a bargain purchase. This statement also defines the acquirer as the
entity that obtains control of one or more businesses in the business combination and establishes
the acquisition date as the date that the acquiree achieves control. Additionally this statement
determines what information to disclose to enable users of the financial statements to evaluate the
nature and financial effects of the business combination. This statement is effective for fiscal
years beginning after December 15, 2008. The Company is currently evaluating the impact of SFAS
141R on its financial condition, results of operations and disclosures.
In December 2007, the FASB issued Statement No. 160, Non-controlling Interests in Consolidated
Financial Statements an amendment of ARB No. 51. This statement applies to all entities that
prepare consolidated financial statements, except not-for-profit organizations, but will affect
only those entities that have an outstanding non-controlling interest in one or more subsidiaries
or that deconsolidate a subsidiary. This statement amends ARB 51 to establish accounting and
reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of
a subsidiary. This statement is effective for fiscal years beginning after January 1, 2009. The
Company is currently evaluating the impact of SFAS 160 on its financial condition, results of
operations and disclosures.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities. SFAS 159 provides companies with an option to report selected financial
assets and liabilities at fair value. The Statements
- 7 -
objective is to reduce both complexity in accounting for financial instruments and the volatility
in earnings caused by measuring related assets and liabilities differently. SFAS 159 also
establishes presentation and disclosure requirements designed to facilitate comparisons between
companies that choose different measurement attributes for similar types of assets and liabilities.
SFAS 159 requires companies to provide additional information that will help investors and other
users of financial statements to more easily understand the effect of the companys choice to use
fair value on its earnings. It also requires entities to display the fair value of those assets
and liabilities for which the company has chosen to use fair value on the face of the balance
sheet. The adoption of SFAS 159 did not have an effect on the Companys consolidated financial
statements.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which defines fair
value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair
value measurements. SFAS 157 is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal years, with early
adoption permitted. The adoption of SFAS 157 did not have a significant effect on the Companys
consolidated financial statements.
In September 2006, the Emerging Issues Task Force reached a consensus regarding EITF 06-4,
Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement
Split-Dollar Life Insurance Arrangements. The scope of EITF 06-4 is limited to the recognition of
a liability and related compensation costs for endorsement split-dollar life insurance policies
that provide a benefit to an employee that extends to postretirement periods. Therefore, this EITF
would not apply to a split-dollar life insurance arrangement that provides a specified benefit to
an employee that is limited to the employees active service period with an employer. The Company
made a cumulative effect adjustment to equity of $813 thousand in connection with the adoption of
EITF 06-4.
Note 2. Mergers, Acquisitions and Branching Activity
In September 2007, the Company completed the acquisition of GreenPoint Insurance Group, Inc.
(GreenPoint), a High Point, North Carolina, insurance agency. In connection with the initial
payment of approximately $1.66 million, the Company issued 49,088 shares of common stock. Under
the terms of the stock purchase agreement, former shareholders of GreenPoint are entitled to
additional consideration aggregating up to $1.45 million in the form of cash or the Companys
common stock, valued at the time of issuance, if certain future operating performance targets are
met. If those operating targets are met, the value of the consideration ultimately paid will be
added to the cost of the acquisition, which will increase the amount of goodwill related to the
acquisition. The Company is in the process of identifying and valuing intangibles. The Company
assumed $5.57 million of debt in connection with the acquisition, of which approximately $5.00
million was retired at closing. In March 2008, the Company issued 7,728 additional shares in
connection with the acquisition, resulting in a goodwill adjustment of approximately $267 thousand.
The acquisition of GreenPoint has added a total $7.19 million of goodwill and intangibles.
In December 2007, the Company opened two new locations in the Richmond, Virginia, area. In
November and October 2007, the Company opened a new branch location in Princeton and Daniels, West
Virginia, respectively. In March 2007, the Company opened two new branch locations in the
Winston-Salem, North Carolina, area. The Company currently has plans to open one branch location
in Summersville, West Virginia.
In November 2006, the Company completed the acquisition of Investment Planning Consultants, Inc.
(IPC), a registered investment advisory firm. In connection with the initial payment of
approximately $1.47 million, the Company issued 39,874 shares of common stock. Under the terms of
the stock purchase agreement, former shareholders of IPC are entitled to additional consideration
aggregating up to $1.43 million in the form of the Companys common stock, valued at the time of
issuance, if certain future operating performance targets are met. If those operating targets are
met, the value of the consideration ultimately paid will be added to the cost of the acquisition,
which will increase the amount of goodwill related to the acquisition. In December 2007, the
Company issued 13,401 additional shares in connection with the acquisition.
- 8 -
Note 3. Investment Securities
As of March 31, 2008, and December 31, 2007, the amortized cost and estimated fair value of
available-for-sale securities are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2008 |
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
(In Thousands) |
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
U.S. Government agency securities |
|
$ |
81,358 |
|
|
$ |
2,528 |
|
|
$ |
|
|
|
$ |
83,886 |
|
States and political subdivisions |
|
|
183,485 |
|
|
|
3,628 |
|
|
|
(990 |
) |
|
|
186,123 |
|
Trust-preferred securities |
|
|
164,522 |
|
|
|
|
|
|
|
(28,156 |
) |
|
|
136,366 |
|
Mortgage-backed securities |
|
|
184,671 |
|
|
|
2,772 |
|
|
|
(3,830 |
) |
|
|
183,613 |
|
Equities |
|
|
8,660 |
|
|
|
751 |
|
|
|
(546 |
) |
|
|
8,865 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
622,696 |
|
|
$ |
9,679 |
|
|
$ |
(33,522 |
) |
|
$ |
598,853 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007 |
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
U.S. Government agency securities |
|
$ |
136,791 |
|
|
$ |
2,446 |
|
|
$ |
|
|
|
$ |
139,237 |
|
States and political subdivisions |
|
|
186,834 |
|
|
|
2,667 |
|
|
|
(965 |
) |
|
|
188,536 |
|
Trust-preferred securities |
|
|
164,731 |
|
|
|
|
|
|
|
(14,106 |
) |
|
|
150,625 |
|
Mortgage-backed securities |
|
|
177,984 |
|
|
|
816 |
|
|
|
(2,073 |
) |
|
|
176,727 |
|
Equities |
|
|
8,597 |
|
|
|
814 |
|
|
|
(416 |
) |
|
|
8,995 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
674,937 |
|
|
$ |
6,743 |
|
|
$ |
(17,560 |
) |
|
$ |
664,120 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2008, and December 31, 2007, the amortized cost and estimated fair value of
held-to-maturity securities are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2008 |
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
(In Thousands) |
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
States and political subdivisions |
|
$ |
11,700 |
|
|
$ |
248 |
|
|
$ |
|
|
|
$ |
11,948 |
|
Other securities |
|
|
375 |
|
|
|
|
|
|
|
|
|
|
|
375 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
12,075 |
|
|
$ |
248 |
|
|
$ |
|
|
|
$ |
12,323 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007 |
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
States and political subdivisions |
|
$ |
11,699 |
|
|
$ |
223 |
|
|
$ |
|
|
|
$ |
11,922 |
|
Mortgage-backed securities |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
1 |
|
Other securities |
|
|
375 |
|
|
|
|
|
|
|
|
|
|
|
375 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
12,075 |
|
|
$ |
223 |
|
|
$ |
|
|
|
$ |
12,298 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- 9 -
The following table reflects those investments in an unrealized loss position at March 31, 2008,
and December 31, 2007. There were no securities in a continuous unrealized loss position for 12 or
more months which the Company does not have the ability to hold until the security matures or
recovers in value.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2008 |
|
|
|
Less than 12 Months |
|
|
12 Months or longer |
|
|
Total |
|
Description of Securities |
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
(In Thousands) |
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
U. S. Government agency
securities |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
States and political subdivisions |
|
|
27,266 |
|
|
|
(511 |
) |
|
|
15,281 |
|
|
|
(479 |
) |
|
|
42,547 |
|
|
|
(990 |
) |
Trust-preferred securities |
|
|
113,794 |
|
|
|
(24,460 |
) |
|
|
22,572 |
|
|
|
(3,696 |
) |
|
|
136,366 |
|
|
|
(28,156 |
) |
Mortgage-backed securities |
|
|
20,408 |
|
|
|
(420 |
) |
|
|
24,784 |
|
|
|
(3,410 |
) |
|
|
45,192 |
|
|
|
(3,830 |
) |
Equity securities |
|
|
1,713 |
|
|
|
(386 |
) |
|
|
2,225 |
|
|
|
(160 |
) |
|
|
3,938 |
|
|
|
(546 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
163,181 |
|
|
$ |
(25,777 |
) |
|
$ |
64,862 |
|
|
$ |
(7,745 |
) |
|
$ |
228,043 |
|
|
$ |
(33,522 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007 |
|
|
|
Less than 12 Months |
|
|
12 Months or longer |
|
|
Total |
|
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
Description of Securities |
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
U. S. Government agency
securities |
|
$ |
|
|
|
$ |
|
|
|
$ |
1,999 |
|
|
$ |
|
|
|
$ |
1,999 |
|
|
$ |
|
|
States and political subdivisions |
|
|
40,461 |
|
|
|
(900 |
) |
|
|
12,287 |
|
|
|
(65 |
) |
|
|
52,748 |
|
|
|
(965 |
) |
Trust-preferred securities |
|
|
129,006 |
|
|
|
(12,431 |
) |
|
|
21,994 |
|
|
|
(1,675 |
) |
|
|
151,000 |
|
|
|
(14,106 |
) |
Mortgage-backed securities |
|
|
7,991 |
|
|
|
(108 |
) |
|
|
63,393 |
|
|
|
(1,965 |
) |
|
|
71,384 |
|
|
|
(2,073 |
) |
Equity securities |
|
|
2,269 |
|
|
|
(345 |
) |
|
|
1,759 |
|
|
|
(71 |
) |
|
|
4,028 |
|
|
|
(416 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
179,727 |
|
|
$ |
(13,784 |
) |
|
$ |
101,432 |
|
|
$ |
(3,776 |
) |
|
$ |
281,159 |
|
|
$ |
(17,560 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2008, there were 164 individual security holdings in an unrealized loss position. 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 declines in value are attributable
to changes in market interest rates, changes in market credit risk premiums, and current market
illiquidity. The Companys portfolio of trust-preferred securities are generally collateralized
with bank-issued debt, rated A or higher, have not had a credit rating downgrade, and have not experienced any defaults.
The Company does not believe the declines in value are attributable to the credit
quality of the issuers.
Note 4. Loans
Loans, net of unearned income, consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2008 |
|
|
December 31, 2007 |
|
(Dollars in Thousands) |
|
Amount |
|
|
Percent |
|
|
Amount |
|
|
Percent |
|
Loans held for investment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and agricultural |
|
$ |
88,532 |
|
|
|
7.51 |
% |
|
$ |
96,261 |
|
|
|
7.85 |
% |
Commercial real estate |
|
|
376,087 |
|
|
|
31.89 |
% |
|
|
386,112 |
|
|
|
31.51 |
% |
Residential real estate |
|
|
488,860 |
|
|
|
41.45 |
% |
|
|
498,345 |
|
|
|
40.66 |
% |
Construction |
|
|
151,242 |
|
|
|
12.82 |
% |
|
|
163,310 |
|
|
|
13.33 |
% |
Consumer |
|
|
69,377 |
|
|
|
5.88 |
% |
|
|
75,447 |
|
|
|
6.16 |
% |
Other |
|
|
5,406 |
|
|
|
0.45 |
% |
|
|
6,027 |
|
|
|
0.49 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,179,504 |
|
|
|
100.00 |
% |
|
$ |
1,225,502 |
|
|
|
100.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans held for sale |
|
$ |
2,116 |
|
|
|
|
|
|
$ |
811 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
- 10 -
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 Companys 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.
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 customers
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 managements 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 are commitments to extend credit
(including availability of lines of credit) of $213.71 million and standby letters of credit and
financial guarantees written of $2.96 million at March 31, 2008. Additionally, the Company had
gross notional amount of outstanding commitments to lend related to secondary market mortgage loans
of $13.16 million at March 31, 2008.
Note 5. Allowance for Loan Losses
The allowance for loan losses is maintained at a level sufficient to absorb probable loan losses
inherent in the loan portfolio. The allowance is increased by charges to earnings in the form of
provision for loan losses and recoveries of prior loan charge-offs, and decreased by loans charged
off. The provision 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 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. Managements 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 loan 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 Companys allowance for loan loss activity for the three-month
periods ended March 31, 2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
|
March 31, |
|
(In Thousands) |
|
2008 |
|
|
2007 |
|
Beginning balance |
|
$ |
12,833 |
|
|
$ |
14,549 |
|
Provision for loan losses |
|
|
323 |
|
|
|
|
|
Charge-offs |
|
|
(966 |
) |
|
|
(893 |
) |
Recoveries |
|
|
672 |
|
|
|
854 |
|
|
|
|
|
|
|
|
Ending balance |
|
$ |
12,862 |
|
|
$ |
14,510 |
|
|
|
|
|
|
|
|
- 11 -
Note 6. Deposits
The following is a summary of interest-bearing deposits by type as of March 31, 2008, and December
31, 2007.
|
|
|
|
|
|
|
|
|
|
|
March 31 |
|
|
December 31, |
|
(In Thousands) |
|
2008 |
|
|
2007 |
|
Interest-bearing demand deposits |
|
$ |
172,864 |
|
|
$ |
153,570 |
|
Savings deposits |
|
|
305,725 |
|
|
|
327,691 |
|
Certificates of deposit |
|
|
656,267 |
|
|
|
688,095 |
|
|
|
|
|
|
|
|
Total |
|
$ |
1,134,856 |
|
|
$ |
1,169,356 |
|
|
|
|
|
|
|
|
Note 7. Borrowings
The following schedule details the Companys Federal Home Loan Bank (FHLB) borrowings and other
indebtedness at March 31, 2008, and December 31, 2007.
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
(In thousands) |
|
2008 |
|
|
2007 |
|
FHLB borrowings |
|
$ |
250,870 |
|
|
$ |
275,888 |
|
Subordinated debt |
|
|
15,464 |
|
|
|
15,464 |
|
Other long-term debt |
|
|
555 |
|
|
|
564 |
|
|
|
|
|
|
|
|
Total |
|
$ |
266,889 |
|
|
$ |
291,916 |
|
|
|
|
|
|
|
|
FHLB borrowings include $250.00 million in convertible and callable advances and $870 thousand of
noncallable term advances from the FHLB at March 31, 2008. The weighted average interest rates of
advances are 3.91% and 4.38% at March 31, 2008, and December 31, 2007, respectively.
The Company has entered into a derivative interest rate swap instrument where it receives
LIBOR-based variable interest payments and pays fixed interest payments. The notional amount of
the derivative swap is $50.00 million and effectively fixes a portion of the FHLB borrowings at
approximately 4.34%. After considering the effect of the interest rate swap, the effective
weighted average interest rate of all FHLB borrowings is 3.94% at March 31, 2008. The fair value
of the interest rate swap was a liability of $2.90 million at March 31, 2008.
At March 31, 2008, the FHLB advances have maturities between five and thirteen years. The
scheduled maturities of the advances are as follows:
|
|
|
|
|
(In Thousands) |
|
Amount |
|
2008 |
|
$ |
|
|
2009 |
|
|
|
|
2010 |
|
|
|
|
2011 |
|
|
|
|
2012 |
|
|
50,000 |
|
2013 and thereafter |
|
|
200,870 |
|
|
|
|
|
Total |
|
$ |
250,870 |
|
|
|
|
|
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 a
fixed or 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
maturities. Advances from the FHLB are secured by stock in the FHLB of Atlanta, qualifying first
mortgage loans, mortgage-backed securities, and certain other securities.
- 12 -
Also included in borrowings is $15.46 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-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
Companys subsidiary bank to support further growth.
The Company has committed to irrevocably and unconditionally 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: (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 and all accrued and unpaid distributions and the amount of assets of the trust
remaining available for distribution, in each case to the extent the Trust has funds available.
Note 9. Commitments and Contingencies
In the normal course of business, the Company is a defendant in various legal actions and asserted
claims. While the Company and its legal counsel are unable to assess the ultimate outcome of each
of these matters with certainty, 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.
Note 10. Segment Information
The Company operates in two segments: Community Banking and Insurance Services. The Community
Banking segment includes both commercial and consumer lending and provides customers with such
products as commercial loans, real estate loans, business financing and consumer loans. This
segment provides customers with several choices of deposit products including demand deposit
accounts, savings accounts and certificates of deposit. In addition, the Community Banking segment
provides wealth management services to a broad range of customers. The Insurance Services segment
is a full-service insurance agency providing commercial and personal lines of insurance.
The following table sets forth information about the reportable operating segments and
reconciliation of this information to the consolidated financial statements at and for the three
months ended March 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
|
March 31, 2008 |
|
|
|
Community |
|
|
Insurance |
|
|
Parent/ |
|
|
|
|
(In Thousands) |
|
Banking |
|
|
Services |
|
|
Elimination |
|
|
Total |
|
Net interest income |
|
$ |
16,635 |
|
|
$ |
(6 |
) |
|
$ |
(269 |
) |
|
$ |
16,360 |
|
Provision for loan losses |
|
|
323 |
|
|
|
|
|
|
|
|
|
|
|
323 |
|
Noninterest income |
|
|
7,994 |
|
|
|
1,344 |
|
|
|
(197 |
) |
|
|
9,141 |
|
Noninterest expense |
|
|
15,792 |
|
|
|
1,046 |
|
|
|
(555 |
) |
|
|
16,283 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
8,514 |
|
|
|
292 |
|
|
|
89 |
|
|
|
8,895 |
|
Provision (benefit) for income taxes |
|
|
2,432 |
|
|
|
86 |
|
|
|
65 |
|
|
|
2,583 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
6,082 |
|
|
$ |
206 |
|
|
$ |
24 |
|
|
$ |
6,312 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of period assets |
|
$ |
2,045,941 |
|
|
$ |
8,900 |
|
|
$ |
10,272 |
|
|
$ |
2,065,113 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 11: Fair Value Disclosures
Effective January 1, 2008, the Company adopted the provisions of SFAS No. 157, Fair Value
Measurements, for financial assets and financial liabilities. In accordance with Financial
Accounting Standards Board Staff Position (FSP) No. 157-2, Effective Date of FASB Statement No.
157, the Company will delay application of SFAS 157 for non-financial assets and non-financial
liabilities until January 1, 2009. SFAS 157 defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles and expands disclosures about fair
value measurements.
SFAS 157 defines fair value as the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants. A fair value
measurement assumes that the transaction to sell the asset or transfer
- 13 -
the liability occurs in the principal market for the asset or liability or, in the absence of a
principal market, the most advantageous market for the asset or liability. The price in the
principal, or most advantageous, market used to measure the fair value of the asset or liability
shall not be adjusted for transaction costs. An orderly transaction is a transaction that assumes
exposure to the market for a period prior to the measurement date to allow for marketing activities
that are usual and customary for transactions involving such assets and liabilities; it is not a
forced transaction. Market participants are buyers and sellers in the principal market that are
(i) independent, (ii) knowledgeable, (iii) able to transact, and (iv) willing to transact.
SFAS 157 requires the use of valuation techniques that are consistent with the market approach, the
income approach and/or the cost approach. The market approach uses prices and other relevant
information generated by market transactions involving identical or comparable assets and
liabilities. The income approach uses valuation techniques to convert future amounts, such as cash
flows or earnings, to a single present amount on a discounted basis. The cost approach is based on
the amount that currently would be required to replace the service capacity of an asset, or the
replacement cost. Valuation techniques should be consistently applied. Inputs to valuation
techniques refer to the assumptions that market participants would use in pricing the asset or
liability. Inputs may be observable, meaning those that reflect the assumptions market
participants would use in pricing the asset or liability developed based on market data obtained
from independent sources, or unobservable, meaning those that reflect the reporting entitys own
assumptions about the assumptions market participants would use in pricing the asset or liability
developed based on the best information available in the circumstances. In that regard, SFAS 157
establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted
prices in active markets for identical assets or liabilities and the lowest priority to
unobservable inputs. The fair value hierarchy is as follows:
|
|
|
Level 1 Inputs |
|
Unadjusted quoted prices in active markets for identical assets or
liabilities that the reporting entity has the ability to access at the measurement date. |
|
|
|
Level 2 Inputs |
|
Inputs other than quoted prices included in Level 1 that are observable for
the asset or liability, either directly or indirectly. These might include quoted prices
for similar assets or liabilities in active markets, quoted prices for identical or similar
assets or liabilities in markets that are not active, inputs other than quoted prices that
are observable for the asset or liability, such as interest rates, volatilities, prepayment
speeds, and credit risks, or inputs that are derived principally from or corroborated by
market data by correlation or other means. |
|
|
|
Level 3 Inputs |
|
Unobservable inputs for determining the fair values of assets or
liabilities that reflect an entitys own assumptions about the assumptions that market
participants would use in pricing the assets or liabilities. |
A description of the valuation methodologies used for instruments measured at fair value, as well
as the general classification of such instruments pursuant to the valuation hierarchy, is set forth
below. These valuation methodologies were applied to all of the Companys financial assets and
financial liabilities carried at fair value effective January 1, 2008.
In general, fair value is based upon quoted market prices, where available. If such quoted market
prices are not available, fair value is based upon third party models that primarily use, as
inputs, observable market-based parameters. Valuation adjustments may be made to ensure that
financial instruments are recorded at fair value. These adjustments may include amounts to reflect
counterparty credit quality, the Companys creditworthiness, among other things, as well as
unobservable parameters. Any such valuation adjustments are applied consistently over time. The
Companys valuation methodologies may produce a fair value calculation that may not be indicative
of net realizable value or reflective of future fair values. While management believes the
Companys valuation methodologies are appropriate and consistent with other market participants,
the use of different methodologies or assumptions to determine the fair value of certain financial
instruments could result in a different estimate of fair value at the reporting date.
Securities Available-for-Sale. Securities classified as available-for-sale are reported at fair
value utilizing Level 1 and Level 2 inputs. For Level 1 securities, the Company obtains fair value
measurements from active exchanges. For Level 2 securities, the Company obtains fair value
measurements from an independent pricing service. The fair value measurements consider observable
data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve,
live trading levels, trade execution data, market consensus prepayment speeds, credit information,
and the bonds terms and conditions, among other things.
Other Assets and Associated Liabilities. Securities held for trading purposes are recorded at fair
value and included in other assets on the consolidated balance sheets. Securities held for
trading purposes include assets related to employee deferred
- 14 -
compensation plans. The assets associated with these plans are generally invested in equities and
classified as Level 1. Deferred compensation liabilities, also classified as Level 1, are carried
at the fair value of the obligation to the employee, which corresponds to the fair value of the
invested assets.
Derivatives. Derivatives are reported at fair value utilizing Level 2 inputs. The Company obtains
dealer quotations based on observable data to value its derivatives.
Impaired Loans. Certain impaired loans are reported at the fair value of the underlying collateral
if repayment is expected solely from the collateral. Collateral values are estimated using Level 3
inputs based on customized discounting criteria.
The following table summarizes financial assets and financial liabilities measured at fair value on
a recurring basis as of March 31, 2008, segregated by the level of the valuation inputs within the
fair value hierarchy utilized to measure fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using |
|
Total |
(In Thousands) |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Fair Value |
Available-for-sale securities |
|
$ |
6,807 |
|
|
$ |
592,046 |
|
|
$ |
|
|
|
$ |
598,853 |
|
Other assets |
|
|
3,122 |
|
|
|
|
|
|
|
|
|
|
|
3,122 |
|
Derivative assets |
|
|
|
|
|
|
927 |
|
|
|
|
|
|
|
927 |
|
Other liabilities |
|
|
3,122 |
|
|
|
|
|
|
|
|
|
|
|
3,122 |
|
Derivative liabilities |
|
|
|
|
|
|
3,921 |
|
|
|
|
|
|
|
3,921 |
|
Certain financial assets and financial liabilities are measured at fair value on a nonrecurring
basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject
to fair value adjustments in certain circumstances, for example, when there is evidence of
impairment. Loans considered impaired and collateral dependent were $3.00 million at March 31,
2008.
Certain non-financial assets and non-financial liabilities measured at fair value on a recurring
basis include reporting units measured at fair value in the first step of a goodwill impairment
test. Certain non-financial assets measured at fair value on a non-recurring basis include
non-financial assets and non-financial liabilities measured at fair value in the second step of a
goodwill impairment test, as well as intangible assets and other non-financial long-lived assets
measured at fair value for impairment assessment. As stated above, SFAS 157 will be applicable to
these fair value measurements beginning January 1, 2009.
- 15 -
PART I. ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
The following discussion and analysis is provided to address information about First Community
Bancshares, Inc.s (the Company) financial condition and results of operations. This discussion
and analysis should be read in conjunction with the Companys 2007 Annual Report on Form 10-K and
the other financial information included in this report.
The Company is a multi-state financial holding company headquartered in Bluefield, Virginia, with
total assets of $2.07 billion at March 31, 2008. Through its community bank subsidiary, First
Community Bank, N. A. (the Bank), the Company provides financial, trust and investment advisory
services to individuals and commercial customers through over fifty locations in the Virginia, West
Virginia, North and South Carolina, and Tennessee. The Company is also the parent of GreenPoint
Insurance Group, Inc., a North Carolina-based full-service insurance agency offering commercial and
personal lines (GreenPoint). The Bank is the parent of Investment Planning Consultants, Inc., a
SEC-registered investment advisory firm that offers wealth management and investment advice
(IPC). The Companys common stock is traded on the NASDAQ Global Select 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 Companys
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 Companys 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 Companys 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 Companys 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 Companys
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. These factors are described in greater
detail in Item 1A. Risk Factors of the Companys 2007 Annual Report on Form 10-K.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
The Companys consolidated financial statements are prepared in accordance with U.S. generally
accepted accounting principles (GAAP) and conform to general practices within the banking
industry. The Companys financial position and results of operations are affected by managements
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
Companys consolidated financial position and 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
- 16 -
is not available, valuation adjustments are estimated by management primarily through the use of
internal modeling techniques and appraisal estimates.
The Companys accounting policies are fundamental to understanding Managements Discussion and
Analysis of Financial Condition and Results of Operation. The disclosures presented in the Notes
to the Consolidated Financial Statements and in Managements 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 the determination of the allowance for loan losses, accounting for
acquisitions and intangible assets, and accounting for income taxes as the accounting areas that
require the most subjective or complex judgments. The identified critical accounting policies are
described in detail in the Companys 2007 Annual Report on Form 10-K. There have been no material
changes in the Companys critical accounting policies since December 31, 2007.
COMPANY OVERVIEW
The Company is a full service commercial financial holding company which operates within the
four-state region of Virginia, West Virginia, North Carolina, and Tennessee. The Company operates
through the Bank, IPC, and GreenPoint, and offers a wide range of financial services. The Company
reported total assets of $2.07 billion at March 31, 2008.
The Company funds its lending activities primarily through the retail deposit operations of its
branch banking network. Retail and wholesale repurchase agreements and borrowings from the Federal
Home Loan Bank (FHLB) provide additional funding as needed. The Company invests its funds
primarily in loans to retail and commercial customers. In addition to loans, the Company also
invests a portion of its funds in various debt securities, including those of United States
agencies, state and political subdivisions, and certain corporate notes and debt instruments. The
Company also maintains overnight interest-bearing balances with the FHLB and correspondent banks.
The difference between interest earned on assets and interest paid on liabilities is the Companys
primary source of earnings.
The Company also conducts asset management activities through the Banks Trust and Financial
Services Division (Trust Division) and its registered investment advisory firm, IPC. The Banks
Trust Division and IPC manage assets with an aggregate market value of $823 million. These assets
are not assets of the Company, but are managed under various fee-based arrangements as fiduciary or
agent.
MERGERS, ACQUISITIONS AND BRANCHING ACTIVITY
In September 2007, the Company acquired GreenPoint, a High Point, North Carolina, insurance agency.
In connection with the initial payment of approximately $1.66 million, the Company issued 49,088
shares of its common stock. Under the terms of the stock purchase agreement, former shareholders
of GreenPoint are entitled to additional consideration aggregating up to $1.45 million in the form
of cash or the Companys common stock, valued at the time of issuance, if certain future operating
performance targets are met. If those operating targets are met, the value of the consideration
ultimately paid will be added to the cost of the acquisition, which will increase the amount of
goodwill related to the acquisition. The Company is in the process of identifying and valuing
intangibles. The Company assumed $5.57 million debt in connection with the acquisition, of which
approximately $5.00 million was retired at closing. In March 2008, the Company issued 7,728
additional shares in connection with the acquisition, resulting in a goodwill adjustment of
approximately $267 thousand. The acquisition of GreenPoint added $7.19 million of goodwill and
intangibles.
In December 2007, the Company opened two new locations in the Richmond, Virginia, area. In
November and October 2007, the Company opened a new branch location in Princeton and Daniels, West
Virginia, respectively. In March 2007, the Company opened two new branch locations in the
Winston-Salem, North Carolina, area. The Company currently has plans to open one branch location
in Summersville, West Virginia.
RESULTS OF OPERATIONS
Overview
Net income for the three months ended March 31, 2008, was $6.31 million, or $0.57 per basic and
diluted share, compared with $7.12 million, or $0.63 per basic and diluted share, for the three
months ended March 31, 2007, a decrease of $812 thousand, or 11.40%. Return on average assets was
1.21% for the three months ended March 31, 2008, compared with 1.42% for the same period in 2007.
Return on average equity for the three months ended March 31, 2008, was 11.66% compared with 13.33%
for the three months ended March 31, 2007.
- 17 -
Net Interest Income Quarterly Comparison (See Table I)
Net interest income, the largest contributor to earnings, was $16.36 million for the three months
ended March 31, 2008, compared with $17.02 million for the corresponding period in 2007, a decrease
of $655 thousand, or 3.85%. Tax-equivalent net interest income totaled $17.49 million for the
three months ended March 31, 2008, a decrease of $566 thousand from $18.06 million for the first
quarter of 2007. The decrease in net interest income was due primarily to decreases in loan
balances and in loan yields as a result of the precipitous declines in the prime rate and the
target lending rates for banks in December 2007, January 2008, and March 2008.
Compared with the first quarter of 2007, average earning assets increased $22.20 million while
interest-bearing liabilities increased $68.32 million. The yield on average earning assets
decreased by 37 basis points to 6.62% from 6.99% between the three months ended March 31, 2008 and
2007, respectively. Total cost of interest-bearing liabilities decreased 30 basis points between
the first quarters of 2007 and 2008, which resulted in a net interest rate spread that was seven
basis points lower at 3.39% for the first quarter of 2008 compared with 3.46% for the same period
last year. The Companys tax-equivalent net interest margin of 3.78% for the three months ended
March 31, 2008, decreased 20 basis points from 3.98% for the same period of 2007.
The rate earned on loans decreased 45 basis points to 7.09% from 7.54% for the three months ended
March 31, 2008 and 2007, respectively. The effect of the December 2007 and the January and March
2008 cuts in the target federal funds rate by the Federal Open Market Committee and the associated
decline in the Prime rate had a profound impact on loan yields in the first quarter. Declines in
the average portfolio balances also contributed to a net $2.27 million, or 9.66%, decrease in
tax-equivalent loan interest income for the first quarter of 2008 compared with the first quarter
of 2007.
During the three months ended March 31, 2008, the tax-equivalent yield on available-for-sale
securities increased seven basis points to 5.81%, while the average balance increased by $90.66
million, or 17.02%, compared with the same period in 2007. The average tax-equivalent yield
increased due to the addition of higher rate securities and the reduction of lower rate securities.
As net payoffs in the loan portfolio are realized, the Company has been reinvesting those funds in
securities. The average balance of the held-to-maturity securities portfolio continued to decline
as securities matured or were called and were not replaced.
Compared with the first quarter of 2007, average interest-bearing balances with banks decreased to
$22.60 million during the first quarter of 2008, as the yield decreased 158 basis points to 3.20%
during the same period. Interest-bearing balances with banks is comprised largely of excess
liquidity bearing overnight market rates. The rate earned on these overnight balances during the
first quarter of 2008 decreased along with decreases in short-term benchmark interest rates.
Compared with the same period in 2007, the average balances of interest-bearing demand and savings
deposits increased $16.22 million, or 11.11%, and $7.40 million, or 2.32%, respectively, for the
three months ended March 31, 2008. The average rate paid on interest-bearing demand deposits
during the first quarter of 2008 decreased by 12 basis points, while the average rate paid on
savings decreased 29 basis points. Average time deposits decreased $24.47 million, or 3.51%, while
the average rate paid on time deposits decreased eight basis points from 4.37% in the first quarter
of 2007 to 4.29% in the first quarter of 2008. Retail repurchase agreements, which consist of
collateralized retail deposits and commercial treasury accounts, decreased $11.94 million, or
7.39%, to $149.58 million for the three months ended March 31, 2008, while the rate decreased 88
basis points to 2.75% during the same period. The level of average non-interest-bearing demand
deposits decreased $16.60 million, or 7.23%, to $212.97 million during the quarter ended March 31,
2008, compared with the corresponding period of the prior year.
Compared with the same period in 2007, average federal funds purchased decreased $1.12 million to
$1.82 million during the first quarter of 2008, and wholesale repurchase agreements remained
unchanged at $50.00 million, while the rate decreased 62 basis points between the two periods. The
average balance of FHLB borrowings and other long-term debt increased by $82.23 million, or 42.33%,
in first quarter of 2008 to $276.50 million, while the rate paid on those borrowings decreased 61
basis points. The Company prepaid a $25.00 million FHLB advance during the first quarter of 2008.
The advance carried an interest rate of 5.47% and was extinguished using current liquidity.
- 18 -
Table I
AVERAGE BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Three Months Ended |
|
|
|
March 31, 2008 |
|
|
March 31, 2007 |
|
|
|
Average |
|
|
|
|
|
|
Yield/ |
|
|
Average |
|
|
|
|
|
|
Yield/ |
|
|
|
Balance |
|
|
Interest (1) |
|
|
Rate (1) |
|
|
Balance |
|
|
Interest (1) |
|
|
Rate (1) |
|
|
|
(Dollars in Thousands) |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earning Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans (2) |
|
$ |
1,205,481 |
|
|
$ |
21,258 |
|
|
|
7.09 |
% |
|
$ |
1,265,628 |
|
|
$ |
23,530 |
|
|
|
7.54 |
% |
Securities available for sale |
|
|
623,275 |
|
|
|
8,998 |
|
|
|
5.81 |
% |
|
|
532,618 |
|
|
|
7,537 |
|
|
|
5.74 |
% |
Securities held to maturity |
|
|
12,075 |
|
|
|
242 |
|
|
|
8.06 |
% |
|
|
19,765 |
|
|
|
387 |
|
|
|
7.94 |
% |
Interest-bearing deposits |
|
|
22,602 |
|
|
|
180 |
|
|
|
3.20 |
% |
|
|
23,224 |
|
|
|
274 |
|
|
|
4.78 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Earning Assets |
|
|
1,863,433 |
|
|
|
30,678 |
|
|
|
6.62 |
% |
|
|
1,841,235 |
|
|
|
31,728 |
|
|
|
6.99 |
% |
Other assets |
|
|
227,964 |
|
|
|
|
|
|
|
|
|
|
|
195,771 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS |
|
$ |
2,091,397 |
|
|
|
|
|
|
|
|
|
|
$ |
2,037,006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits |
|
$ |
162,175 |
|
|
$ |
76 |
|
|
|
0.19 |
% |
|
$ |
145,960 |
|
|
$ |
112 |
|
|
|
0.31 |
% |
Savings deposits |
|
|
327,061 |
|
|
|
1,487 |
|
|
|
1.83 |
% |
|
|
319,660 |
|
|
|
1,674 |
|
|
|
2.12 |
% |
Time deposits |
|
|
672,645 |
|
|
|
7,178 |
|
|
|
4.29 |
% |
|
|
697,115 |
|
|
|
7,514 |
|
|
|
4.37 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing deposits |
|
|
1,161,881 |
|
|
|
8,741 |
|
|
|
3.03 |
% |
|
|
1,162,735 |
|
|
|
9,300 |
|
|
|
3.24 |
% |
Borrowings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds purchased |
|
|
1,819 |
|
|
|
18 |
|
|
|
3.98 |
% |
|
|
2,937 |
|
|
|
42 |
|
|
|
5.80 |
% |
Retail repurchase agreements |
|
|
149,581 |
|
|
|
1,022 |
|
|
|
2.75 |
% |
|
|
161,518 |
|
|
|
1,447 |
|
|
|
3.63 |
% |
Wholesale repurchase agreements |
|
|
50,000 |
|
|
|
473 |
|
|
|
3.80 |
% |
|
|
50,000 |
|
|
|
545 |
|
|
|
4.42 |
% |
FHLB borrowings and other long-term debt |
|
|
276,503 |
|
|
|
2,933 |
|
|
|
4.27 |
% |
|
|
194,271 |
|
|
|
2,337 |
|
|
|
4.88 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total borrowings |
|
|
477,903 |
|
|
|
4,446 |
|
|
|
3.74 |
% |
|
|
408,726 |
|
|
|
4,371 |
|
|
|
4.34 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
|
|
1,639,784 |
|
|
|
13,187 |
|
|
|
3.23 |
% |
|
|
1,571,461 |
|
|
|
13,671 |
|
|
|
3.53 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interestbearing demand deposits |
|
|
212,972 |
|
|
|
|
|
|
|
|
|
|
|
229,574 |
|
|
|
|
|
|
|
|
|
Other liabilities |
|
|
20,962 |
|
|
|
|
|
|
|
|
|
|
|
19,164 |
|
|
|
|
|
|
|
|
|
Stockholders Equity |
|
|
217,679 |
|
|
|
|
|
|
|
|
|
|
|
216,807 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND
STOCKHOLDERS EQUITY |
|
$ |
2,091,397 |
|
|
|
|
|
|
|
|
|
|
$ |
2,037,006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income, Tax Equivalent |
|
|
|
|
|
$ |
17,491 |
|
|
|
|
|
|
|
|
|
|
$ |
18,057 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Rate Spread (3) |
|
|
|
|
|
|
|
|
|
|
3.39 |
% |
|
|
|
|
|
|
|
|
|
|
3.46 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Margin (4) |
|
|
|
|
|
|
|
|
|
|
3.78 |
% |
|
|
|
|
|
|
|
|
|
|
3.98 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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. |
- 19 -
The following table summarizes the changes in tax-equivalent 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 dollar amounts.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, 2008 |
|
|
|
Compared to 2007 |
|
|
|
$ Increase/(Decrease) due to |
|
(In Thousands) |
|
Volume |
|
|
Rate |
|
|
Total |
|
Interest Earned On: |
|
|
|
|
|
|
|
|
|
|
|
|
Loans (1) |
|
$ |
(1,010 |
) |
|
$ |
(1,262 |
) |
|
$ |
(2,272 |
) |
Securities available-for-sale (1) |
|
|
1,367 |
|
|
|
94 |
|
|
|
1,461 |
|
Securities held-to-maturity (1) |
|
|
(151 |
) |
|
|
6 |
|
|
|
(145 |
) |
Interest-bearing deposits with other banks |
|
|
(7 |
) |
|
|
(87 |
) |
|
|
(94 |
) |
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets |
|
|
199 |
|
|
|
(1,249 |
) |
|
|
(1,050 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Paid On: |
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits |
|
|
14 |
|
|
|
(50 |
) |
|
|
(36 |
) |
Savings deposits |
|
|
37 |
|
|
|
(224 |
) |
|
|
(187 |
) |
Time deposits |
|
|
(221 |
) |
|
|
(115 |
) |
|
|
(336 |
) |
Fed funds purchased |
|
|
(13 |
) |
|
|
(11 |
) |
|
|
(24 |
) |
Retail repurchase agreements |
|
|
(99 |
) |
|
|
(326 |
) |
|
|
(425 |
) |
Wholesale repurchase agreements |
|
|
|
|
|
|
(72 |
) |
|
|
(72 |
) |
FHLB borrowings and other long-term debt |
|
|
847 |
|
|
|
(251 |
) |
|
|
596 |
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
|
|
565 |
|
|
|
(1,049 |
) |
|
|
(484 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in net interest income,
tax-equivalent |
|
$ |
(366 |
) |
|
$ |
(200 |
) |
|
$ |
(566 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Fully taxable equivalent using a rate of 35%. |
Provision and Allowance for Loan Losses
The allowance for loan losses was $12.86 million at March 31, 2008, $12.83 million at December 31,
2007 and $14.51 million at March 31, 2007. The Companys allowance for loan loss activity for the
three-month periods ended March 31, 2008 and 2007, is as follows:
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
|
March 31, |
|
(In Thousands) |
|
2008 |
|
|
2007 |
|
Allowance for loan losses |
|
|
|
|
|
|
|
|
Beginning balance |
|
$ |
12,833 |
|
|
$ |
14,549 |
|
Provision for loan losses |
|
|
323 |
|
|
|
|
|
Charge-offs |
|
|
(966 |
) |
|
|
(893 |
) |
Recoveries |
|
|
672 |
|
|
|
854 |
|
|
|
|
|
|
|
|
Net charge-offs |
|
|
(294 |
) |
|
|
(39 |
) |
|
|
|
|
|
|
|
Ending balance |
|
$ |
12,862 |
|
|
$ |
14,510 |
|
|
|
|
|
|
|
|
The total allowance for loan losses to loans held for investment ratio was 1.09% at March 31, 2008,
compared with 1.05% at December 31, 2007, and 1.15% at March 31, 2007. Management considers the
allowance adequate based upon its analysis of the portfolio as of March 31, 2008. However, no
assurances can be made that future adjustments to the allowance for loan losses will not be
necessary as a result of increases in non-performing loans and other factors.
- 20 -
Throughout the first quarter of 2008, the Company had net charge-offs of $294 thousand compared
with $39 thousand in the first quarter of 2007. Annualized net charge-offs were 0.10% and 0.01%
for first quarter of 2008 and 2007, respectively. The Company made a provision for loan losses of
$323 thousand for the first three months of 2008 compared with none in the first three months 2007.
Noninterest Income
Noninterest income consists of all revenues that are not included in interest and fee income
related to earning assets. Noninterest income for the first quarter of 2008 was $9.14 million
compared with $5.22 million in the same period of 2007, an increase of $3.93 million, or 75.28%.
Wealth management revenues decreased $119 thousand, or 11.69%, to $899 thousand for the three
months ended March 31, 2008, compared with the same period in 2007. Wealth management revenues
were slightly elevated in the first quarter of 2007 as the Trust Division settled several large
estates. Service charges on deposit accounts increased $690 thousand, or 28.64%, to $3.10 million
for the three months ended March 31, 2008, compared with the same period in 2007. Other service
charges, commissions, and fees increased $251 thousand, or 28.85%, to $1.12 million thousand for
the three months ended March 31, 2008, compared with the same period in 2007. Insurance
commissions for the first quarter of 2008 were $1.34 million. Other operating income was $858
million, an increase of $69 thousand, or 8.75%, compared with 2007.
During the first quarter of 2008, securities gains of $1.82 million were realized, compared with a
gain of $129 thousand in the comparable period in 2007. During the first quarter, certain
investment securities in the Companys portfolio significantly increased in value as the interest
rate environment declined, and the Company monetized that value.
Noninterest Expense
Noninterest expense totaled $16.28 million for the quarter ended March 31, 2008, an increase of
$4.13 million, or 33.93%, from the same period in 2007. Salaries and benefits for the first
quarter of 2008 increased $1.38 million, or 21.51%, compared to the same period in 2007. Salaries
and benefits at GreenPoint accounted for $645 thousand of the increase in the first quarter of 2008
over the prior first quarter. Increases in wages, other than at GreenPoint, accounted for $159
thousand of the increase over 2007. Increases in retirement plan accruals, incentive compensation
accruals, and commissions expense made up the remainder of the increase. Included in noninterest
expense for the first quarter of 2008 is a prepayment penalty of $1.65 million incurred in
connection with the early payment of a $25.00 million FHLB advance. Other non-interest expense
totaled $4.62 million for the first quarter of 2008, an increase of $857 thousand, or 22.77%, from
$3.76 million for the first quarter of 2007. The increase between comparable periods is due mostly
to increases in consulting expense and new account promotions. Occupancy and furniture and
fixtures expenses remained relatively stable between the comparable periods.
Income Tax Expense
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 income on state and municipal
securities which are exempt from federal income tax, certain dividend payments which are deductible
by the Company, and tax credits generated by investments in low income housing and historic
rehabilitations.
For the first quarter of 2008, income taxes were $2.58 million compared with $2.95 million for the
first quarter of 2007. For the quarters ended March 31, 2008 and 2007, the effective tax rates
were 29.04% and 29.27%, respectively.
FINANCIAL CONDITION
Total assets at March 31, 2008, decreased $84.73 million, or 3.94%, to $2.07 billion from December
31, 2007. The decline reflects continued loan payoffs and planned attrition of high-rate, single
service deposit households.
Securities
Available-for-sale securities were $598.85 million at March 31, 2008, compared with $664.12 million
at December 31, 2007, a decrease of $65.27 million, or 9.83%. Held-to-maturity securities remained
even at $12.08 million at March 31, 2008,
compared with December 31, 2007. The market value of investment securities held-to-maturity was
102.05% and 101.85% of book value at March 31, 2008, and December 31, 2007, respectively.
- 21 -
The Companys available-for-sale securities portfolio is reported at fair value. The fair value of
most securities is determined based on third party model prices. Available-for-sale and
held-to-maturity securities are reviewed quarterly for 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 securitys
performance, the creditworthiness of the issuer and the Companys intent and ability to hold the
security to recovery or maturity. 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 declines in value are attributable to changes in market interest rates, changes in market
credit risk premiums, and current market illiquidity. The Companys portfolio of trust-preferred securities are
generally collateralized
with bank-issued debt, rated A or higher, have not had a credit rating downgrade, and have not experienced any
defaults. The Company does not believe the declines in
value are attributable to the credit quality of the issuers.
Loan Portfolio
Loans Held for Sale: The $2.12 million balance of loans held for sale at March 31, 2008, represents
mortgage loans that are sold to investors on a best efforts 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, 2008, was $13.16 million on 89 loans.
Loans Held for Investment: Total loans held for investment were $1.18 billion at March 31, 2008,
representing declines of $46.00 million and $79.34 million from December 31 and March 31, 2007,
respectively. The average loan to deposit ratio decreased to 87.68% for the first quarter of 2008,
compared with 88.49% for the fourth quarter of 2007 and 90.90% for the first quarter of 2007.
Average loans of $1.21 billion for the first quarter of 2008 decreased $60.15 million when compared
with first quarter of 2007 average of $1.27 billion.
Over the course of the last three years, the Company has taken aggressive measures to tighten its
commercial underwriting standards. The more stringent underwriting has led to improved credit
quality, but, coupled with the loss of commercial loan officers, has resulted in the decreases in
loan portfolio. The Company also continues to realize net payoffs in the area of consumer finance,
as it competes with credit card lenders.
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, 2008, December 31, 2007, and March 31, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2008 |
|
|
December 31, 2007 |
|
|
March 31, 2007 |
|
(Dollars in Thousands) |
|
Amount |
|
|
Percent |
|
|
Amount |
|
|
Percent |
|
|
Amount |
|
|
Percent |
|
Loans Held for Investment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and agricultural |
|
$ |
88,532 |
|
|
|
7.51 |
% |
|
$ |
96,261 |
|
|
|
7.85 |
% |
|
$ |
99,960 |
|
|
|
7.94 |
% |
Commercial real estate |
|
|
376,087 |
|
|
|
31.89 |
% |
|
|
386,112 |
|
|
|
31.51 |
% |
|
|
414,696 |
|
|
|
32.94 |
% |
Residential real estate |
|
|
488,860 |
|
|
|
41.45 |
% |
|
|
498,345 |
|
|
|
40.66 |
% |
|
|
499,621 |
|
|
|
39.69 |
% |
Construction |
|
|
151,242 |
|
|
|
12.82 |
% |
|
|
163,310 |
|
|
|
13.33 |
% |
|
|
154,440 |
|
|
|
12.27 |
% |
Consumer |
|
|
69,377 |
|
|
|
5.88 |
% |
|
|
75,447 |
|
|
|
6.16 |
% |
|
|
86,506 |
|
|
|
6.87 |
% |
Other |
|
|
5,406 |
|
|
|
0.45 |
% |
|
|
6,027 |
|
|
|
0.49 |
% |
|
|
3,624 |
|
|
|
0.29 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,179,504 |
|
|
|
100.00 |
% |
|
$ |
1,225,502 |
|
|
|
100.00 |
% |
|
$ |
1,258,847 |
|
|
|
100.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans Held for Sale |
|
$ |
2,116 |
|
|
|
|
|
|
$ |
811 |
|
|
|
|
|
|
$ |
1,068 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Performing Assets
Non-performing assets include loans on non-accrual status, loans contractually past due 90 days or
more and still accruing interest, and other real estate owned (OREO). Non-performing assets were
$3.54 million at March 31, 2008, $3.47 million at December 31, 2007, and $4.67 million at March 31,
2007. The percentage of non-performing assets to total loans and OREO was 0.30% at March 31, 2008,
0.28% at December 31, 2007, and 0.37% at March 31, 2007.
- 22 -
The following schedule details non-performing assets by category at the close of each of the
quarters ended March 31, 2008 and 2007, and December 31, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
March 31, |
|
(In Thousands) |
|
2008 |
|
|
2007 |
|
|
2007 |
|
Non-accrual |
|
$ |
3,137 |
|
|
$ |
2,923 |
|
|
$ |
4,074 |
|
Ninety days past due and accruing |
|
|
|
|
|
|
|
|
|
|
|
|
Other real estate owned |
|
|
400 |
|
|
|
545 |
|
|
|
600 |
|
|
|
|
|
|
|
|
|
|
|
Total non-performing assets |
|
$ |
3,537 |
|
|
$ |
3,468 |
|
|
$ |
4,674 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructured loans
performing in accordance
with modified terms |
|
$ |
239 |
|
|
$ |
245 |
|
|
$ |
265 |
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2008, non-accrual loans increased $214 thousand from December 31, 2007, and decreased
$937 thousand from March 31, 2007. Ongoing activity within the classification and categories of
non-performing loans includes collections on delinquencies, foreclosures and movements into or out
of the non-performing classification as a result of changing customer business conditions. OREO
was $400 thousand at March 31, 2008, and is carried at the lesser of estimated net realizable value
or cost.
Deposits and Other Borrowings
Total deposits decreased by $34.49 million, or 2.48%, during the first three months of 2008. Non
interest-bearing demand deposits were stable at $224.10 million at March 31, 2008, compared with
$224.09 million at December 31, 2007. Interest-bearing demand deposits increased $19.29 million to
$172.86 million at March 31, 2008. Savings decreased $21.97 million, or 6.70%, and time deposits
decreased $31.83 million, or 4.63%, during the first quarter of 2008. Throughout the last six
months, the Company has aggressively lowered money market and certificate of deposit rates, which
is the main cause of the decreases in the balance.
Securities sold under repurchase agreements increased $573 thousand, or 0.28%, in the first three
months of 2008 to $208.00 million. There were no federal funds purchased outstanding at March 31,
2008.
Stockholders Equity
Total stockholders equity decreased $8.12 million, or 3.74%, from $217.10 million at December 31,
2007, to $208.98 million at March 31, 2008, as the Company continued to balance capital adequacy
and returns to stockholders. The decrease in equity was due mainly to net earnings of $6.31
million, less dividends paid to stockholders of $3.08 million, common stock repurchases of $1.84
million, and other comprehensive loss of $8.76 million.
The Company repurchased 67,300 shares of its common stock in the first quarter of 2008. The share
repurchases were conducted as part of a share repurchase plan previously adopted by the Company.
The Company has availability under the plan to purchase approximately 64,000 additional shares of
its common stock.
Risk-Based Capital
Risk-based capital guidelines promulgated by federal banking agencies weight balance sheet assets
and off-balance sheet commitments based on inherent risks associated with the respective asset
types. At March 31, 2008, the Companys total capital to
risk-weighted assets ratio was 12.70%
versus 12.34% at December 31, 2007. The Companys Tier 1 capital to risk-weighted assets ratio was
11.78% at March 31, 2008, compared with 11.45% at December 31, 2007. The Companys Tier 1 leverage
ratio at March 31, 2008, was 8.32% compared with 8.09% at December 31, 2007. All of the Companys
regulatory capital ratios exceed the current well-capitalized levels prescribed for banks.
- 23 -
PART I. ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
Liquidity and Capital Resources
At March 31, 2008, the Company maintained a significant level of liquidity in the form of cash and
cash equivalent balances of $77.12 million, unpledged securities available-for-sale of $263.18
million, and FHLB credit availability of approximately $162.15 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 liquidity and the associated risk.
The policy includes a Liquidity Contingency Plan (the 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 Companys
quarterly earnings to a decline in the market price of the Companys 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 the Company and its Board of Directors.
Interest Rate Risk and Asset/Liability Management
The Companys profitability is dependent to a large extent upon its net interest income, 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 Company, like other financial institutions, is subject to interest rate risk to
the degree that interest-earning assets reprice differently than interest-bearing liabilities. The
Company 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
while maintaining an acceptable level of net interest income given the current interest rate
environment.
The Companys primary component of operational revenue, net interest income, 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: repricing risk, basis risk, yield curve risk and option risk. Repricing
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 interest rate risk exposure to insulate net interest income and net earnings from
fluctuations in the general level of interest rates. To measure its exposure to interest rate
risk, quarterly simulations of net interest income are performed using financial models that
project net interest income 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 interest rate risk 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 the Companys
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 net
interest income. 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 the Companys
strategies. However, the earnings simulation model is currently the best tool available to the
Company for managing interest rate risk.
Specific strategies for management of interest rate risk have included shortening the amortized
maturity of new fixed-rate loans, increasing the volume of adjustable-rate loans to reduce the
average maturity of the Companys interest-earning assets, and monitoring the term structure of
liabilities to maintain a balanced mix of maturity and repricing structures to mitigate potential
exposure. Based upon the latest simulation, the Company believes that it has shifted more towards
a more neutral position. Although the Company is in a neutral position, significantly more assets
reprice in the short term than do liabilities, creating potential for net interest income to be
negatively impacted in a declining rate environment.
- 24 -
The Company has established policy limits for tolerance of interest rate risk that allow for no
more than a 10% reduction in projected net interest income for the next twelve months based on a
comparison of net interest income simulations in various interest rate scenarios. In addition, the
policy addresses exposure limits to changes in the economic value of equity according to predefined
policy guidelines. The most recent simulation indicates that current exposure to interest rate
risk is within the Companys defined policy limits.
The following table summarizes the projected impact on the next twelve months net interest income
and the economic value of equity as of March 31, 2008, and December 31, 2007, of immediate and
sustained rate shocks in the interest rate environments of plus and minus 100 and 200 basis points
from the base simulation, assuming no remedial measures are effected.
The economic value of equity is a measure which reflects the impact of changing rates of the
underlying values of the Companys assets and liabilities in various rate scenarios. The scenarios
illustrate the potential estimated impact of instantaneous rate shocks on the underlying value of
equity. The economic value of the equity is based on the present value of all the future cash
flows under the different rate scenarios.
Rate Sensitivity Analysis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2008 |
(Dollars in Thousands) |
|
Change in |
|
|
|
|
|
Change in |
|
|
Increase (Decrease) in |
|
Net Interest |
|
% |
|
Econcomic Value |
|
% |
Interest Rates (Basis Points) |
|
Income |
|
Change |
|
of Equity |
|
Change |
200 |
|
$ |
2,137 |
|
|
|
3.1 |
|
|
$ |
(8,446 |
) |
|
|
(3.1 |
) |
100 |
|
|
1,384 |
|
|
|
2.0 |
|
|
|
(8,074 |
) |
|
|
(3.0 |
) |
(100) |
|
|
(2,166 |
) |
|
|
(3.1 |
) |
|
|
(31,171 |
) |
|
|
(11.4 |
) |
(200) |
|
|
(4,897 |
) |
|
|
(7.0 |
) |
|
|
(64,965 |
) |
|
|
(23.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007 |
|
|
Change in |
|
|
|
|
|
Change in |
|
|
Increase (Decrease) in |
|
Net Interest |
|
% |
|
Econcomic Value |
|
% |
Interest Rates (Basis Points) |
|
Income |
|
Change |
|
of Equity |
|
Change |
200 |
|
$ |
(3,124 |
) |
|
|
(4.2 |
) |
|
$ |
(30,894 |
) |
|
|
(10.7 |
) |
100 |
|
|
(327 |
) |
|
|
(0.4 |
) |
|
|
(5,315 |
) |
|
|
(1.8 |
) |
(100) |
|
|
(449 |
) |
|
|
(0.6 |
) |
|
|
(11,128 |
) |
|
|
(3.9 |
) |
(200) |
|
|
(1,657 |
) |
|
|
(2.2 |
) |
|
|
(32,008 |
) |
|
|
(11.1 |
) |
- 25 -
PART I. ITEM 4. Controls and Procedures
Disclosure 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 Companys management, including the Companys
Chief Executive Officer (CEO) along with the Companys Chief Financial Officer (CFO), of the
effectiveness of the Companys disclosure controls and procedures pursuant to the Securities
Exchange Act of 1934 (Exchange Act) Rule 13a-15(b). Based on that evaluation, the Companys CEO
along with the Companys CFO concluded that the Companys 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 Companys periodic SEC filings.
The Companys management, including the CEO and CFO, does not expect that the Companys 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.
Changes in Internal Control Over Financial Reporting
There have not been any changes in the Companys internal controls over financial reporting during
the quarter ended March 31, 2008, that have materially affected, or are reasonably likely to
materially affect, the Companys internal controls over financial reporting.
- 26 -
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
The Company is currently a defendant in various legal actions and asserted claims in the normal
course of business. Although 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 1A. Risk Factors
There were no material changes to the risk factors as presented in the Companys Annual Report on
Form 10-K for the year ended December 31, 2007.
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 open market purchases by the Company of its equity securities during
the three months ended March 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum |
|
|
|
|
|
|
|
|
|
|
|
Total Number of |
|
|
Number of |
|
|
|
Total # of |
|
|
Average |
|
|
Shares Purchased |
|
|
Shares That May |
|
|
|
Shares |
|
|
Price Paid |
|
|
as Part of Publicly |
|
|
Yet be Purchased |
|
|
|
Purchased |
|
|
per Share |
|
|
Announced Plan |
|
|
Under the Plan |
|
January 1-31, 2008 |
|
|
30,000 |
|
|
$ |
31.17 |
|
|
|
30,000 |
|
|
|
90,628 |
|
February 1-29, 2008 |
|
|
22,000 |
|
|
|
34.10 |
|
|
|
22,000 |
|
|
|
68,628 |
|
March 1-31, 2008 |
|
|
15,300 |
|
|
|
31.62 |
|
|
|
15,300 |
|
|
|
63,556 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
67,300 |
|
|
$ |
32.23 |
|
|
|
67,300 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys stock repurchase plan, as amended, allows the purchase and retention of up to 550,000
shares. The plan has no expiration date and remains open. The Company held 486,444 shares in
treasury at March 31, 2008.
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 29, 2008. |
|
|
(b) |
|
The following directors were elected to serve a three-year term through the date of the
2011 Annual Meeting of Stockholders: |
|
|
|
|
Franklin P. Hall, Robert E. Perkinson, William P. Stafford |
|
|
|
|
The following directors terms continued after the Annual Meeting: |
|
|
|
|
Allen T. Hamner, I. Norris Kantor, John M. Mendez, A. A. Modena, and William P. Stafford |
- 27 -
|
(c) |
|
Three proposals were voted upon at the annual meeting, which included: 1) the election
of the aforementioned directors as the Class of 2011; 2) amend the Articles of
Incorporation to allow for the election of directors on an annual basis to coincide with
the expiration of current terms, and 3) ratification of the selection of Dixon Hughes PLLC,
Asheville, North Carolina, as independent registered public accountants for the year ending
December 31, 2008. The results of the proposals and voting are as follows: |
Proposal 1. Election of Directors:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Votes |
|
For All |
|
|
Votes For |
|
Withheld |
|
Except |
Franklin P. Hall |
|
|
8,273,725 |
|
|
|
175,822 |
|
|
|
5,933 |
|
Robert E. Perkinson |
|
|
8,244,291 |
|
|
|
175,822 |
|
|
|
35,367 |
|
William P. Stafford |
|
|
8,224,552 |
|
|
|
175,822 |
|
|
|
55,106 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proposal 2. Amendment of the Articles of Incorporation to allow for the election of directors on
and annual basis to coincide with the expiration of current terms: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Votes For |
|
|
6,309,856 |
|
|
|
|
|
|
|
|
|
Votes Against |
|
|
2,115,959 |
|
|
|
|
|
|
|
|
|
Votes Abstained |
|
|
29,664 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proposal 3. Ratification of the selection of Dixon Hughes PLLC as independent registered public
accountants: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Votes For |
|
|
8,407,340 |
|
|
|
|
|
|
|
|
|
Votes Against |
|
|
12,278 |
|
|
|
|
|
|
|
|
|
Votes Abstained |
|
|
35,861 |
|
|
|
|
|
|
|
|
|
ITEM 5. Other Information
Not Applicable
ITEM 6. Exhibits
(a) Exhibits
|
|
|
|
|
Exhibit No. |
|
|
|
Exhibit |
3.1
|
|
|
|
Articles of Incorporation of First Community Bancshares, Inc., as amended. (1) |
|
|
|
|
|
3.2
|
|
|
|
Bylaws of First Community Bancshares, Inc., as amended. (15) |
|
|
|
|
|
4.1
|
|
|
|
Specimen stock certificate of First Community Bancshares, Inc. (3) |
|
|
|
|
|
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 (2) and Plan. (4) |
|
|
|
|
|
10.1.1
|
|
|
|
Amendment to First Community Bancshares, Inc. 1999 Stock Option Plan. (10) |
|
|
|
|
|
10.2
|
|
|
|
First Community Bancshares, Inc. 2001 Non-Qualified Directors Stock Option Plan. (5) |
|
|
|
|
|
10.3
|
|
|
|
Employment Agreement dated January 1, 2000 and amended October 17, 2000, between First
Community Bancshares, Inc. and John M. Mendez. (2) (6) |
|
|
|
|
|
10.4
|
|
|
|
First Community Bancshares, Inc. 2000 Executive Retention Plan, as amended. (2) |
|
|
|
|
|
10.5
|
|
|
|
First Community Bancshares, Inc. Split Dollar Plan and Agreement. (2) |
|
|
|
|
|
10.6
|
|
|
|
First Community Bancshares, Inc. 2001 Directors Supplemental Retirement Plan. (2) |
|
|
|
|
|
10.6.1
|
|
|
|
First Community Bancshares, Inc. 2001 Directors Supplemental Retirement Plan. Second
Amendment (B.W. Harvey, Sr. October 19, 2004). (12) |
|
|
|
|
|
10.7
|
|
|
|
First Community Bancshares, Inc. Wrap Plan. (7) |
- 28 -
|
|
|
|
|
Exhibit No. |
|
|
|
Exhibit |
10.8
|
|
|
|
Reserved. |
|
|
|
|
|
10.9
|
|
|
|
Form of Indemnification Agreement between First Community Bancshares, Inc. and its Directors
and Certain Executive Officers. (8) |
|
|
|
|
|
10.10
|
|
|
|
Form of Indemnification Agreement between First Community Bank, N. A., its Directors and
Certain Executive Officers. (8) |
|
|
|
|
|
10.11
|
|
|
|
Reserved. |
|
|
|
|
|
10.12
|
|
|
|
First Community Bancshares, Inc. 2004 Omnibus Stock Option Plan (9) and Award Agreement. (11) |
|
|
|
|
|
10.13
|
|
|
|
Reserved. |
|
|
|
|
|
10.14
|
|
|
|
First Community Bancshares, Inc. Directors Deferred Compensation Plan. (7) |
|
|
|
|
|
10.15
|
|
|
|
First Community Bancshares, Inc. Deferred Compensation and Supplemental Bonus Plan For Key
Employees. (13) |
|
|
|
|
|
10.16
|
|
|
|
Employment Agreement dated November 30, 2006, between First Community Bank, N. A. and Ronald
L. Campbell. (16) |
|
|
|
|
|
10.17
|
|
|
|
Employment Agreement dated September 28, 2007, between GreenPoint Insurance Group, Inc. and
Shawn C. Cummings. (17) |
|
|
|
|
|
31.1
|
|
|
|
Rule 13a-14(a)/a5d-14(a) Certification of Chief Executive Officer |
|
|
|
|
|
31.2
|
|
|
|
Rule 13a-14(a)/a5d-14(a) Certification of Chief Financial Officer |
|
|
|
|
|
32
|
|
|
|
Certification of Chief Executive Officer and Chief Financial Officer Section 1350. |
|
|
|
(1) |
|
Incorporated by reference from Exhibit 3.1 of the Quarterly Report on Form 10-Q for the
period ended March 31, 2007, filed on May 10, 2007. |
|
(2) |
|
Incorporated by reference from the Quarterly Report on Form 10-Q for the period ended June
30, 2002, filed on August 14, 2002. |
|
(3) |
|
Incorporated by reference from Exhibit 4.1 of 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. |
|
(4) |
|
Incorporated by reference from Exhibit 10.1 of the Annual Report on Form 10-K for the period
ended December 31, 1999, filed on March 30, 2000, as amended April 13, 2000. |
|
(5) |
|
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. |
|
(6) |
|
First Community Bancshares, Inc. has entered into substantially identical agreements with
Robert L. Buzzo and E. Stephen Lilly, with the only differences being with respect to title,
salary and the use of a vehicle. |
|
(7) |
|
Incorporated by reference from Item 1.01 of the Current Report on Form 8-K dated August 22,
2006, and filed August 23, 2006. |
|
(8) |
|
Form of indemnification agreement entered into by the Company and by First Community Bank, 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, E. Stephen Lilly, David D.
Brown, and Gary R. Mills. Incorporated by reference from Exhibits 10.10 and 10.11 of Annual
Report on Form 10-K for the period ended December 31, 2003, filed on March 15, 2004, and
amended on May 19, 2004. |
|
(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. |
- 29 -
|
|
|
(11) |
|
Incorporated by reference from Exhibit 10.13 of the Quarterly Report on Form 10-Q for the
period ended June 30, 2004, filed on August 6, 2004. |
|
(12) |
|
Incorporated by reference from Exhibit 10.6.1 of the Annual Report on Form 10-K for the
period ended December 31, 2004, and filed on March 16, 2005. Amendments in substantially
similar form were executed for Directors Clark, Kantor, Hamner, Modena, Perkinson, Stafford,
and Stafford, II. |
|
(13) |
|
Incorporated by reference from Item 1.01 of the Current Report on Form 8-K dated October 24,
2006, and filed October 25, 2006. |
|
(14) |
|
Reserved. |
|
(15) |
|
Incorporated by reference from Exhibit 3.2 of the Quarterly Report on Form 10-Q for the
period ended September 30, 2006, filed on November 8, 2006. |
|
(16) |
|
Incorporated by reference from Exhibit 2.1 of the Form S-3 registration statement filed May
2, 2007. |
|
(17) |
|
Incorporated by reference from Exhibit 10.17 of the Annual Report of Form 10-K for the period
ended December 31, 2007, filed March 13, 2008. |
- 30 -
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
First Community Bancshares, Inc.
DATE:
May 12, 2008
|
|
|
/s/ John M. Mendez
John M. Mendez
President & Chief Executive Officer
(Principal Executive Officer)
|
|
|
DATE:
May 12, 2008
|
|
|
/s/ David D. Brown
David D. Brown
Chief Financial Officer
(Principal Accounting Officer)
|
|
|
- 31 -
Index to Exhibits
|
|
|
Exhibit No. |
|
Exhibit |
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 pursuant to 18 USC Section 1350 |
- 32 -