<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
[X] Annual Report Pursuant to Section 13
or 15(d) of the Securities Exchange Act of
1934 (Fee Required)
For the Fiscal Year Ended December 31, 1998
or
[ ] Transition Report Pursuant to Section 13
or 15(d) of the Securities Exchange Act of
1934 (Fee Required)
For the transition period from ___________________________
Commission File Number 0-19297
First Community Bancshares, Inc.
(Exact name of Registrant as specified in its charter)
Nevada 55-0694814
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
1001 Mercer Street, Princeton, West Virginia 24740-5909
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (304) 487-9000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
NONE NONE
Securities registered pursuant to Section 12(g) of the Act:
Common stock, par value $1 per share
(Title of Class)
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 such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of Registrant's knowledge, in definitive proxy or information statement
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
----
State the aggregate market value of the voting stock held by non-affiliates of
the Registrant as of March 19, 1999.
$153,896,699 based on the sales price at that date
Common Stock, $1 par value
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of March 19, 1999.
Common Stock, $1 par value- 7,019,123
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the First Community Bancshares, Inc. 1998 Annual Report to Security
Holders are incorporated by reference in Part I and II hereof.
Portions of the First Community Bancshares, Inc. 1998 Annual Proxy Statement are
incorporated by reference in Part III hereof.
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Form 10-K Information
Table of Contents
1998 Form 10-K Annual Report
<TABLE>
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Page
<S> <C> <C>
Part I
Item 1. Business...................................................................................................... 3
Item 2. Properties.................................................................................................... 15
Item 3. Legal Proceedings............................................................................................. 16
Item 4. Submission of Matters to a Vote of Security Holders........................................................... 17
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters......................................... 18
Item 6. Selected Financial Data....................................................................................... 18
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations......................... 18
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.................................................... 19
Item 8. Financial Statements and Supplementary Data................................................................... 20
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.......................... 21
Part III
Item 10. Directors and Executive Officers of the Registrant............................................................ 21
Item 11. Executive Compensation........................................................................................ 21
Item 12. Security Ownership of Certain Beneficial Owners and Management................................................ 21
Item 13. Certain Relationships and Related Transactions................................................................ 21
Part IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................................... 21
Signatures.................................................................................................... 23
</TABLE>
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PART I
ITEM 1. BUSINESS
First Community Bancshares, Inc., formerly FCFT, Inc., (Registrant) was
incorporated in November 1989, under the laws of the State of Delaware to serve
as the holding company for and to facilitate the merger of First Community
Bancshares, Inc. (FCBI) and Flat Top Bankshares, Inc. (Flat Top). FCFT, Inc. was
a Delaware bank holding company with one wholly-owned subsidiary, First
Community Bank, Inc. (FCB), a state-chartered West Virginia bank headquartered
in Princeton, West Virginia. Flat Top was a West Virginia bank holding company
headquartered in Bluefield, West Virginia, with two wholly-owned subsidiaries,
The Flat Top National Bank of Bluefield (FTNB), a National Association, and
Peoples Bank of Bluewell (PBB), a state-chartered West Virginia bank. After the
mergers, FCFT, Inc. operated as the surviving holding company for the three
constituent banks described above as well as First Federal Savings Bank (FFSB)
which was acquired in November 1990. On December 30, 1994, FFSB was merged into
FCB. Subsequently on January 4, 1995, FTNB and PBB were also merged into FCB. On
September 30, 1997 the Company, formerly known as FCFT, Inc., merged with and
into First Community Bancshares, Inc. (FCBI), a Nevada corporation, formed to
facilitate the change of the Company's state of domicile from Delaware to Nevada
and to effect the change in name.
On December 29, 1995, FCBI reorganized its existing bank subsidiary, First
Community Bank, Inc., Princeton, West Virginia, by splitting it into two
separate banks. This was accomplished by chartering a second, affiliated,
Federal Deposit Insurance Corporation (FDIC) insured state commercial bank
formed through the acquisition of assets and assumption of the liabilities of
six of First Community Bank, Inc.'s operating divisions and branches located
within Mercer County, West Virginia. This new bank, First Community Bank of
Mercer County, Inc., headquartered in Princeton, West Virginia, consists of six
divisions with offices in Princeton, Bluefield, and Bluewell, as well as the
Credit Card Division, Trust Division, and Corporate/Administrative Division. The
main office of the reorganized First Community Bank, Inc., was relocated to
Buckhannon, West Virginia.
At the close of business on July 3, 1996, FCBI acquired Citizens Bank of
Tazewell (Citizens), headquartered in Tazewell, Virginia. Pursuant to the
Agreement and Plan of merger, FCBI exchanged 3.51 shares of its common stock for
each share of Citizen's common stock. Accordingly, 263,159 shares of FCFT, Inc.
common stock were issued to holders of Citizens common stock. The merger was
accounted for under the pooling of interests method. Accordingly, all financial
reporting periods presented have been restated to properly reflect this business
combination. Subsequent to the merger, Citizens operates as a wholly owned
subsidiary of FCBI. On June 2, 1997, the corporate name of Citizens was changed
to First Community Bank of Southwest Virginia, Inc. (FCB SWV, Inc.).
At the close of business on September 26, 1996, First Community Bank, Inc.
acquired the Grafton and Rowlesburg, West Virginia branches of Huntington
National Bank West Virginia. The acquisition of these branches added
approximately $21 million in deposits. The intangible value of this transaction
totaled approximately $1 million that is being amortized over a 15-year period.
This acquisition was accounted for under the purchase method of accounting.
Accordingly, the consolidated results in periods after September 26, 1996
include the operations of the Grafton and Rowlesburg branches only from the date
of acquisition.
On April 9, 1997, FCBI acquired 100% of the common stock of Blue Ridge Bank
(Blue Ridge), headquartered in Sparta, North Carolina. Blue Ridge, a $105
million state-chartered bank, with offices located in Sparta, Elkin, Hays and
Taylorsville, North Carolina. Pursuant to the Agreement and Plan of merger, FCBI
exchanged cash of $19.50 for each of Blue Ridge's 1,212,148 common shares. In
conjunction with the acquisition, Blue Ridge cancelled outstanding stock options
through the payment of $727,948 representing the difference between $19.50 and
the respective option prices. Total consideration including the payment for
cancellation of the options was $24.7 million and resulted in an intangible
asset of approximately $13.2 million, which is being amortized over a 15-year
period. The acquisition was partially funded with loan proceeds of $11.5 million
that the Company borrowed from an outside source. The loan agreement has certain
covenants that may restrict the payment of dividends to stockholders in the
event of default along with other customary borrowing provisions. The
acquisition was accounted for under the purchase method of accounting.
Accordingly, results of operations of Blue Ridge are included in consolidated
results of FCBI from the date of acquisition. Subsequent to the merger, Blue
Ridge operates as a wholly owned subsidiary of FCBI.
First Community Bank of Southwest Virginia, the Virginia subsidiary of First
Community Bancshares, Inc., opened a de novo branch in Wytheville, Virginia,
located at 910 E. Main Street on August 1, 1997.
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In September 1997, FCB-SWV, Inc. acquired three branches from First Virginia
Banks and Premier Bankshares. The branches located in Fort Chiswell, Pound and
Clintwood, Virginia had total deposits of $43,864,000 at the date of the branch
acquisition. The intangible value of this transaction was approximately $4.6
million that is being amortized over a 15-year period.
Currently, the Registrant is a multi-bank holding company and the banking
operations are expected to remain the principal business and major source of
revenue. The Registrant provides a mechanism for ownership of the subsidiaries
banking operations, provides capital funds as required and serves as a conduit
for distribution of dividends to stockholders. The Registrant also considers and
evaluates options for growth and expansion of the existing subsidiaries' banking
operations.
The Registrant currently derives substantially all of its revenues from
dividends paid by the subsidiary banks. Dividend payments by the banks are
determined in relation to earnings, asset growth and capital position and are
subject to certain restrictions by regulatory agencies as described more fully
under Supervision and Regulation of this item.
First Community Bank of Mercer County, Inc.
- -------------------------------------------
First Community Bank of Mercer County, Inc. (FCB, Mercer) is a state-chartered
bank organized under the banking laws of the State of West Virginia. FCB, Mercer
engages in general commercial and retail banking business in Mercer County, West
Virginia. It provides safe deposit services and makes all types of loans,
including commercial, mortgage and personal loans. FCB, Mercer also provides
trust services and its deposits are insured by the FDIC. FCB, Mercer is a member
of the Federal Reserve System and is a member of the Federal Home Loan Bank
(FHLB) of Pittsburgh.
First Community Bank, Inc.
- --------------------------
First Community Bank, Inc. (FCB, Inc.) is a state-chartered bank organized under
the banking laws of the State of West Virginia. FCB, Inc. engages in general
commercial and retail banking business in Upshur, Wyoming, Taylor, Nicholas,
Preston, Logan, and Webster Counties, West Virginia. It provides safe deposit
services and makes all types of loans, including commercial, mortgage and
personal loans. FCB, Inc. deposits are insured by the FDIC. FCB, Inc. is a
member of the Federal Reserve System and is a member of the FHLB of Pittsburgh.
First Community Bank of Southwest Virginia, Inc.
- ------------------------------------------------
First Community Bank of Southwest Virginia, Inc. (FCB-SWV), formerly Citizens
Bank of Tazewell, Inc. is a state-chartered bank organized under the banking
laws of the State of Virginia. FCB-SWV, Inc. engages in general commercial and
retail banking business in Dickenson, Tazewell, Wise and Wythe counties in
Southwest Virginia. It provides safe deposit services and makes all types of
loans including commercial, mortgage and personal loans. FCB-SWV, Inc. deposits
are insured by the FDIC. FCB-SWV, Inc. is a member of the Federal Reserve
System.
Blue Ridge Bank
- ---------------
Blue Ridge Bank (Blue Ridge) is a state-chartered bank organized under the laws
of the state of North Carolina. Blue Ridge engages in general commercial and
retail banking business in Alexander, Alleghany, Surry and Wilkes counties in
North Central North Carolina. It provides safe deposit services and makes all
types of loans including commercial, mortgage and personal loans. Blue Ridge
deposits are insured by the FDIC. Blue Ridge is a member of the Federal Reserve
System.
Pending Mergers
- ---------------
Early in 1999, the Company and its four subsidiary banks entered into an
Agreement to Merge which provides for the merger of the four banks into a single
national bank under the charter of First Community Bank, Inc. which will be
converted to a national association as part of the reorganization (pending the
regulatory approval of the Comptroller of the Currency). From the effective date
of the merger (expected completion on April 30, 1999), all banking operations
will be conducted under the charter and title of First Community Bank, N.A., a
national association supervised by the Comptroller of the Currency.
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Lending Activities
- ------------------
The Company's banking subsidiaries generate revenues primarily through the
investment of borrowed and deposited funds in earning assets. These assets are
comprised of securities available for sale, investment securities, short-term
investment vehicles and loans to businesses and individuals. Average loans
represent approximately 67% of average earning assets and present a greater
level of credit risk to the Company when contrasted with investment securities.
The principal lending activities of the banks are concentrated primarily within
its market areas in West Virginia and the surrounding mid-Atlantic area. These
are areas with which bank personnel are most acquainted and are within
reasonable distances of the banks which allows for timely communications with
customers as well as periodic inspections of collateral.
Loan portfolios total $611.5 million at December 31, 1998 and are comprised of
commercial, real estate and consumer loans including credit cards and home
equity loans. Commercial and commercial real estate loans comprise 40.5% of the
total loan portfolio. Commercial loans include loans to small to mid-size
industrial and commercial and service companies that include but are not limited
to, coal mining companies, manufacturers, automobile dealers, and retail and
wholesale merchants. Collateral securing these loans includes equipment,
machinery, inventory, receivables, vehicles and commercial real estate.
Commercial loans are considered to contain a higher level of risk than other
loan types although care is taken to minimize these risks. Underwriting
standards require a comprehensive review and independent evaluation of virtually
all commercial loans by Credit Administration and Discount Committees prior to
approval with updates to these credit reviews performed periodically on a
quarterly or annual basis depending on the size of the loan relationship.
Real estate mortgage loans comprise 37.3% of the total loan portfolio. Mortgage
loans to consumers are secured primarily by first lien deeds of trust. These
loans generally do not exceed an 80% loan to value ratio at the loan origination
date and are considered to contain normal risk. Loans in the real estate
mortgage category have historically yielded the lowest loss ratio of all loan
types.
Consumer loans comprise 20.6% of the total loan portfolio. Collateral for these
loans include automobiles, boats, recreational vehicles, and other personal
property. Personal loans, home equity loans and unsecured credit card
receivables are also included as consumer loans. Historically, losses on these
types of loans have been minimal; however, indirect lending through various
automobile dealerships in 1996 and 1997 led to a significant increase in
consumer loan charge-offs in 1997 and 1998. During 1998, $14 million in credit
card revolving loan accounts were sold from the loan portfolio. This sale
represented substantially all credit card loans held by the Bank.
The average yield on a tax equivalent basis on all loans in 1998 was 9.70% and
average loans expressed as a percentage of average deposits were 74% in 1998.
This percentage represents a lower average level of outstanding loans when
compared with historical loan to deposit ratios of 81% in 1997 and 84% in 1996.
Employees
- ---------
The Registrant and its subsidiaries had 505 employees at December 31, 1998.
Management considers employee relations to be excellent.
Competition
- -----------
The Company's subsidiaries have been able to compete effectively with other
financial institutions in their respective market areas. The subsidiaries
emphasize customer service in an effort to establish long-term customer
relationships and build customer loyalty. The subsidiaries of the Company have
consolidated services such as data processing, accounting, loan review and
compliance, and internal audit services to enhance the ability to compete
effectively in its respective markets.
Principal competition for the banking subsidiaries is provided by other local
and regional commercial banking companies as well as Thrift Institutions, Credit
Unions and investment brokerage firms. Other non-bank organizations including
regional and national mortgage origination firms and manufacturer captive credit
corporations also provide competition for residential real estate loans and
consumer loans.
5
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Supervision and Regulation
- --------------------------
The Registrant is a bank holding company within the meaning of the Bank Holding
Act of 1956 (Act), as amended, and is registered as such with the Board of
Governors of the Federal Reserve System. The Registrant is required to file with
the Board of Governors quarterly reports of the Registrant and the subsidiary
and such other information as the Board of Governors may require. The Federal
Reserve makes periodic examinations of the Registrant typically on an annual
basis. The Act requires every bank holding company to obtain prior approval of
the Board of Governors before acquiring substantially all the assets or direct
or indirect ownership or control of more than 5% of the voting shares of any
bank which is not already majority-owned. The Act also prohibits a bank holding
company, with certain exceptions, from engaging in, or acquiring direct or
indirect control of more than 5% of the voting shares of any company engaged in
non-banking activities.
Bank holding companies and their subsidiary banks are also subject to the
provisions of the Community Reinvestment Act of 1977 ("CRA"). Under the CRA, the
Federal Reserve Board is required, in connection with its examination of a bank,
to assess such bank's record in meeting the credit needs of the communities
served by that bank, including low and moderate-income neighborhoods. Further,
such assessment is also required of any bank holding company which has applied
to (i) charter a National bank, (ii) obtain deposit insurance coverage for a
newly chartered institution, (iii) establish a new branch office that will
accept deposits, (iv) relocate an office, or (v) merge or consolidate with, or
acquire the assets or assume the liabilities of a federally-regulated financial
institution. In the case of a bank holding company applying for approval to
acquire a bank or other bank holding company, the Federal Reserve Board will
assess the record of each subsidiary of the applicant bank holding company, and
such records may be the basis for denying the application or imposing conditions
in connection with approval of the application. On July 1, 1995, the federal
bank regulators amended the CRA regulations to simplify enforcement of the CRA
by substituting the prior twelve assessment categories with three performance
categories for use in calculating CRA ratings. The federal bank regulators will
evaluate banks under the lending, investment, and service tests. Additional data
collection and reporting requirements are imposed on institutions which accept
mortgage loan applications within metropolitan statistical areas.
The Financial Institutions Reform, Recovery, and Enforcement Act of 1989
("FIRREA") was enacted by Congress on August 9, 1989. Among the more significant
consequences of FIRREA with respect to bank holding companies is the impact of
the "cross-guarantee" provision and the significantly expanded enforcement
powers of bank regulatory agencies. Under the cross-guarantee provision, if one
depository institution subsidiary of a multi-unit holding company fails or
requires FDIC assistance, the FDIC may assess a commonly controlled depository
institution for the estimated losses suffered by the FDIC. While the FDIC's
claim is junior to the claims of non-affiliated depositors, holders of secured
liabilities, general creditors, and subordinated creditors, it is superior to
the claims of shareholders. Among the significantly expanded enforcement powers
of the bank regulatory agencies are the powers to (i) obtain cease and desist
orders, (ii) remove officers and directors, (iii) approve new directors and
senior executive officers of certain depository institutions, and (iv) assess
criminal and civil money penalties for violations of law, regulations. or
conditions imposed by, or agreements with, regulatory agencies.
In September 1994, the Riegle-Neal Interstate Banking and Branching Efficiency
Act of 1994 was passed. This legislation significantly changes the laws
governing interstate banking. Beginning on September 29, 1995, bank holding
companies could acquire banks located in any state, despite former prohibitive
state statutes, subject to certain conditions. Beginning on June 1, 1997, banks
were allowed to merge or consolidate on an interstate basis. States may elect to
"opt-out" of this provision by expressly prohibiting interstate bank mergers.
This Act also permits banks to branch into other states on a de novo basis
provided that the state has enacted a law that permits de novo interstate branch
banking.
The banking subsidiaries of the Registrant are subject to certain restrictions
by regulatory bodies which limit the amounts and the manner in which it may loan
funds to the Registrant. The banks are further subject to restrictions on the
amount of dividends that can be paid to the Registrant in any one calendar year
without prior approval by primary regulators. Payment of dividends by the
subsidiary banks to the Registrant cannot exceed net profits, as defined, for
the current year combined with net profits for the two preceding years. In
addition, any distribution that might reduce the bank's equity capital to unsafe
levels or which, in the opinion of regulatory agencies, or is not in the best
interests of the public, could be prohibited. ( For additional information
concerning these restrictions, see Note 14 of the Notes to Consolidated
Financial Statements incorporated by reference in Part II of this report.)
Governmental Monetary Policies and Economic Controls
- ----------------------------------------------------
The earnings of the Registrant and its subsidiaries are affected by the monetary
policies of the Federal Reserve System. An important function of the Federal
Reserve System is to regulate the National supply of credit in order to
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deal with economic conditions. The instruments employed by the Federal Reserve
are open market operations of U.S. Government securities, changes in the
discount rate on member bank borrowings, changes in Federal Funds rates and
changes in reserve requirements. These policies influence, in various ways, the
level of the company's investments, loans and deposits and rates earned on its
earning assets and interest rates paid on liabilities.
I. DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY, INTEREST RATES
AND INTEREST DIFFERENTIAL
A. & B. AVERAGE BALANCE SHEETS--NET INTEREST INCOME ANALYSIS
<TABLE>
<CAPTION>
(Amounts in Thousands, except %)
1998 1997 1996
---- ---- ----
AVERAGE INTEREST YIELD/RATE AVERAGE INTEREST YIELD/RATE AVERAGE INTEREST YIELD/RATE
BALANCE (1) (1) BALANCE (1) (1) BALANCE (1) (1)
------- --- --- ------- --- --- ------- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Earning Assets:
Loans (2)
Taxable $ 634,342 $61,355 9.67% $601,492 $58,676 9.76% $507,554 $49,443 9.74%
Tax-Exempt 13,425 1,490 11.10% 15,993 1,657 10.36% 15,401 1,708 11.09%
---------- ------- ------ -------- ------- ------ -------- ------- ------
Total 647,767 62,845 9.70% 617,485 60,333 9.77% 522,955 51,151 9.78%
Reserve for Loan
Losses (11,731) (9,770) (8,797)
---------- ------- ------ -------- ------- ------ -------- ------- ------
Net Total 636,036 62,845 9.88% 607,715 60,333 9.93% 514,158 51,151 9.95%
Securities Available For
Sale:
Taxable 121,704 7,750 6.37% 122,326 8,226 6.72% 104,112 6,690 6.43%
Tax-Exempt 26,056 2,015 7.73% 17,162 1,388 8.09% 15,472 1,333 8.61%
---------- ------- ------ -------- ------- ------ -------- ------ ------
Total 147,760 9,765 6.61% 139,488 9,614 6.89% 119,584 8,023 6.71%
Investment Securities:
Taxable 20,221 1,307 6.46% 45,581 2,820 6.19% 65,857 4,233 6.43%
Tax-Exempt 74,766 6,036 8.07% 59,547 4,830 8.11% 47,026 3,776 8.03%
---------- ------- ------ -------- ------- ------ -------- ------- ------
Total 94,987 7,343 7.73% 105,128 7,650 7.28% 112,883 8,009 7.09%
Interest-Bearing
Deposits 56,136 3,007 5.36% 418 44 10.53% 750 28 3.73%
Federal Funds Sold 29,628 1,593 5.38% 17,127 949 5.54% 2,188 117 5.35%
---------- ------- ------ -------- ------- ------ -------- ------- ------
Total Earning Assets 964,547 84,553 8.77% 869,876 78,590 9.03% 749,563 67,328 8.98%
Other Assets 93,984 79,604 54,758
---------- ------- ------ -------- ------- ------ -------- ------- ------
Total $1,058,531 $949,480 $804,321
========== ======== ========
Interest-Bearing
Liabilities:
Demand Deposits $ 134,195 3,732 2.78% $111,177 3,064 2.76% $ 92,857 2,519 2.71%
Savings Deposits 150,749 4,452 2.95% 141,827 4,350 3.07% 134,178 4,150 3.09%
Time Deposits 474,263 26,196 5.52% 406,208 21,359 5.26% 313,899 16,501 5.26%
Short-Term Borrowings 51,457 2,288 4.45% 59,462 2,623 4.41% 64,933 2,886 4.44%
Long-Term Borrowings 23,468 1,459 6.22% 22,654 1,494 6.59% 15,130 877 5.80%
---------- ------- ------ -------- ------- ------ -------- ------- ------
Total Interest-Bearing
Liabilities 834,132 38,127 4.57% 741,328 32,890 4.43% 620,997 26,933 4.34%
------- ------ ------- ------ ------- ------
Demand Deposits 111,565 100,158 84,265
Other Liabilities 12,236 13,955 13,465
Stockholders' Equity 100,598 94,039 85,594
---------- -------- --------
Total $1,058,531 $949,480 $804,321
========== ======== ========
Net Interest Income $46,426 $45,700 $40,395
======= ======= =======
Net Interest Rate Spread (3) 4.20% 4.60% 4.64%
===== ===== =====
Net Interest Margin (4) 4.81% 5.25% 5.39%
===== ===== =====
</TABLE>
(1) Fully Taxable Equivalent-Using the Federal statutory rate of 35% as applied
to non-taxable loans and securities in periods in which related tax
benefits arise.
(2) Non-accrual loans are included in average balances outstanding but with no
related interest income.
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(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.
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C. RATE AND VOLUME ANALYSIS OF INTEREST (1)
<TABLE>
<CAPTION>
(Amounts in Thousands)
1998 Compared to 1997 1997 Compared to 1996
Increase/(Decrease) due to Increase/(Decrease) due to
-------------------------- --------------------------
Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- -----
<S> <C> <C> <C> <C> <C> <C>
Interest Earned On:
Loans $ 2,902 $ (390) $ 2,512 $ 9,228 $ (46) $ 9,182
Investment securities available
for sale 649 (498) 151 1,353 238 1,591
Investment securities
held to maturity (405) 98 (307) (245) (114) (359)
Interest bearing deposits
with other banks 2,995 (32) 2,963 (17) 33 16
Federal funds sold 673 (29) 644 828 4 832
-------- -------- -------- -------- -------- --------
Total interest earning
assets 6,814 (851) 5,963 11,147 115 11,262
-------- -------- -------- -------- -------- --------
Interest Paid On:
Demand deposits 640 28 668 504 41 545
Savings deposits 267 (165) 102 235 (35) 200
Time deposits 3,718 1,119 4,837 4,854 4 4,858
Short-term borrowings (356) 31 (325) (241) (22) (263)
Long-term debt 53 (98) (45) 483 134 617
-------- -------- -------- -------- -------- --------
Total interest bearing
liabilities 4,322 915 5,237 5,835 122 5,957
-------- -------- -------- -------- -------- --------
Change in net interest
income $ 2,492 $ (1,766) $ 726 $ 5,312 $ (7) $ 5,305
======== ======== ======== ======== ======== ========
</TABLE>
(1) Fully Taxable Equivalent-using the federal statutory rate of 35% as applied
to non-taxable loans and securities in periods in which related tax
benefits arise.
The preceding table sets forth a summary of the changes in interest earned and
paid resulting from changes in volume of earning assets and paying liabilities
and changes in rates thereon. For purposes of this analysis, the change in
interest due to both rate and volume has been allocated to volume and rate
changes in proportion to the relationship of the absolute dollar amounts.
II. INVESTMENT PORTFOLIO
A. Amortized Cost of Investment Securities Held to Maturity:
<TABLE>
<CAPTION>
December 31
-----------
(Amounts in Thousands) 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
U.S. Treasury securities $ 100 $ 4,098 $ 8,247
U.S. Government agencies and corporations 7,546 26,377 43,494
States and political subdivisions 75,009 77,641 47,532
Other securities 1,361 1,058 1,055
-------- -------- --------
$ 84,016 $109,174 $100,328
======== ======== ========
</TABLE>
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Market Value of Securities Available for Sale:
<TABLE>
<CAPTION>
December 31
-----------
(Amounts in Thousands) 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
U.S. Treasury securities $ -- $ -- $ 1,005
U.S. Government agencies and corporations 119,508 132,746 110,967
States and political subdivisions 37,343 22,576 16,037
Other securities 36,343 6,473 8,104
-------- -------- --------
$193,194 $161,795 $136,113
======== ======== ========
</TABLE>
B. Maturity and Yields
The required information is incorporated by reference to pages 33 and 34 of the
1998 Annual Report.
C. There are no issues included in obligations of states and political
subdivisions or other securities which exceed ten percent of
stockholders' equity.
III. LOAN PORTFOLIO
A. Loan Summary
<TABLE>
<CAPTION>
December 31
-----------
(Amounts in Thousands) 1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Commercial, Financial and Agricultural $ 77,233 $ 82,445 $ 79,278 $ 71,441 $ 61,691
Real Estate- Commercial 170,683 202,625 166,787 152,579 129,672
Real Estate- Construction 8,988 9,612 10,589 5,608 2,406
Real Estate- Residential 228,540 227,465 171,455 155,282 143,350
Consumer 127,169 151,429 120,720 100,843 84,453
Other 894 1,185 552 519 501
-------- -------- -------- -------- --------
Total 613,507 674,761 549,381 486,272 422,073
Less: Unearned Income 2,014 2,944 1,678 1,121 883
-------- -------- -------- -------- --------
611,493 671,817 547,703 485,151 421,190
Less: Reserve for Loan
Losses 11,404 11,406 8,987 8,321 8,479
-------- -------- -------- -------- --------
Net Loans $600,089 $660,411 $538,716 $476,830 $412,711
======== ======== ======== ======== ========
</TABLE>
10
<PAGE> 11
B. Maturities and Rate Sensitivity of Loan Portfolio at December 31, 1998:
<TABLE>
<CAPTION>
Remaining Maturities
--------------------
(Amounts in Thousands)
Over One Over
One Year Year to Five
and Less Five Years Years Total Percent
-------- ---------- ----- ----- -------
<S> <C> <C> <C> <C> <C>
Commercial, Financial and
Agricultural $ 42,480 $ 15,788 $ 18,965 $ 77,233 12.63%
Real Estate- Commercial 44,516 45,041 81,112 170,669 27.91%
Real Estate- Construction 2,623 428 5,937 8,988 1.47%
Real Estate- Mortgage 28,479 48,432 151,307 228,218 37.32%
Consumer 22,827 49,040 53,624 125,491 20.52%
Other 648 153 93 894 0.15%
-------- -------- -------- -------- -------
$141,573 $158,882 $311,038 $611,493 100.00%
======== ======== ======== ======== =======
Rate Sensitivity:
Pre-determined Rate $ 89,116 $117,367 $257,540 $464,023 75.88%
Floating or Adjustable Rate 52,457 41,515 53,498 147,470 24.12%
-------- -------- -------- -------- -------
$141,573 $158,882 $311,038 $611,493 100.00%
======== ======== ======== ======== =======
23.15% 25.98% 50.87% 100.00%
======== ======== ======== ========
</TABLE>
C. Risk Elements. The required information for risk elements is included
below and incorporated by reference to pages 17 through 19 of the 1998
Annual Report.
<TABLE>
<CAPTION>
Nonperforming Assets:
December 31
-----------
(Amounts in Thousands) 1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Non-accruing Loans $7,763 $9,988 $5,476 $4,371 $6,909
Loans Past Due Over 90 Days 377 4,391 780 673 968
Restructured Loans Per-
forming in Accordance
With Modified Terms 509 534 401 440 640
Gross Interest Income Which
Would Have Been Recorded
Under Original Terms of
Non-Accruing and Re-
Structured Loans 607
Actual Interest Income During the Period 231
Commitments to Lend
Additional Funds on Non-Performing Assets --
</TABLE>
Management believes that the extent of problem loans at December 31, 1998 is
disclosed as non-performing assets or delinquent loans in the preceding charts.
However, there can be no assurance that future circumstances, such as further
erosion of economic conditions and the related potential effect that such
erosion may have on certain borrowers' ability to continue to meet payment
obligations, will not lead to an increase in problem loan totals. Management
11
<PAGE> 12
believes that the non-performing asset carrying values will be substantially
recoverable, taking into consideration the adequacy of the applicable collateral
and, in certain cases, partial write-downs which have been taken and allowances
that have been established.
It is the Registrant's policy to discontinue the accrual of interest on loans
based on their payment status and evaluation of the related collateral and the
financial strength of the borrower. The accrual of interest is normally
discontinued when a loan becomes 90 days past due as to principal or interest.
At December 31, 1998, and at the date of this report, the Company does not have
any concentrations of loans to borrowers engaged in similar activities exceeding
10% of total loans, net of unearned income.
The Company has no significant concentrations of credit risk other than
geographic concentrations. Most loans in the current portfolio are made and
collateralized in West Virginia and the surrounding mid-Atlantic area. Although
portions of the West Virginia economy are closely related to coal and timber,
they are supplemented by service industries. The current economies of the
Company's markets are relatively stable and are not seen as highly subject to
volatile economic change.
The following table presents the Company's investment in loans considered to be
impaired:
<TABLE>
<CAPTION>
December 31
-----------
1998 1997
(Amounts in thousands) ---- ----
<S> <C> <C>
Commercial, financial and agricultural $5,112 $6,800
Real estate-mortgage 154 708
------ ------
Total investment in loans considered to be impaired $5,266 $7,508
===== =====
</TABLE>
Under SFAS No. 114, the allowance for loan losses related to loans that are
identified for evaluation in accordance with SFAS No. 114 is based on discounted
cash flows using the loan's initial effective interest rate or the fair value of
the collateral for certain collateral dependent loans.
12
<PAGE> 13
IV. SUMMARY OF LOAN LOSS EXPERIENCE
A. 1. Summary of Loan Loss Experience:
<TABLE>
<CAPTION>
Years Ended December 31
-----------------------
(Amounts in Thousands, Except Percent Data) 1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Balance of reserve at beginning of period .............. $11,406 $ 8,987 $ 8,321 $ 8,479 $ 9,568
Reserve of subsidiaries at date of acquisition ......... -- 1,981 -- -- --
Charge-offs:
Commercial, financial and agricultural ............. 3,602 2,052 369 1,875 2,237
Real estate- residential ........................... 367 385 275 109 163
Installment ........................................ 3,019 2,761 1,537 899 963
------- ------- ------- ------- -------
Total Charge-offs .............................. 6,988 5,198 2,181 2,883 3,363
------- ------- ------- ------- -------
Recoveries:
Commercial, financial and agricultural ............. 190 130 249 126 83
Real estate-residential ............................ 31 31 26 35 7
Installment ........................................ 515 512 299 329 420
------- ------- ------- ------- -------
Total Recoveries ............................... 736 673 574 490 510
------- ------- ------- ------- -------
Net charge-offs ........................................ 6,252 4,525 1,607 2,393 2,853
Provision charged to operations ........................ 6,250 4,963 2,273 2,235 1,764
------- ------- ------- ------- -------
Balance of reserve at end of period .................... $11,404 $11,406 $ 8,987 $ 8,321 $ 8,479
======= ======= ======= ======= =======
Ratio of net charge-offs to average loans outstanding... .97% .73% .31% .54% .70%
======= ======= ======= ======= =======
Ratio of reserve to total loans outstanding ............ 1.86% 1.70% 1.64% 1.72% 2.01%
======= ======= ======= ======= =======
</TABLE>
A. 2. The required information is incorporated by reference to page 18 of
the 1998 Annual Report.
B. Allocation of Reserve for Loan Losses:
<TABLE>
<CAPTION>
(Amounts in Thousands, Except Percent Data) December 31
-----------
1998 1997 1996 1995 1994
---------------- ----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial, Financial
and Agricultural $ 4,054 40% $ 4,795 42% $ 3,167 45% $ 3,465 46% $ 3,327 45%
Real Estate- Mortgage 2,297 39% 2,819 35% 1,956 33% 1,751 33% 747 35%
Consumer 1,378 21% 1,979 23% 1,567 22% 1,280 21% 1,099 20%
Unallocated 3,675 N/A 1,813 N/A 2,297 N/A 1,825 N/A 3,306 N/A
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total $11,404 100% $11,406 100% $ 8,987 100% $ 8,321 100% $ 8,479 100%
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
The percentages in the table above represent the percent of loans in each
category of total loans.
V. DEPOSITS
A. The required information for average deposits and rates paid by type is
included on page 7 of this report.
B. Not applicable.
C. Not applicable.
13
<PAGE> 14
D. The required information is incorporated by reference to page 37 of the
1998 Annual Report and as follows:
<TABLE>
<CAPTION>
Maturities of Time Deposits of $100,000 or more
(Amounts in Thousands)
1998
----
<S> <C>
Three months or less .................... $ 37,656
Over Three to Six Months ................ 21,245
Over Six to Twelve Months................ 25,877
Over Twelve Months ...................... 28,574
--------
Total $113,352
========
</TABLE>
E. Not applicable.
VI. RETURN ON EQUITY AND ASSETS
A. The required information is incorporated by reference to page 12 of the
1998 Annual Report.
VII. SHORT-TERM BORROWINGS
A. Securities Sold Under Agreements to Repurchase and Other Short-Term
Borrowings:
The Company uses various short-term funding sources including term repurchase
agreements, customer repurchase agreements and Federal funds purchased. The
Company's short-term borrowings and rates paid are summarized as follows
(Amounts in Thousands, Except Percent Data):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ----
<S> <C> <C> <C> <C> <C> <C>
At year-end $47,680 3.97% $55,056 4.28% $53,031 4.02%
Average during year 51,457 4.45% 59,462 4.41% 64,933 4.44%
Maximum month-end
balance 55,755 63,782 54,833
</TABLE>
B. Long-Term Advances From the Federal Home Loan Bank (FHLB) and Long-Term
Debt
Two subsidiaries of the Company are members of the FHLB and as such have the
ability to obtain advances from the FHLB. The Company had long-term advances
from the FHLB ( original maturities in excess of one year) of $10 million with a
weighted average rate of 6.01% at December 31, 1998 and $15 million with a
weighted average rate of 5.83% at December 31, 1997. The advances from the FHLB
are secured by certain qualifying first mortgage loans, stock in the FHLB,
mortgage-backed securities and certain other investment securities.
14
<PAGE> 15
ITEM 2. PROPERTIES
FIRST COMMUNITY BANK OF MERCER COUNTY, INC.
The offices of the Registrant are located within First Community Bank of Mercer
County, Inc. at 1001 Mercer Street, Princeton, West Virginia. Principal
properties owned by the subsidiary banks primarily consist of modern office
facilities described as follows:
Princeton- Two-story, 30,000 square foot banking offices with detached
drive-up/walk-in facility in Princeton, West Virginia, completed in 1976; Pine
Plaza branch office with drive-up located in Princeton, West Virginia,
constructed in 1986 on leased land with initial lease term plus renewal options
totaling twenty years; moveable, modular branch office with drive-up/walk-in
located in Matoaka, West Virginia, constructed in 1983 on leased land. Seven (7)
automated teller machines located throughout Mercer County.
Bluefield- Three-story, 37,000 square foot banking offices located on Federal
Street with detached drive-up facility, completed in 1972 and walk-up automated
teller machine located on premises; one off-site automated teller machine on
leased land in Bluefield Plaza.
Bluewell- Two-story, 8,200 square foot banking offices with drive-up facility
located in Bluewell, West Virginia completed in 1965; one drive-up automated
teller machine located on premises.
Green Valley- Two-story, 6,000 square foot banking office with drive-up located
in Green Valley, West Virginia, constructed in 1978. Branch office leased in
Mercer Mall; one walk-up automated teller machine located on premises.
FIRST COMMUNITY BANK, INC.
Wyoming County- Two-story banking offices located in Pineville, West Virginia,
acquired in 1961; two-story banking offices with drive-up located in Oceana,
West Virginia, constructed in 1984; branch office with drive-up located in
Mullens, West Virginia, constructed in 1984; moveable, modular branch office
with drive-up/walk-in located in Pineville, West Virginia, constructed in 1984;
three automated teller machines.
Upshur County- Three-story banking offices with an off-premise drive-up/walk-in
facility located in Buckhannon, West Virginia, acquired in 1937; branch office
with drive-up located in Tennerton, West Virginia, constructed in 1980; two
automated teller machines.
Taylor County- Two-story banking offices with an attached drive-up/walk-up
facility located in Grafton, West Virginia, constructed in 1966; one automated
teller machine; one-story, 1,200 square foot banking offices with an attached
drive-up facility, located in the Blueville area of Grafton, West Virginia,
constructed in 1968.
Nicholas County- Two story banking offices and office addition with drive-up
located in Richwood, West Virginia; off-premises facility with drive-up located
in Richwood, West Virginia, constructed in 1977 on leased land; one and one-half
story branch office with drive-up located in Summersville, West Virginia,
constructed in 1984; one story branch office with an adjoining drive-up located
in Craigsville, West Virginia, constructed in 1985; three automated teller
machines.
Webster County- Branch office with drive-up located in Cowen, West Virginia,
constructed in 1988.
Preston County- One-story, 4,000 square foot banking offices with an attached
drive-up facility located in Rowlesburg, West Virginia, constructed in the early
1920's and remodeled in 1981.
Logan County- Two and one-half story banking facility with attached two-lane
drive-up located in Man, West Virginia, constructed in 1976 with additional
levels added in 1981; separate mini-bank facility with four drive-thru lanes;
banking sales center located inside the Wal-Mart Supercenter in Logan, West
Virginia; one automated teller machine.
15
<PAGE> 16
FIRST COMMUNITY BANK OF SOUTHWEST VIRGINIA, INC.
Tazewell County- Bi-level, 6,500 square foot banking offices with attached
drive-up facility and one automated teller machine located in Tazewell,
Virginia, constructed in 1978, remodeled in 1981 and 1995; one-story, 2,500
square foot banking offices with an attached drive-up facility, located in
Richlands, Virginia, constructed in 1989 and remodeled in 1995.
Dickenson County- Two story bank building with attached drive-up constructed in
1973 located in Clintwood, Virginia.
Wythe County- One story bank building with attached two-lane drive-up and one
automated teller machine located in Fort Chiswell, Virginia, constructed in
1962, additions in 1984 and completely remodeled in 1994; a leased one story
banking facility with walk-up automated teller machine and two-lane drive-up
remodeled in 1997, located in Wytheville, Virginia.
Wise County- One story bank building with attached two-lane drive-up located in
Pound, Virginia.
BLUE RIDGE BANK
Alleghany County- One story 17,980 square foot bank building constructed in 1987
located in Sparta, North Carolina.
Alexander County- 4,000 square foot one story banking facility situated on
approximately three acres in Taylorsville, North Carolina; with a walk-up
automated teller machine.
Wilkes County- One story, 1,500 square foot banking facility purchased by the
bank in 1995, located in Hays, North Carolina.
Surry County- One story, 4,000 square foot banking facility purchased by the
bank in 1995, located in Elkin, North Carolina; with a walk-up automated teller
machine.
ITEM 3. LEGAL PROCEEDINGS
The Registrant and its subsidiaries (the Company) are plaintiffs and defendants
in lawsuits arising out of the normal course of business, in which claims for
monetary damages are asserted. Management, after consulting with legal counsel
handling the respective matters, is of the opinion that the ultimate outcome of
such pending actions will not have a material effect on the consolidated results
of operations or financial condition of the Registrant. Following is a summary
of significant proceedings along with recent developments, where applicable.
In August 1997, the Company was named as a defendant in a suit styled Ann
Tierney Smith, as Executrix of the Estate of Katharine B. Tierney, Ann Barclay
Smith and Laurence E. Tierney Smith, Plaintiffs vs. FCFT, Inc., First Community
Bank, Inc., Gentry, Locke, Rakes & Moore, and W. William Gust, Defendants, Civil
Action No. 97-CV-408-K, seeking to overturn the establishment of a private
foundation for which the Company's Trust and Financial Services Division serves
as Trustee. The suit filed by heirs of the Foundation donor, seeks a total of $6
million in compensatory and punitive damages as well as the termination of the
Foundation. The Company and Trustee believe the creation and the operation of
the Foundation represent the intent and will of the donor, accordingly, the
Company has entered a vigorous defense of this suit and the continuation of the
foundation's purpose. On October 15, 1998, the plaintiffs in the matter filed a
motion for summary judgment. In a hearing on this motion, the Court requested
that the Company, as defendant, file a motion for summary dismissal. The motion
for summary dismissal was filed with the Court on January 14, 1999, and in a
subsequent ruling, the Court partially granted the bank's motion for summary
judgment finding no wrongdoing by the bank in its discretionary use of principal
in this matter. The plaintiffs subsequently filed a motion requesting that the
court's order dismissing a portion of the case be amended to allow the plaintiff
to immediately appeal the decision to the State Supreme Court. No ruling on this
motion has been made as of this report. Both management and the Company's legal
counsel are of the opinion that the remainder of this suit is without merit and
will be successfully defended with no material adverse impact on the Company's
financial condition or results of operations.
16
<PAGE> 17
Civil suit number CAN-97-C-171 styled James A. Sill d/b/a Sill Trucking vs.
First Community Bank, Inc. and Carla Elder and Robert Williams was filed on
October 15, 1998 alleging the Company aided a customer in converting checks
payable to the company for payment on loan accounts of the co-defendants. The
plaintiff claims to have purchased rolling stock from co-defendants pursuant to
an oral contract. The suit seeks $150,000 in compensatory and punitive damages.
The Company has no knowledge of arrangements between the two plaintiffs and was
not a party to the oral contract. The Company has filed an answer to this suit
denying the allegations against the Company and intends to vigorously defend
this matter. No material adverse impact on the Company's financial condition or
results of operations is expected as a result of this litigation.
Civil Action No. 82-C-610, styled Rhondal L. Toler, et al, vs. Castle Rock Bank
of Pineville, filed on December 2, 1982 in the Circuit Court of Wyoming County,
West Virginia, was reported in the 1997 Annual Report on Form 10-K. In this
action, Rhondal L. and Annette Toler and Vern and Henrietta Ellison, Plaintiffs,
claimed that former representatives of a subsidiary of the Registrant
misrepresented the condition of a company at the time the Plaintiffs borrowed
money to purchase the company. The Company filed an answer denying all pertinent
allegations made by the Plaintiffs and additionally filed a counterclaim seeking
$322,000 plus costs. This case was dismissed in 1996 due to its prolonged
existence on the Court docket and the Plaintiff's failure to prosecute. The
Plaintiff has filed a motion to reinstate this matter. Ruling on this motion has
not been made as of the date of this report.
Additionally, the Company is also subject to certain asserted and unasserted
potential claims encountered in the normal course of business. In the opinion of
management, the resolution of these claims and unasserted potential claims will
not have a material adverse affect on the Company's financial position or
results of operations and, due to the relative smaller amounts of claims where
damages are sought and/or based upon the Company's evaluation, these matters
have not been included in this report.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1998.
17
<PAGE> 18
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED MATTERS
Market Price of Common Stock
- ----------------------------
The common stock of First Community Bancshares, Inc. is traded over-the-counter
and is quoted on the NASDAQ (Level III) Electronic Billboard. The following
table shows the approximate high and low bids as known to the Company or
reported by local brokers for each quarter in 1997 and 1998. Also, presented
below is the book value and cash dividends paid per share as of and for each
quarter of 1997 and 1998. The number of common stockholders of record on
December 31, 1998 was 2,149 and outstanding shares totaled 7,014,042.
<TABLE>
<CAPTION>
Bid Book Value Cash Dividends
1997 High Low Per Share Per Share
- ---- ---- --- --------- ---------
<S> <C> <C> <C> <C>
First Quarter $23.68 $21.76 $12.83 $ .22
Second Quarter 26.40 22.60 13.30 .25
Third Quarter 28.90 25.40 13.58 .25
Fourth Quarter 32.00 26.20 13.85 .32
-----
$1.04
=====
</TABLE>
<TABLE>
<CAPTION>
1998
- ----
<S> <C> <C> <C> <C>
First Quarter $29.60 $24.48 $14.18 $ .25
Second Quarter 43.00 36.00 14.01 .25
Third Quarter 42.75 31.00 14.35 .25
Fourth Quarter 33.75 26.50 14.50 .30
-----
$1.05
=====
</TABLE>
The holders of shares of common stock of the Company are entitled to such
dividends as the Board of Directors, in its discretion, may declare out of funds
legally available thereof. On March 16, 1999 a five for four stock split in the
form of a 25% stock dividend was declared and will be distributed to
stockholders of record on March 31, 1999.
The Company has historically paid dividends on a quarterly basis and currently
intends to continue to pay such dividends in the foreseeable future. However,
there can be no assurance that dividends will be paid in the future. The
declaration and payment of future dividends will depend upon, among other
things, the Company's earnings and financial condition, the general economic and
regulatory climate.
The Company's ability to pay dividends to its shareholders depends to a large
extent upon the dividends the Company receives from its subsidiaries. Dividends
paid by its banking subsidiaries are subject to restrictions under various
Federal banking laws. In addition, the banking subsidiaries must maintain
certain capital levels which may restrict their ability to pay dividends to the
Company. As of December 31, 1998, the net profits available for distribution to
the shareholders as dividends without regulatory approval were approximately
$1.5 million; however the regulators of the banking subsidiaries could
administratively impose stricter limits on the ability of the banking
subsidiaries to distribute net profits to the Company.
ITEM 6. SELECTED FINANCIAL DATA
The required information is incorporated by reference to page 12 of the 1998
Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The required information is incorporated by reference to pages 10 through 22 of
the 1998 Annual Report.
18
<PAGE> 19
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk (IRR) and Asset/Liability Management
The Bank's profitability is dependent to a large extent upon its net interest
income (NII), which is the difference between its interest income on
interest-earning assets, such as loans and securities, and its interest expense
on interest-bearing liabilities, such as deposits and borrowings. The Bank, like
other financial institutions, is subject to interest rate risk to the degree
that its interest-earning assets reprice differently than its interest-bearing
liabilities. The Bank 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. Specific strategies for management
of IRR have included shortening the amortized maturity of fixed-rate loans and
increasing the volume of adjustable rate loans to reduce the average maturity of
the Bank's interest-earning assets.
The Bank seeks to control its interest rate risk (IRR) exposure to insulate net
interest income and net earnings from fluctuations in the general level of
interest rates. To measure its exposure to IRR, the bank performs quarterly
simulations of NII using financial models which project NII through a range of
possible interest rate environments including rising, declining, most likely and
flat rate scenarios. The results of these simulations indicate the existence and
severity of IRR in each of those rate environments based upon the current
balance sheet position and assumptions as to changes in the volume and mix of
interest-earning assets and interest-paying liabilities and management's
estimate of yields attained in those future rate environments and rates which
will be paid on various deposit instruments and borrowings.
The following table summarizes the impact on NII and the Market Value of Equity
(MVE) as of December 31, 1998 and 1997, respectively, of immediate and sustained
rate shocks in the interest rate environment of plus and minus 100, 200, 300 and
400 basis points from the flat rate simulation. The table depicts the impact of
these charges over a twelve month period.
<TABLE>
<CAPTION>
1998
- -----------------------------------------------------------------------------------------------------
Change in Market
Interest Rates Net Interest % Value of %
(Basis Points) Income Change Equity Change
- -------------- ------ ------ ------ ------
<S> <C> <C> <C> <C>
400 40,553.2 -7.8 66,179.6 -38.9
300 42,404.3 -3.5 79,027.9 -27.1
200 43,698.5 -0.6 89,626.2 -17.3
100 43,975.2 0.3 99,119.2 -8.5
- -0- 43,961.3 0.0 108,354.2 0.0
- -100 45,154.9 2.7 118,235.6 9.1
- -200 46,330.5 5.4 128,938.6 19.0
- -300 46,229.8 5.2 140,663.2 29.8
- -400 44,889.4 2.1 153,564.1 41.7
</TABLE>
<TABLE>
<CAPTION>
1997
- -----------------------------------------------------------------------------------------------------
Change in Market
Interest Rates Net Interest % Value of %
(Basis Points) Income Change Equity Change
- -------------- ------ ------ ------ -----
<S> <C> <C> <C> <C>
400 32,290.6 -25.5 90,873.7 -7.6
300 35,086.1 -19.1 92,359.7 -6.1
200 37,862.7 -12.7 94,062.0 -4.4
100 40,620.2 -6.3 96,045.5 -2.4
- -0- 43,358.8 0.0 98,390.1 0.0
- -100 46,079.4 6.3 101,192.9 2.8
- -200 48,781.8 12.5 104,572.5 6.3
- -300 51,466.0 18.7 108,701.2 10.5
- -400 54,132.2 24.8 113,982.1 15.8
</TABLE>
The preceding table which illustrates the prospective effects of hypothetical
interest rate changes is based upon numerous assumptions, including relative and
estimated levels of key interest rate factors. Management feels that this type
of modeling technique, although useful, does not take into account all
strategies which management might undertake in response to a sudden and
sustained rate shock as depicted. Also, as market conditions vary from those
assumed in the sensitivity analysis, actual results will also differ due to:
prepayment/refinancing levels likely deviating from those assumed, the varying
impact of interest rate change caps or floors on adjustable rate assets, the
potential effect of changing debt service levels on customers with adjustable
rate loans, depositor early withdrawals and product
19
<PAGE> 20
preference changes, and other internal/external variables. Additionally,
management does not believe that a rate shock of the magnitude described is
likely in the forecast period presented.
When comparing the impact of the rate shock analysis between 1998 and 1997, the
1998 changes in net interest income reflect a smaller fluctuation from the flat
rate scenario. The reduction in the fluctuations is attributed to the increased
life of the investment portfolio and the control measures taken in the fourth
quarter of 1998 to reduce deposit cost. Conversely the impact of the analysis
has a larger effect on the market value of equity due to increased portfolio
terms negotiated in 1998 in order to achieve higher yields in the presence of
the declining rate environment experienced in 1998.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The required information is incorporated by reference to pages 24 through 47 of
the 1998 Annual Report and as follows:
<TABLE>
<CAPTION>
FIRST COMMUNITY BANCSHARES, INC.
QUARTERLY EARNINGS SUMMARY (UNAUDITED)
Quarterly earnings for the years ended December 31, 1998 and 1997 are as follows
(in thousands):
1998
--------------------------------------
March 31 June 30 Sept 30 Dec 31
-------- ------- ------- ------
<S> <C> <C> <C> <C>
Interest Income $20,655 $20,620 $20,330 $19,607
Interest Expense 9,551 9,678 9,633 9,267
------- ------- ------- -------
Net interest income 11,104 10,942 10,697 10,340
Provision for possible loan losses 1,287 3,789 749 425
Net interest income after provision
for loan losses 9,817 7,153 9,948 9,915
Other income 3,259 2,452 3,100 2,372
Other expenses 7,338 7,388 7,258 6,768
------- ------- ------- -------
Income before income taxes 5,738 2,217 5,790 5,519
Income taxes 1,784 681 1,795 1,903
------- ------- ------- -------
Net income $ 3,954 $ 1,536 $ 3,995 $ 3,616
======= ======= ======= =======
Per share:
Basic and diluted earnings $ .56 $ .22 $ .57 $ .51
Dividends $ .25 $ .25 $ .25 $ .30
Weighted average basic and
diluted shares outstanding 7,063 7,049 7,032 7,019
</TABLE>
<TABLE>
<CAPTION>
1997
--------------------------------------
March 31 June 30 Sept 30 Dec 31
-------- ------- ------- ------
<S> <C> <C> <C> <C>
Interest Income $16,546 $18,934 $19,512 $20,842
Interest Expense 6,942 7,946 8,609 9,393
------- ------- ------- -------
Net interest income 9,604 10,988 10,903 11,449
Provision for possible loan losses 630 1,087 736 2,510
Net interest income after provision
for possible loan losses 8,974 9,901 10,167 8,939
Other income 1,824 2,163 2,123 2,551
Other expenses 5,441 5,975 7,305 5,951
------- ------- ------- -------
Income before income taxes 5,357 6,089 4,985 5,539
Income taxes 1,660 1,950 1,598 1,668
------- ------- ------- -------
Net income $ 3,697 $ 4,139 $ 3,387 $ 3,871
======= ======= ======= =======
Per share:
Basic earnings $ 0.52 $ 0.59 $ 0.48 $ 0.55
Dividends $ 0.22 $ 0.25 $ 0.25 $ 0.32
Weighted average basic and
diluted shares outstanding 7,063 7,063 7,063 7,064
</TABLE>
20
<PAGE> 21
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The required information concerning directors has been omitted in accordance
with General Instruction G. Such information regarding directors appears on
pages 3, 4, 5, and 6 of the Proxy Statement relating to the 1999 Annual Meeting
of Stockholders and is incorporated herein by reference.
A portion of the information relating to executive officers has been omitted in
accordance with General Instruction G. Such information regarding executive
officers appears on pages 6, 7, and 8 of the Proxy Statement relating to the
1999 Annual Meeting of Stockholders and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The required information concerning management remuneration has been omitted in
accordance with General Instruction G. Such information appearing on pages 7, 8,
9, and 10 of the Proxy Statement relating to the 1999 Annual Meeting of
Stockholders is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The required information concerning security ownership of certain beneficial
owners and management has been omitted in accordance with General Instruction G.
Such information appearing on page 6 of the Proxy Statement relating to the 1999
Annual Meeting of Stockholders is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The required information concerning certain relationships and related
transactions have been omitted in accordance with General Instruction G. Such
information appearing on pages 5 and 6 of the Proxy Statement relating to the
1999 Annual Meeting of Stockholders is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Financial Statements
The Consolidated Financial Statements of First Community
Bancshares, Inc. and subsidiaries together with the independent
Auditors' Report dated January 29, 1999 are incorporated by
reference to pages 24 through 47 of the 1998 Annual Report which
is included herein as Exhibit 13.
(2) Financial Statement Schedules
All applicable financial statement schedules required by
Regulation S-X are included in the Notes to Consolidated Financial
Statements.
(b) No reports on Form 8-K were filed during the current year.
21
<PAGE> 22
(c) Exhibits:
(3) Articles of Incorporation and Bylaws
The Registrant's Articles of Incorporation and By-laws were
previously filed as exhibits (3)(i) and (3)(ii), respectively,
with the Annual Report on Form 10-K for the year ending 12/31/97
in connection with the change of corporate domicile to a Nevada
corporation.
(11) Statement Regarding Computation of Per Share Earnings
The statement regarding computation of per share earnings is
included as Note 10 of the Notes to Consolidated Financial
Statements in the 1998 Annual Report to Stockholders and is
incorporated herein by reference.
(13) Annual Report to Security Holders
(21) Subsidiaries of Registrant:
First Community Bank, Inc. (a West Virginia Corporation)
First Community Bank of Mercer County, Inc. (a West Virginia
Corporation)
First Community Bank of Southwest Virginia, Inc. (a
Virginia Corporation)
Blue Ridge Bank, Inc. (a North Carolina Corporation)
(23) Independent Auditors' Consent
(27) Financial Data Schedule
22
<PAGE> 23
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
BY: /s/
-------------------------------------
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
BY: /s/
-------------------------------------
Principal Accounting Officer
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/________________________________ Director 3/30/99
(Sam Clark)
/s/________________________________ Director 3/30/99
(Allen T. Hamner)
/s/_______________________________ President, Chief Executive Officer 3/30/99
(James L. Harrison, Sr.) and Director (Principal Executive
Officer)
/s/________________________________ Director 3/30/99
(B.W. Harvey)
/s/________________________________ Director 3/30/99
(I. Norris Kantor)
/s/________________________________ Vice President, Chief Financial 3/30/99
(John M. Mendez) Officer and Director (Principal
Financial Officer)
/s/________________________________ Director 3/30/99
(A. A. Modena)
/s/________________________________ Director 3/30/99
(Robert E. Perkinson, Jr.)
/s/________________________________ Chairman of the Board and Director 3/30/99
(William P. Stafford)
/s/________________________________ Director 3/30/99
(William P. Stafford, II)
/s/________________________________ Director 3/30/99
(W. W. Tinder, Jr.)
</TABLE>
23
<PAGE> 1
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(Amounts in Thousands, Except Percent and Per Share Data)
EARNINGS AND DIVIDENDS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------------
<S> <C> <C> <C>
Net income............................................. $ 13,101 $ 15,094 $ 13,917
Basic and diluted earnings per share................... 1.86 2.14 1.98
Cash dividends per share............................... 1.05 1.04 .91
Return on average equity............................... 13.02% 16.05% 16.26%
Return on average assets............................... 1.24% 1.59% 1.73%
- ---------------------------------------------------------------------------------------------
</TABLE>
BALANCE SHEET DATA AT YEAR-END
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------------
<S> <C> <C> <C>
Total assets........................................... $1,054,006 $1,042,322 $837,615
Earning assets......................................... 971,856 955,337 775,244
Deposits............................................... 875,996 853,507 643,497
Securities sold under agreements to repurchase......... 47,680 52,351 53,031
Stockholders' equity................................... 101,737 97,860 89,276
- ---------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
1
<PAGE> 2
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Message to Stockholders...................................................... 3
Management's Discussion and Analysis......................................... 9
Consolidated Financial Statements............................................ 23
Board of Directors........................................................... 49
</TABLE>
- --------------------------------------------------------------------------------
LOGOFirst Community Bancshares Logo
<PAGE> 3
MESSAGE TO STOCKHOLDERS
- --------------------------------------------------------------------------------
TO OUR STOCKHOLDERS:
First Community Bancshares, Inc. enjoyed another great year in 1998. We are
pleased to provide this report on the financial performance of your Company for
that year and to review with you other activities, both completed and ongoing,
which are directed to ensuring continuing financial success in the future.
The world is counting the days to December 31, 1999, and the beginning of a
new millennium. Computer readiness for the Year 2000 and its impact on the world
economy is an ongoing topic of discussion and has resulted in misinformation and
the unnecessary heightening of concerns that banks and the financial system may
not be ready for the transition. The Year 2000 issue in its most simple form is
based upon the inability of some computer chips and software to distinguish
between the years 2000 and 1900. First Community began its Y2K efforts in 1997,
carefully reviewing all computer hardware and software purchases for Y2K
readiness. Early in 1998, the Board of Directors appointed a Y2K coordinator and
established a committee to review all operations of the Company to ensure we are
well prepared to make the millennium change smoothly. First Community's core
processing systems which support customers and other information applications
are dependent upon hardware and software used by literally hundreds of other
financial institutions throughout the country. These systems are
state-of-the-art and have been undergoing Y2K readiness testing since 1997,
first by the vendors themselves then by users similar to First Community. Our
systems have been tested by artificially advancing the internal system dates
gradually through the year 2000 and beyond while processing data. Our core
systems all have performed well which was expected as they have been certified
by vendors of substantial reputation as Y2K compliant and have undergone
substantial independent testing by other users with similar good results. Other
non-customer computer applications have been or are being tested throughout the
Company and where necessary both software and hardware replaced and retested.
The Company has budgeted $150,000 in one-time costs to prepare for the Y2K
transition. As a further precaution, a contingency plan was developed early in
1999 to ensure there is no disruption of service to our customers or disruption
of operations in the unlikely event our testing fails to identify a potential
problem or should a vendor critical to our operations experience problems with
the millennium date change.
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998
------ ------ ------ ------ ------
(Amounts in thousands)
<S> <C> <C> <C> <C> <C>
Total Assets 744,686 780,253 837,615 1,042,322 1,054,006
Earnings Assets 684,630 723,616 775,244 955,337 971,856
</TABLE>
With these testing efforts continuing throughout the remainder of 1999, our
efforts have now been directed to communicating with customers our state of
readiness and to working with customers to ensure they too are well-prepared.
All of these activities should ensure that the century date change is a non-
event for First Community and, as one of our Y2K marketing pieces states, "we
want to ensure that the only ball dropped on New Year's Eve is in Times Square."
Net income for 1998 was $13.101 million, significantly lower than the
$15.094 million reported for 1997 and lower than our plan. Late in the second
quarter the Company recorded a one-time $2,900,000 loan loss provision related
to a single commercial loan charge-off resulting from foreclosure on a West
Virginia based furniture manufacturing facility. Although reserves had been
established in prior periods related to this loan, a single provision adequate
to absorb the entire loss significantly strengthened the Company's reserves and
positioned us well to speedily dispose of the real estate acquired through
foreclosure. This extraordinary loan loss provision, while undesirable, is a
result of our role as a community bank which includes contributing to and
supporting community development efforts which create jobs and add to the
ongoing economic vitality
- --------------------------------------------------------------------------------
3
<PAGE> 4
of the areas we serve. Over the years, First Community Banks have been lenders
to the small business community and have always been supporters of new business
and business expansion through involvement in loans to developing enterprises.
Most of these investments have yielded great dividends in the form of new jobs
and the improvement of local economies. From time to time, however, success is
not realized and assets which serve as collateral must be liquidated often at
values which are inadequate to repay the entire debt. First Community will,
however, continue to play a significant role in the economic development process
within the bounds of prudent underwriting and tolerable risk as we believe that
community involvement and willingness to invest in efforts to improve the
economic health of our communities is one of the primary roles of your Company.
We are pleased to report that the manufacturing facility is under contract to
sell with the closing expected in March 1999, and that the new owner will not
only create jobs at the facility but will immediately begin a substantial
building expansion which will create even more opportunity and employment in our
market area.
Earnings per share were $1.86 in 1998 compared with $2.14 for the preceding
year while dividends paid were $1.05 and $1.04 in 1998 and 1997, respectively.
Return on Average Equity which measures our stewardship of your equity was
13.02% for 1998, very comparable to our peers, but somewhat off the 16% standard
set by First Community in recent
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Dividends Per Share .68 .78 .91 1.04 1.05
Basic Earnings Per Share 1.62 1.82 1.98 2.14 1.86
</TABLE>
years. Return on Average Assets measures our ability to use assets to produce
net income combined with the effective use of capital resources. Acquisitions
completed during 1997 which added over $200 million in resources, negatively
impacted our Return on Average Assets. This reduction is part of our overall
strategic plan which requires more effective leveraging of capital with asset
growth through acquisitions that produce initial returns on assets of less than
1%. Return on Average Assets was 1.24% in 1998, 1.59% in 1997 and 1.73% in 1996,
reflecting the impact of acquisitions completed during 1997.
<TABLE>
1994 1995 1996 1997 1998
------ ------ ------ ------ ------
<S> <C> <C> <C> <C>
Return on Average Equity 16.33 16.77 16.26 16.05 13.02
Return on Average Assets 1.55 1.70 1.73 1.59 1.24
</TABLE>
While the extraordinary provision for loan losses discussed above
significantly impacted net income, earnings per share, return on average equity
and return on average assets, a rapid downturn in overall interest rates to
30-year lows compressed net interest margins during 1998 as assets repriced more
rapidly than did liabilities. In addition, current attitudes of many bank and
non-bank financial service providers which have relaxed what we consider prudent
risk/ reward standards resulted in the prepayment of approximately $40 million
in outstanding commercial loans in 1998. The U.S. economy is more robust than
ever in history. However, there is, in our opinion, never a time when it makes
good long-term sense to weaken commercial and other loan underwriting standards,
regardless of competitive pressures, as any future economic downturn will have
significant negative impact on the collection of poorly underwritten credit. Our
approach continues to be one of care, caution and patience as we remain
- --------------------------------------------------------------------------------
LOGOFirst Community Bancshares Logo
<PAGE> 5
willing to give up some current period net interest income to avoid substantial
exposure to losses in the future.
Total assets grew to $1.054 billion at year-end 1998 compared with $1.042
billion at year-end 1997. Earning assets, those which produce revenue, grew to
an impressive $971.9 million from $955.3 million one year earlier. Stockholders'
equity, the foundation upon which the Company is based, broke the $100 million
mark in 1998 and was $101.7 million at year end with book value per share of
$14.50 compared with $13.85 at the end of 1997. Reserves for loan losses were
$11.4 million at year end 1998 or 1.86% of outstanding loans, an increase of
9.86% over the 1.70% reported at the end of 1997. Record levels of assets,
capital and reserves position First Community well for the new millennium and
the years to follow.
Wide-ranging issues including deterioration in the global economy, the
flattening of the yield curve, projected costs of Y2K remediation, concern over
industry-wide relaxation of underwriting standards, slowdown in industry
consolidation and the threat of a deflationary recession took its toll on the
market value of stock in the financial services sector during the third and
fourth quarters of 1998 and continuing adjustment has been experienced in early
1999.
<TABLE>
<CAPTION>
PERFORMANCE COMPARISON
---------------------------------------------------------------------
S&P 500 INDEX FCBC PEER GROUP
------------- ---- ----------
<S> <C> <C> <C>
1993 100.00 100.00 100.00
1994 101.00 134.00 98.00
1995 139.00 149.00 114.00
1996 170.00 162.00 155.00
1997 223.00 241.00 223.00
1998 283.00 240.00 218.00
</TABLE>
Currently, bank stocks are trading at approximately 58% of the S&P 500 versus
historical averages of 63% on a relative price/earnings basis, in spite of
record levels of capital and reserves, lower levels of non-performing assets and
record earnings in the industry. First Community did not escape the broad
decline in the market for bank stock with a market value of $29.25 at December
31, 1998, compared with $30.45 at year end 1997, and slipping to $27.00 during
January and February 1999. Cumulative returns on your First Community stock,
however, continue to out-perform our peers which also were negatively impacted
by the decline in the broader market, but for the first time in recent years
were slightly below the S&P 500.
The decline in market value afforded the Company the opportunity to
reinstate our Stock Repurchase Program in the third quarter of 1998 which had
been suspended since 1996 due to pending business combinations. Your Company's
Board of Directors has authorized the repurchase of up to 100,000 shares of FCBC
stock on the open market. The timing, price and quantity of purchases are at the
discretion of the Corporation and the program may be discontinued or suspended
at any time. The Board believes that current market prices present an attractive
buying opportunity for the Company and will make the shares available for
general corporate purposes which may include potential acquisitions, shareholder
dividend reinvestment and employee benefit plans.
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Market Value Per Share 18.88 21.12 22.08 30.45 29.25
Stockholders' Equity 70,149 80,411 89,276 97,860 101,737
(In thousands)
</TABLE>
In June 1998, your Board of Directors adopted a new plan of strategic
vision for the Company which provides both direction and goals well into the
future. The 1998 Strategic Plan provides a new statement of purpose, vision and
culture specifically focused on stockholders, customers and employees. Although
no area of operation is untouched by the Plan, its primary focus is on raising
the level of
- --------------------------------------------------------------------------------
5
<PAGE> 6
service quality to all those we serve. Initiatives incorporated in the Plan
transform the entire organization into one which is more proactive, moving from
a focus on products and delivery to a greater focus on customer relationships
and their needs. The entire financial services community is undergoing rapid
change and we are excited that the activities contemplated by our Strategic Plan
will create an organization of service second to none, providing the financial
products and services necessary for our customers to reach their maximum
financial potential as we go through the years ahead together. We think that
success in the future will be the result of First Community growing with its
well-established customer base, and we are confident the new Strategic Plan
provides the guidance to ensure that future success.
During 1999, we celebrate 125 YEARS OF SERVICE to customers, communities
and shareholders. Rich in history and heritage, we enjoy a unique position in
that fewer and fewer true community banking institutions exist today. We quietly
invest our time, our economic resources and ourselves in the communities which
we call home to ensure their continual success as ours is an effort of
cooperation -- an effort of community -- simply what we are about. One
well-known author succinctly stated the challenge of the future when he said,
"It is not the strongest . . . that survive, nor the most intelligent, but the
one most responsive to change." We do not wish only to survive by being
responsive to the changes around us, but desire to thrive in the new millennium
and the years to come by being a proactive agent of change. First Community is
celebrating 125 years of success and, armed with a new vision, is well-prepared
for the century date change and is excited about the opportunities which lie in
its future. As always, we greatly appreciate your loyalty and support as
customers and stockholders and welcome your input and suggestions.
Sincerely,
/s/ James L. Harrison, Sr.
James L. Harrison, Sr.
President & Chief Executive Officer
[PICTURE]
The Officers of First Community Bancshares, Inc. from left to right:
JOHN M. MENDEZ, VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
JAMES L. HARRISON, SR. PRESIDENT AND CHIEF EXECUTIVE OFFICER
ROBERT L. BUZZO, VICE PRESIDENT
- --------------------------------------------------------------------------------
LOGOFirst Community Bancshares Logo
<PAGE> 7
YEAR 2000 STATEMENT
- --------------------------------------------------------------------------------
First Community Bancshares has made a commitment to Year 2000 readiness
which began in 1997 and will continue until the issue is resolved in the coming
New Year. The Year 2000 problem revolves around a computer programming oversight
which was made when program date fields were written in two character (i.e., 99)
instead of four character (i.e. 1999) formats. It is feared that when the date
changes from 1999 to 2000, some systems may not properly recognize the step
forward to 2000 and revert to 1900. This incorrect assumption may cause the
non-Y2K ready systems to malfunction or fail.
What is First Community Bancshares' solution for the Y2K problem? Our
solution is extensive planning and preparation. Our Board of Directors and
senior management have made Year 2000 readiness a top priority. An in-depth Year
2000 Plan was devised and a Board-appointed Steering Committee composed of
senior level management and internal technology specialists was assembled to
address our Year 2000 concerns.
Our Year 2000 Plan not only addresses First Community's Y2K preparation,
but also works to verify that our vendors are prepared and will not fail to
deliver the services upon which we rely. The Plan incorporates the Federal
Financial Institution Examination Council's guidelines and deadlines for bank
Y2K preparations. These guidelines are divided into five phases: Awareness,
Assessment, Renovation, Testing and Implementation. The Plan also focuses on
evaluating the ability of our primary borrowers to operate and keep their
relationships in good standing. The results of this evaluation have been
encouraging and indicate that most of our customers and vendors are aware of and
are working to eliminate the Y2K issues they may face.
First Community Bancshares' Year 2000 Steering Committee began a full risk
assessment of hardware, software and service providers during the fourth quarter
of 1997. The Committee has used this risk assessment to help monitor Year 2000
remediation and testing efforts for computer systems throughout our
organization. Special attention has been focused on "mission critical"
systems -- those systems upon which our Company most heavily relies for daily
operation. The key component in our system is the central mainframe computer,
which is an IBM AS400. Not relying upon hardware and software manufacturer
reassurances, the Steering Committee acquired an additional AS400 computer in
September 1998 for use as a "time machine." The AS400 "time machine" enabled
First Community's specialists to leap forward into the future to December 31,
1999. On this simulated New Year's Eve the test team ran our actual core
application software (CBS Fiserv) on the same type of computer that drives the
bank's daily operations. Both hardware and software ran smoothly through the
simulated New Year's date change, through the leap year and other key processing
dates which have generated concern. So far, this test has provided us with
assurance that our core system and its connected sub-systems have been properly
remediated and will be able to deliver non-interrupted service to our customers
in the new millennium. All other mission critical systems have also performed
superbly in extensive Y2K testing, the results of which have been verified by
system users and our audit department's quality control staff. In addition to
our testing, the hardware and software used by our Company is used by other
banks nationally and has withstood their testing regimens.
- --------------------------------------------------------------------------------
7
<PAGE> 8
Although First Community Bancshares' important systems have been tested and
proven Y2K ready, a contingency plan has been developed. This plan provides
further assurance that no disruption of service will occur in the unlikely event
our testing efforts have failed to identify a potential Year 2000 problem. The
second and third quarters of 1999 will be devoted to Year 2000 contingency plan
training and testing.
Our in-depth risk assessment also isolated some systems which were not
capable of working in the new millennium. The systems which have been or are
being replaced include payroll, several personal computers and their operating
systems and some telephone equipment. Non-compliant systems will be replaced and
thoroughly tested before the century date change.
Our projected Year 2000 direct expenses are expected to total $150,000. Due
to our practice of investing in top quality technology, the actual direct
expense to date has been approximately $47,000. These expenses have been aimed
at replacing non-compliant systems and personnel costs associated with our
comprehensive testing and test results validation. In addition to these direct
expenses, $30,000 in administrative costs have been realized to assure proper
management of the project.
We are proud of the efforts and results of our Year 2000 preparation and
are excited by the level of readiness it has given our Company. The commitment
and energy of our board, management and staff will ensure that our 125 year old
company will be there to provide service in the new millennium.
- --------------------------------------------------------------------------------
LOGOFirst Community Bancshares Logo
<PAGE> 9
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Introduction................................................ 10
Acquisitions................................................ 10
Summary Financial Results................................... 10
Five-Year Selected Financial Data........................... 12
Common Stock and Dividends.................................. 12
Net Interest Margin......................................... 13
Net Interest Income......................................... 14
Provision for Loan Losses................................... 14
Non-Interest Income......................................... 15
Non-Interest Expense........................................ 15
Income Tax Expense.......................................... 17
Investment Securities....................................... 17
Securities Available for Sale............................... 17
Loan Portfolio.............................................. 17
Reserve for Loan Losses..................................... 18
Non-Performing Assets....................................... 19
Deposits.................................................... 19
Short-Term Borrowings....................................... 19
Other Indebtedness.......................................... 19
Stockholders' Equity........................................ 20
Liquidity................................................... 20
Interest Rate Sensitivity................................... 20
Year 2000 Preparedness...................................... 21
</TABLE>
- --------------------------------------------------------------------------------
9
<PAGE> 10
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
INTRODUCTION
This discussion should be read in conjunction with the consolidated financial
statements, notes and tables included throughout this report and the Company's
Annual Report on Form 10-K. Management's discussion and analysis may contain
forward-looking statements that are provided to assist in the understanding of
future financial performance. However, such performance involves risks and
uncertainties, which may cause actual results to differ materially from those
expressed in forwarding-looking statements.
First Community Bancshares, Inc. (the "Company" or "First Community") is
currently a multi-state, multi-bank holding company headquartered in Princeton,
West Virginia. With total resources of $1.054 billion at year-end 1998, First
Community provides financial and trust services to individuals and commercial
customers through 33 full-service banking locations in West Virginia, Virginia
and North Carolina.
In February 1999, the respective boards of the four affiliate banks adopted a
merger and reorganization agreement providing for the merger of all affiliate
banks of First Community Bancshares, Inc. into a single national association.
The mergers are expected to be complete on or about April 30, 1999, at which
time all banking operations will be conducted within First Community Bank, N.A.,
a national association subject to supervision of the Comptroller of the
Currency. The mergers are designed to enhance operational efficiency and
streamline regulatory considerations.
The completion of bank and branch acquisitions in 1997 resulted in significant
growth in total resources of the Company between 1996 and 1997 and have a
material impact on the following discussion of financial condition and results
of operations in comparison with other periods presented.
ACQUISITIONS
The Company acquired Citizens Bank of Tazewell ("Citizens") in Tazewell,
Virginia in July 1996 and Blue Ridge Bank ("Blue Ridge") in Sparta, North
Carolina in April 1997. Additionally, the Company acquired three Virginia
branches in July 1997 and one additional West Virginia branch in September 1997.
All of the above acquisitions, except Citizens, were accounted for as "purchase"
transactions. "Purchase" accounting does not require restatement of prior years'
results; accordingly, the addition of Blue Ridge and the branches result in
material changes in balance sheet items and revenues and expenses.
The Company's common stock was split five shares for four on March 31, 1997
and March 31, 1998. All share and per share data in this report have been
retroactively adjusted to reflect these two stock splits.
SUMMARY FINANCIAL RESULTS
<TABLE>
<CAPTION>
NET INCOME
----------
<S> <C>
1994 11,454
1995 12,789
1996 13,917
1997 15,094
1998 13,101
</TABLE>
Net income for 1998 was $13.1 million, or $1.86 per share, down $1.99 million
from $15.09 million or $2.14 per share in 1997. The decrease in net income
between 1997 and 1998 is primarily attributable to higher loan loss provisions
in the second quarter of 1998 due to the resolution through foreclosure of a
$4.7 million commercial loan relationship. Other factors negatively affecting
1998 results include the increase in operating costs and intangible amortization
associated with the bank and branch acquisitions and the decline in net interest
margin from 5.25% in 1997 to the 1998 level of
- --------------------------------------------------------------------------------
LOGOFirst Community Bancshares Logo
<PAGE> 11
4.81%. The reduction in net interest margin reflects the addition of interest
cost on acquisition indebtedness, a decrease in the Company's loan-to-deposit
ratio, and declining asset yields as a result of the overall decreasing trend in
the interest rate environment throughout 1998.
<TABLE>
<CAPTION>
RETURN ON AVERAGE ASSETS (%)
----------------------------
<S> <C>
1994 1.55%
1995 1.70%
1996 1.73%
1997 1.59%
1998 1.24%
</TABLE>
The Company's key profitability ratios of Return on Average Assets (ROA) and
Return on Average Equity (ROE) continue to reflect the strong earnings
performance of the Company and compare favorably with regional and national peer
groups. ROA,which measures the Company's stewardship of assets, was 1.24%, down
from 1.59% in 1997 and 1.73% in 1996. These decreases in ROA relate, in large
part, to branch acquisitions and related increases in average assets in 1997 and
1998 designed to maintain the Company's capital leverage position. ROE for the
Company remained strong in 1998 at 13.02% but reflects a decrease from 16.05% in
1997 and 16.26% in 1996. The declining ROE reflects the effect of capital growth
from $80.4 million in 1995 to $101.7 million at the close of 1998 and the lower
net income in 1998 as discussed in the preceding paragraph.
<TABLE>
<CAPTION>
RETURN ON AVERAGE EQUITY (%)
----------------------------
<S> <C>
1994 16.33%
1995 16.77%
1996 16.26%
1997 16.05%
1998 13.02%
</TABLE>
- --------------------------------------------------------------------------------
11
<PAGE> 12
FIVE-YEAR SELECTED FINANCIAL DATA
- --------------------------------------------------------------------------------
(Amounts in Thousands, Except Percent and Per Share Data)
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET SUMMARY (AT END OF
PERIOD)
Loans, net of unearned income......... $ 611,493 $ 671,817 $547,703 $485,151 $421,189
Reserve for loan losses............... 11,404 11,406 8,987 8,321 8,479
Securities............................ 277,210 270,969 236,441 246,578 268,906
Total assets.......................... 1,054,006 1,042,322 837,615 780,253 744,686
Deposits.............................. 875,996 853,507 643,497 622,723 616,226
Long-term debt........................ 18,176 24,330 15,000 15,000 10,000
Stockholders' Equity.................. 101,737 97,860 89,276 80,411 70,149
SUMMARY OF EARNINGS
Total interest income................. $ 81,213 $ 75,834 $ 64,941 $ 58,954 $ 53,723
Total interest expense................ 38,128 32,890 26,933 23,482 19,846
Provision for loan losses............. 6,250 4,963 2,273 2,235 1,764
Non-interest income................... 11,182 8,661 9,070 7,214 7,035
Non-interest expense.................. 28,752 24,672 24,358 22,694 23,238
Income tax expense.................... 6,164 6,876 6,530 4,968 4,456
Net Income............................ 13,101 15,094 13,917 12,789 11,454
PER SHARE DATA
Basic and diluted earnings............ $ 1.86 $ 2.14 $ 1.98 $ 1.82 $ 1.62
Cash dividends........................ 1.05 1.04 .91 .78 .68
Book value at year-end................ 14.50 13.85 12.64 11.50 9.97
SELECTED RATIOS
Return on average assets.............. 1.24% 1.59% 1.73% 1.70% 1.55%
Return on average equity.............. 13.02% 16.05% 16.26% 16.77% 16.33%
Dividend payout....................... 56.45% 48.60% 45.96% 42.86% 41.98%
Equity to year-end assets............. 9.65% 9.39% 10.66% 10.31% 9.42%
Risk based capital to risk adjusted
assets.............................. 13.25% 11.96% 17.02% 17.29% 17.22%
Leverage ratio........................ 7.37% 6.96% 10.33% 9.86% 9.49%
- ------------------------------------------------------------------------------------------------
</TABLE>
COMMON STOCK AND DIVIDENDS
The Company's common stock is traded in the over-the-counter market. Daily bid
and ask quotations are available through the NASDAQ Level III Electronic
Billboard under the symbol FCBC. On December 31, 1998, First Community's common
stock price was $29.25, a decrease of 3.9% from the split adjusted December 31,
1997 closing price of $30.45.
Book value per common share was $14.50 at December 31, 1998, compared with
$13.85 at December 31, 1997, and $12.64 at the close of 1996. The year-end
market price for First Community common stock of $29.25 represents 202% of the
Company's book value as of the close of the year and reflects total market
capitalization of $205 million. Utilizing the year-end market price and 1998
basic earnings per share, First Community common stock closed the year trading
at a price/earnings multiple of 15.73 times 1998 basic earnings per share.
Dividends for 1998 totaled $1.05 per share, up $.01 from $1.04 paid in 1997.
The 1998 dividends resulted in a cash yield on year-end market of 3.59%.
- --------------------------------------------------------------------------------
LOGOFirst Community Bancshares Logo
<PAGE> 13
<TABLE>
<CAPTION>
DIVIDENDS PER SHARE
------------------------------------------------------------------------------------------
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER CUMULATIVE
----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
1997 $0.22 $0.25 $0.25 $0.32 $1.04
1998 $0.25 $0.25 $0.25 $0.30 $1.05
</TABLE>
MARKET PRICE AND DIVIDENDS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
BID BOOK
---------------- VALUE CASH DIVIDENDS
1998 HIGH LOW PER SHARE PER SHARE
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
First Quarter................................ $29.60 $24.48 $14.18 $ .25
Second Quarter............................... 43.00 36.00 14.01 .25
Third Quarter................................ 42.75 31.00 14.35 .25
Fourth Quarter............................... 33.75 26.50 14.50 .30
- --------------------------------------------------------------------------------------------------
$1.05
- --------------------------------------------------------------------------------------------------
1997
- --------------------------------------------------------------------------------------------------
First Quarter................................ $23.68 $21.76 $12.83 $ .22
Second Quarter............................... 26.40 22.60 13.30 .25
Third Quarter................................ 28.90 25.40 13.58 .25
Fourth Quarter............................... 32.00 26.20 13.85 .32
- --------------------------------------------------------------------------------------------------
$1.04
- --------------------------------------------------------------------------------------------------
</TABLE>
NET INTEREST MARGIN
Net interest margin measures net interest income as a percentage of average
earning assets. In 1998, net interest margin declined to 4.81% for the year from
5.25% in 1997 and 5.39% in 1996. This decrease was due in large part to a
declining asset yield which decreased 26 basis points, largely in the taxable
portion of the "available for sale" securities portfolio and short-term
investments. During 1998, a larger portion of earning assets was invested in
lower yield, short-term investments further reducing the overall asset yield.
Increases in the Company's cost of funds during 1997 and 1998 of 10 basis points
and 14 basis points, respectively, also had a negative impact on net interest
margin. The cost of funds was adversely impacted by branch acquisitions which
brought with them a relatively higher cost of funds.
- --------------------------------------------------------------------------------
13
<PAGE> 14
<TABLE>
<CAPTION>
NET INTEREST MARGIN
-------------------
<S> <C>
1994 5.30%
1995 5.38%
1996 5.39%
1997 5.25%
1998 4.81%
</TABLE>
NET INTEREST INCOME
The fundamental source of the Company's earnings, net interest income, is
defined as the difference between income on earning assets and the cost of funds
supporting those assets. Significant categories of earning assets are loans and
securities while deposits and short-term borrowings represent the major portion
of interest-bearing liabilities.
On a tax equivalent basis, net interest income increased $726,000 or 1.6% in
1998 and $5.3 million or 13.1% in 1997. Average earning assets increased 10.9%
in 1998 and 16.1% in 1997. These increases were primarily the result of bank and
branch acquisitions occurring throughout 1997 which contributed new earning
assets and increases in tax equivalent net interest income.
The modest increase in tax equivalent net interest income for 1998 is impacted
by the sale of approximately $14.0 million in credit card revolving loan
accounts which reduced interest and fees on loans approximately $747,000 in
1998. The proceeds of the sale were reinvested in interest bearing balances
which yielded substantially lower earnings and, accordingly, reduced current
year net interest income. The portfolio sale was part of an overall exit
strategy for the credit card division.
<TABLE>
<CAPTION>
TAX EQUIVALENT NET INTEREST INCOME
----------------------------------
<S> <C>
1994 $36,094
1995 $37,759
1996 $40,395
1997 $45,700
1998 $46,426
</TABLE>
PROVISION FOR LOAN LOSSES
The provision for loan losses represents charges against operations to
establish reserves for loan losses inherent in the Company's loan portfolio. The
level of expense, as well as the required level of reserves, is dependent upon a
number of factors including historical loss ratios by loan type, assessment of
specific credit weaknesses within the portfolio, concentrations of credit,
assessment of the prevailing economic climate, and other factors which may
affect the overall condition of the loan portfolio.
The provision for loan losses was $6.3 million in 1998, $5.0 million in 1997
and $2.3 million in 1996. The increase in the provision for loan losses in 1998
of $1.3 million was largely the result of a second quarter provision taken in
response to a commercial loan foreclosure.
Elevated provisions in both 1997 and 1998 also include higher levels of
consumer loan charge-offs in the Company's credit card division and indirect
auto financing program. Each of these programs were curtailed in 1998 and losses
associated with these types of retail lending are expected to be substantially
reduced.
- --------------------------------------------------------------------------------
LOGOFirst Community Bancshares Logo
<PAGE> 15
NON-INTEREST INCOME
Non-interest income consists primarily of fiduciary income on trust services
and service charges on deposit accounts. Non-interest income totaled $11.2
million in 1998, a $2.5 million increase or 29.1% over the $8.7 million in 1997
and $2.1 million or 23.3% improvement over the 1996 totals of $9.1 million.
Total non-interest revenues from continuing sources increased $1.04 million
between 1996 and 1997 with this increase due largely to the acquisitions of Blue
Ridge Bank in 1997 which contributed $457,000 in other revenues and new branches
which added an additional $179,000. When comparing 1998 with 1997, the full year
of Blue Ridge and branches contributed an additional $509,000 in other operating
revenues with non-interest income from continuing sources increasing
approximately $260,000.
Higher levels of non-interest income for 1998 and 1996 include pension
curtailment and termination gains of $1,062,000 (net of federal excise tax of
$764,000) and $1,450,000, respectively, as a result of the Company's termination
of its Defined Benefit Pension Plan, which was completed in the first quarter of
1998.
Included in other operating income for 1998 are gains totaling $1.2 million on
the sale of substantially all revolving loan accounts and all merchant account
relationships in the Company's credit card division. The Company's decision to
exit this line of business was based on its relatively small share of this
market, vigorous competition for credit card accounts and rising consumer
delinquencies. At year-end 1998, the Company retained approximately $2 million
in revolving private label credit card accounts.
Service charges on deposit accounts are the largest source of non-interest
income. Service charge income totaled $3.8 million in 1998, an increase of
$457,000 or 13.9% over 1997. This compares with a 10.5% increase of $313,000
between 1997 and 1996.
<TABLE>
<CAPTION>
OTHER SERVICE CHARGES, COMMISSIONS AND FEES
as a Percent of Assets
-------------------------------------------
<S> <C>
1994 .248%
1995 .268%
1996 .273%
1997 .286%
1998 .279%
</TABLE>
Other service charges, commissions and fees declined slightly in 1998 versus
1997. Alternatively, a 30.5% increase in 1997 of $696,000 was experienced over
1996 levels. The increase in 1997 is the result of an increased emphasis on fee
based revenues throughout the organization as well as the addition of Blue Ridge
Bank and branch acquisitions occurring in 1997 which added approximately
$142,000. Other transaction volume also increased in 1997, adding fee revenues
of approximately $614,000.
Fiduciary income continued at a strong level and totaled $1.7 million in 1998,
1997 and 1996. Trust revenues are comprised of fees for asset management and
estate settlement. Expenses associated with the operation of the Trust and
Financial Services Division are included in non-interest expense.
NON-INTEREST EXPENSE
Non-interest expenses consist of salaries and benefits, occupancy, equipment
and all other operating expense incurred by the Company.
Non-interest expense totaled $28.8 million in 1998, as compared with $24.7
million and $24.4 million in 1997 and 1996, respectively. The substantial
increase in 1998 operating costs was attributable to the full year costs of Blue
Ridge Bank and the various branches in 1998 versus the partial year of operation
in 1997. When comparing 1998 to 1997, the addition of Blue Ridge Bank and
branches acquired throughout 1997 added approximately $956,000 and $1,268,000,
respectively, over their 1997 levels. The total increase in 1997 over 1996 for
- --------------------------------------------------------------------------------
15
<PAGE> 16
the bank and branch acquisitions was approximately $3,301,000 and $722,000,
respectively.
In November 1996, the Company detected a "payments system fraud" perpetrated
by a business customer and certain of its principals, all of whom were long-term
customers of a subsidiary of the Company. The transaction commonly referred to
as a "kite" involved the transfer of non-existent funds between a subsidiary
bank of the Company and a third party to cover existing overdrafts. The Company
recorded associated losses in December of 1996 totaling $3.4 million. These
losses are reflected as a separate line item in non-interest expenses for 1996.
The Company expects partial repayment from either the principals or their
business interests. Partial repayment in 1997 totaled $177,000 and is reflected
in other operating income. There were no recoveries recognized in 1998.
The nominal increase in total non-interest expense between 1996 and 1997
reflects the net effect of the check collection losses in 1996 and the added
operating cost of Blue Ridge Bank ($3.3 million) and new branches ($700,000) in
1997. Partially offsetting the cost of operation of new branches in 1997, was
the recognition of a $439,000 credit in lieu of pension expense due to the
benefit freeze and pending plan termination and the reversal of $700,000 in
litigation reserves established in 1995 and 1996. The Company was able to
reverse the largest portion of $1.1 million in reserves established to provide
for possible losses on litigation which was ultimately settled in the second
quarter of 1997 at a total cost of approximately $460,000.
Salaries and employee benefits increased $906,000 or 8.0% when comparing 1998
with 1997 and relate almost exclusively to the addition of Blue Ridge and five
new branches acquired in 1997. The effect of a full year of operations of these
facilities in 1998 versus a partial year in 1997 resulted in additional
personnel costs of approximately $1,118,000 in 1998. Blue Ridge contributed an
additional $521,000 of this total while the branch acquisitions added an
additional $597,000 in 1998. When comparing 1997 to 1996, the increase of
approximately $1.8 million is largely the result of the Blue Ridge and branch
acquisitions occurring in 1997 which added an additional $1,653,000 over 1996.
Blue Ridge added an additional $1,355,000 while the branches added an additional
$298,000 in personnel cost.
Occupancy expense increased $264,000 or 15.7% between 1998 and 1997. The
acquisition of Blue Ridge and new branches in 1997 resulted in additional
occupancy cost in 1998 of approximately $195,000.
The $323,000 increase (19.7%) in furniture and equipment expense in 1998
reflects not only the impact of acquisitions, which added approximately $197,000
in additional cost, but also includes depreciation and maintenance associated
with the implementation of new check processing technology and the advent of
electronic banking services implemented in 1997 and early 1998.
<TABLE>
<CAPTION>
NET OVERHEAD RATIO
------------------
<S> <C>
1994 2.51%
1995 2.27%
1996 2.22%
1997 1.84%
1998 2.06%
</TABLE>
The Company's net overhead ratio (non-interest expense less non-interest
income excluding security gains and non-recurring gains divided by average
earning assets) is a measure of its ability to manage and control costs. As this
ratio decreases, more of the net interest income earned is realized as net
income. The net overhead ratios for 1998, 1997 and 1996 were 2.06%, 1.84% and
2.22%, respectively.
The Company's efficiency ratio also measures management's ability to control
costs and maximize revenue growth. The efficiency ratio is computed by dividing
non-interest expense by the sum of the net interest income plus non-interest
income (all non-recurring items excluded). The efficiency ratio for 1998 was
47.4%. The efficiency ratio for both 1997 and 1996 was 42.2%
- --------------------------------------------------------------------------------
LOGOFirst Community Bancshares Logo
<PAGE> 17
INCOME TAX EXPENSE
Income tax expense totaled $6.2 million in 1998, compared with $6.9 million in
1997 and $6.5 million in 1996. The major difference between the statutory tax
rate and the effective tax rate (income tax expense divided by pre-tax book
income) results from income which is not taxable for Federal income tax
purposes. The primary category of non-taxable income is that of state and
municipal securities and industrial revenue bonds and tax-free loans. The
effective tax rate for 1998 was 32.0% as compared with 31.3% for 1997 and 31.9%
in 1996.
INVESTMENT SECURITIES
Investment securities are comprised largely of U.S. Agency obligations and
state and municipal securities. U.S. Agency obligations include securities
issued by various government corporations and agencies, including FHLB, FNMA,
GNMA, SLMA, FFCB, and FHLMC.
Obligations of States and Political Subdivisions totaling $75.0 million are
comprised of high grade municipal securities generally carrying AAA bond
ratings, many of which also carry credit enhancement insurance by major insurers
of investment obligations.
The average maturity of the investment portfolio increased from 9.08 years in
1997 to 10.05 years in 1998 with the tax equivalent yield increasing from 7.87%
at year-end 1997 to 8.38% at the close of 1998. The increase in yield reflects
the change in portfolio composition which shifted toward the municipal bond
sector.
The investment portfolio totaling $84.0 million decreased $25.2 million
between 1997 and 1998. This decrease is the result of large prepayments and
calls occurring as a result of the declining interest rate environment in 1998.
Portions of these cash flows were invested in overnight interest bearing
balances with the Federal Home Loan Bank and correspondent banking institutions.
SECURITIES AVAILABLE FOR SALE
Securities available for sale are used as part of management's asset/liability
strategy. These securities may be sold in response to changes in interest rates,
changes in prepayment risk, for liquidity needs and other factors. These
securities are recorded at market value.
At December 31, 1998, the Company had $193.2 million in securities available
for sale, compared with $161.8 million at year-end 1997. The increase in this
portfolio reflects the reinvestment of funds received from loan principal
prepayments arising from early payoffs and calls and maturities of investment
securities.
The market value of securities available for sale exceeded book value at
year-end 1998 by $2.1 million. The tax equivalent purchase yield on securities
available for sale in 1998 was 6.56% and the tax equivalent purchase yield in
1997 was 6.99%. The 43 basis point decrease in yield on the portfolio is a
direct result of a general decline in interest rates which triggered above
average calls and prepayments. These prepayments were then invested at
prevailing lower market rates along with additional funds derived from
reductions in the loan portfolio.
The average maturity of the portfolio was 15.6 years and 11.8 years at
December 31, 1998 and 1997, respectively. The extended average maturity reflects
an increase in longer term municipal securities as a percentage of the total
portfolio as well as the replacement of short-term agency securities with longer
term instruments. Most of these longer term securities have call provisions and
many are expected to be called prior to their final maturity.
<TABLE>
<CAPTION>
LOAN PORTFOLIO
- -----------------------------------------------------------------------------------------------------------------------
REAL ESTATE - REAL ESTATE - REAL ESTATE - LOANS TO
COMMERCIAL, FINANCIAL & AGRICULTURAL CONSTRUCTION ALL OTHERS RESIDENTIAL COMMERCIAL INDIVIDUALS
- ------------------------------------ ------------- ---------- ------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
12.6% 1.5% .1% 37.3% 27.9% 20.6%
</TABLE>
LOAN PORTFOLIO
The loan portfolio is diversified among loan types and industry segments as
well as geography. Commercial and commercial real estate loans represent 40.5%
of the total portfolio. During 1998, residential real estate loans increased as
a percentage of total loans and now comprise 37.3% of the portfolio. Decreases
in portfolio sectors were noted in commercial and commercial real estate, which
declined by $37.2 mil-
- --------------------------------------------------------------------------------
17
<PAGE> 18
lion or 13.0% in 1998. Additionally, consumer loans declined by $23.0 million or
15.5% from $148.5 million at December 31, 1997 to $125.5 million at the close of
1998 and include the reduction due to the aforementioned sale of credit card
loans. Consumer loans represent 20.6% and 22.0% of the portfolio at the close of
1998 and 1997, respectively.
<TABLE>
<CAPTION>
LOANS
-----
<S> <C>
1994 $421
1995 $485
1996 $548
1997 $672
1998 $612
</TABLE>
Loans, net of unearned income, were $611.5 million at year-end 1998. This
represents a $60.3 million decline or 9.0% from the $671.8 million level at
December 31, 1997. During 1998, increased competition for commercial loans by
other banks and capital market groups impacted minimum underwriting standards
within the industry leading to sub-prime interest rates, higher loan-to-value
ratios, and less emphasis on owner guarantees. The Company resisted this easing
of price and quality standards and sacrificed some existing and new loan
business in the process. This shift in underwriting standards coupled with the
declining interest rate environment resulted in above average principal
prepayments and contributed to the decline in the loan portfolio.
In addition to loan prepayments, the sale of substantially all credit card
loans in the third and fourth quarters of 1998 resulted in an additional $14
million reduction in the loan portfolio.
The loan-to-deposit ratio decreased to 70% at December 31, 1998 from 79% at
December 31, 1997. The reduction in the loan-to-deposit ratio is a result of the
decline noted in the loan portfolio and a $22.5 million increase in total
deposits.
RESERVE FOR LOAN LOSSES
The reserve for loan losses represents reserves available to absorb estimated
loan losses and other credit-related charges. Loan losses arise primarily from
the loan portfolio, but may also be derived from other sources, including
commitments to extend credit, guarantees, and standby letters of credit. The
reserve for loan losses is increased by both charges to earnings in the form of
provisions for loan losses and recoveries of prior loan charge-offs, and
decreased by loans charged-off. The provision for loan losses is calculated to
bring the reserve to a level which, in management's judgment, is considered
adequate to absorb potential losses inherent in the loan portfolio. Management
performs monthly assessments to determine the appropriate level of the reserve.
The factors considered in this evaluation include, but are not necessarily
limited to, estimated 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, maturity,
composition, delinquencies, and non-accruals. While management has attributed
reserves to various portfolio segments, the allowance is general in nature and
is available for the entire portfolio.
The reserve for loan losses represents 140% of non-performing loans at
year-end 1998 versus 79% and 144% at December 1997 and 1996, respectively. When
other real estate is combined with non-performing loans, reserves equal 98% of
non-performing assets at the end of 1998 versus 72% and 106% at December 31,
1997 and 1996, respectively.
Net charge-offs were $6.3 million in 1998, as compared with $4.5 million in
1997 and $1.6 million in 1996, respectively. The $1.8 million increase in net
charge-offs for 1998 is principally related to the commercial loan charge-off of
$2.9 million on a loan relationship to a failed furniture assembly plant in
Princeton, West Virginia in the second quarter of 1998.
Net charge-offs for 1997 were elevated, due in part, to retail loan losses of
$955,000 and $468,000 in the credit card and indirect auto loan areas,
respectively, as well as a large single commercial loan charge-off of $800,000
on a car dealer floor plan arrangement.
- --------------------------------------------------------------------------------
LOGOFirst Community Bancshares Logo
<PAGE> 19
NON-PERFORMING ASSETS
Non-performing assets include loans on which interest accruals have ceased,
loans contractually past due 90 days or more and still accruing interest, and
other real estate owned (OREO) pursuant to foreclosure proceedings. Total
non-performing assets were $11.7 million at December 31, 1998. The levels of
non-performing assets for the last five years are presented in the table below.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31
------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------ ------ ------
<S> <C> <C> <C> <C> <C>
Non-accruing Loans........................... $ 7,763 $ 9,988 $5,476 $4,371 $6,909
Loans 90 Days Past Due....................... 377 4,391 780 673 968
Other Real Estate Owned...................... 3,547 1,472 2,225 929 919
- -----------------------------------------------------------------------------------------------
$11,687 $15,851 $8,481 $5,973 $8,796
- -----------------------------------------------------------------------------------------------
Non-performing loans as a percentage of total
loans...................................... 1.3% 2.1% 1.1% 1.0% 1.9%
Non-performing assets as a percentage of
total loans and other real estate owned.... 1.9% 2.4% 1.6% 1.2% 2.1%
Reserve for loan losses as a percentage of
non-performing loans....................... 140.1% 79.3% 143.7% 165.0% 107.6%
Reserve for loan losses as a percentage of
non-performing assets...................... 97.6% 72.0% 106.0% 139.3% 96.4%
- -----------------------------------------------------------------------------------------------
</TABLE>
Non-performing assets decreased $4.2 million between 1997 and 1998 with
decreases in both ninety days past due and non-accrual loans. An increase was
reflected in other real estate owned during 1998 as a result of the acquisitions
of a furniture manufacturing facility in southern West Virginia and a townhouse
project in northern West Virginia. These acquisitions resulted in additional
other real estate owned in the amounts of $1.5 million and $500,000,
respectively. The manufacturing property is presently under contract to sell and
the townhouse project is providing rental income until the units are sold. No
losses are anticipated from the sale of these properties.
DEPOSITS
Total deposits at December 31, 1998 increased $22.5 million or 2.6% when
compared to December 31, 1997. The increase in deposits is the result of $20.1
million and $9.6 million increases in demand and interest bearing demand
deposits, respectively. Slight decreases were realized in other savings deposit
categories. In 1998, the average rate paid on interest bearing liabilities was
4.57%, up from 4.4% in 1997. The increase in the Company's cost of funds is the
result of competition for deposits among both financial institutions and
non-bank financial service providers and the addition of new branches in late
1997 with relatively higher costs of funds. These factors lead to an increase in
the overall cost of funds despite a general decline in market interest rates
during the year.
Average deposits totaled $870.8 million for 1998 versus $759.4 million in
1997. The largest increase in average deposits was experienced in
interest-bearing demand deposits, which increased 20.7% versus an overall
increase of 14.7%. Non-interest bearing demand deposits increased 11.5% with a
16.8% increase experienced on average time deposits. Average savings deposit
accounts also increased 6.3%.
SHORT-TERM BORROWINGS
The Company's short-term borrowings consist primarily of Federal Funds
purchased and securities sold under agreements to repurchase. This category of
funding is a source of moderately priced short-term funds. Short-term borrowings
decreased on average $8.0 million or 13.5% from 1997 following a 8.4% decrease
between 1997 and 1996. The decrease in average balances in 1998 is the result of
the increased liquidity in 1998. Strong liquidity in 1998 eliminated the need to
purchase federal funds and reduced the emphasis on short-term funding through
customer repurchase agreements.
OTHER INDEBTEDNESS
Other indebtedness, which represents long-term advances from the Federal Home
Loan Bank (FHLB) and acquisition debt to a correspondent bank decreased by $6.3
million in 1998. The decrease is attributable to the maturity of $5.0 million of
FHLB debt and principal repayments on acquisition debt.
- --------------------------------------------------------------------------------
19
<PAGE> 20
STOCKHOLDERS' EQUITY
Risk-based capital ratios are a measure of the Company's capital adequacy. At
December 31, 1998, the Company's Tier I capital ratio was 12.0% compared with
10.70% in 1997. Risk-based capital ratios and the leverage ratio are used by
banking regulators to measure the capital adequacy of banking institutions.
Risk-based capital guidelines risk weight balance sheet assets and off-balance
sheet commitments in determining capital adequacy. The Company's total
risk-based capital-to-asset ratio was 13.25% at the close of 1998 compared with
11.96% in 1997. Both of these ratios are well above the current minimum level of
8% prescribed for bank holding companies.
<TABLE>
<CAPTION>
RISKED-BASED CAPITAL
------------------------------------------------------
REGULATORY MINIMUM RISK-ADJUSTED ASSETS
------------------ --------------------
<S> <C> <C>
1994 8.00% 17.22%
1995 8.00% 17.29%
1996 8.00% 17.02%
1997 8.00% 11.96%
1998 8.00% 13.25%
</TABLE>
The leverage ratio is the measurement of total tangible equity to total
assets. The Company's leverage ratio at December 31, 1998 was 7.37%, compared to
6.96% at December 31, 1997, both of which are well above the minimum 3% and the
recommended 4% to 5% range prescribed by the Federal Reserve.
LIQUIDITY
Liquidity represents the Company's ability to respond to demands for funds and
is usually derived from maturing investment securities, overnight investments,
periodic repayment of loan principal, and from the Company's ability to generate
new deposits. The Company also has the ability to attract short-term sources of
funds and draw on credit lines which have been established at financial
institutions to meet cash needs.
Total liquidity of $462.7 million at December 31, 1998 is comprised of the
following: cash on hand and deposits with other financial institutions of $91.5
million; securities available for sale of $193.2 million; investment securities
held to maturity due within one year of $3.9 million; federal funds sold of
$25.6 million; and Federal Home Loan Bank credit availability of $148.5 million.
INTEREST RATE SENSITIVITY
Net interest income, the Company's primary component of operational revenue,
is subject to variation as a result of changes in interest rate environments in
conjunction with unbalanced repricing opportunities in earning assets and
interest bearing liabilities. Interest rate risk has four primary components
including repricing risk, basis risk, yield curve risk and option risk.
Repricing 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 called 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 uses an earnings simulation model to measure interest
rate sensitivity. The model 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 and based
upon the latest simulation, the Company believes that it is currently asset
sensitive. Asset sensitive positions can positively impact net interest income
in a rising rate environment or, alternatively, adversely impact net interest
income in a falling rate environment.
The Company has established policy limits for tolerance of interest rate risk
which allows for no more than a ten percent reduction in projected net interest
income based on quarterly income simulations. Based on the most recent
simulation, the
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LOGOFirst Community Bancshares Logo
<PAGE> 21
Company believes that its current exposure to interest rate risk does not exceed
this policy limit. In the simulation's most likely scenario which incorporates
relatively little change in the treasury yield curve and a 25 basis point drop
in the prime lending rate in the second quarter of 1999, net interest income
could potentially increase by as much as 4% over 1998 with effective management
of key deposit interest rates.
YEAR 2000 PREPAREDNESS
The arrival of January 1, 2000 is expected to cause disruption in computer
systems (hardware, software and imbedded chips) with two-digit year fields,
which cannot distinguish between the years 1900 and 2000. First Community
Bancshares, Inc. and affiliates have established an oversight committee to
direct and monitor its Year 2000 readiness project. As of December 31, 1998 and
the date of this report, the project is ongoing and is nearing the completion of
the testing phase. The principal purpose of the project is to address issues or
potential issues involving computer programs and imbedded computer chips which
may be unable to distinguish between the Year 1900 and the Year 2000. The
Project Committee is comprised of key management and operational personnel from
throughout the Company. This Committee, appointed by the Company's Board of
Directors, has full authority to direct resources as necessary to ensure that
project objectives are achieved and completed within prescribed time frames and
well in advance of the millennium date change. The Committee has completed its
work in the awareness and assessment phases by identifying those computer
systems which the Company uses to process important information, and those other
systems which may have embedded computer chips which are subject to Year 2000
problems. The Committee prioritized all such systems and identified a group of
"mission critical" systems.
In order to determine the Company's exposure due to potential third-party Year
2000 problems, the oversight committee coordinated the risk assessment of
significant loan relationships and suppliers to evaluate the state of readiness
of these entities and their ability to deal with Year 2000 problems. The
remediation phase involves upgrading or replacing of hardware, software and
other systems which could be affected by Year 2000 problems. This phase is
complete for all mission critical systems and the testing process is underway on
these renovated systems and mission critical systems provided by third parties
which are certified as Year 2000 compliant.
Testing for mission critical systems, including the Company's Comprehensive
Banking System, items processing, the Federal Reserve On-Line Exchange, the
Trust accounting system, and the ATM Management system has been completed.
Testing for other mission critical systems including loan and deposit
origination platform systems is underway and is scheduled to be complete by
March 31, 1999. Additional testing for vendor-provided releases on these systems
will be necessary throughout 1999 as these releases are made available.
Other systems which are not considered mission critical remain in the
remediation phase with completion of remediation and testing planned for the
second quarter of 1999.
RISKS
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely effect the Company's
results of operations, liquidity and financial condition. For example, if
significant loan customers experience severe Year 2000 problems, their ability
to repay their loan obligations in a timely manner would be adversely affected.
Due to the general uncertainty inherent in the Year 2000 problem, resulting in
part from the uncertainty of the Year 2000 readiness of certain third party
suppliers and customers, the Company is unable to determine at this time whether
the consequences of Year 2000 failures will have a material impact on the
Company's results of operations, liquidity or financial condition. Completion of
the Year 2000 project is expected to significantly reduce the Company's level of
uncertainty about the Year 2000 problem and, in particular, about the Year 2000
compliance and readiness of its material external agents and customers. The
Company believes that with the remediation of existing systems and with the
implementation of new business systems and completion of the project as
scheduled, the possibility of significant interruptions of normal operations
should be reduced.
COSTS
The Company's budgeted total cost of the Year 2000 project is approximately
$150,000. The total amount expended on the project through the date of this
report, exclusive of administration, is approximately $47,000 and includes the
cost of salary and overtime for existing operations and Information Systems
staff in the assessment, testing, and verifica-
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21
<PAGE> 22
tion of systems. Additional costs of $30,000 are estimated to have been incurred
to date in administration and committee meeting bringing total costs to $77,000.
The total remaining cost of the Year 2000 project is estimated at $103,000.
Approximately $75,000 is for new software and hardware purchases. As of the date
of this report, the Company has spent only 31% of its direct budget for the
project despite the fact that it is nearing completion of all phases for mission
critical systems. Hardware replacement and minor software replacement in the
second quarter will bring expenditures more closely in line with the overall
project percentage of completion.
The cost of the project, the dates on which the Company plans to complete Year
2000 modifications, and the impact of third party compliance are based on
management's best estimates which were derived utilizing certain assumptions as
to future events including the availability of outside resources, cooperation
from third parties and external agents of the Company as well as the level of
Year 2000 readiness by various vendors and customers. Some of these assumptions
involve contingencies which are beyond the control of the Company. Accordingly,
the actual cost and impact of Year 2000 problems which the company may
experience, particularly those caused by third-party difficulties, can only be
estimated at this time.
CONTINGENCY PLANNING
The Company has developed a contingency plan for mission critical systems
designed to allow it to avoid significant business interruption in the event
current systems are affected by Year 2000 issues. This Contingency Plan involves
the maintenance of alternate processing sites, acquisition and development of
additional human resources which will be prepared for additional remediation, if
necessary, throughout 1999 and in January 2000, as well as the development of
alternate manual procedures which can be employed as back-up processes for
existing automated business processes. The Contingency Plan was completed and
approved by the Board of Directors in February 1999. Testing of the Plan will be
completed early in the second quarter of 1999 and the Plan will be revised as
necessary throughout 1999.
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LOGOFirst Community Bancshares Logo
<PAGE> 23
CONSOLIDATED FINANCIAL STATEMENTS
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<TABLE>
<S> <C>
Consolidated Balance Sheets................................................ 24
Consolidated Statements of Income and Comprehensive Income................. 25
Consolidated Statements of Cash Flow....................................... 26
Consolidated Statements of Stockholders' Equity............................ 27
Notes to Consolidated Financial Statements................................. 28
Independent Auditors' Report............................................... 47
Report on Management's Responsibilities.................................... 48
</TABLE>
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23
<PAGE> 24
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
(Amounts in Thousands, Except Share Data)
<TABLE>
<CAPTION>
DECEMBER 31
------------------------
1998 1997
------------------------
<S> <C> <C>
ASSETS
Cash and due from banks..................................... $ 33,961 $ 34,590
Interest bearing balances -- FHLB........................... 57,523 145
Federal funds sold.......................................... 25,630 12,406
Securities available for sale (amortized cost of $191,131,
1998; $159,711, 1997)..................................... 193,194 161,795
Investment securities held to maturity:
U.S. Treasury securities.................................. 100 4,098
U.S. Government agencies and corporations................. 7,546 26,377
States and political subdivisions......................... 75,009 77,641
Other securities.......................................... 1,361 1,058
------------------------
Total investment securities (market value, $88,256,
1998; $112,263, 1997)............................... 84,016 109,174
Total loans, net of unearned income......................... 611,493 671,817
Less reserve for loan losses.............................. 11,404 11,406
------------------------
Net loans................................................... 600,089 660,411
Premises and equipment...................................... 17,986 19,133
Other real estate owned..................................... 3,547 1,472
Interest receivable......................................... 7,030 7,688
Other assets................................................ 6,684 9,734
Intangible assets........................................... 24,346 25,774
------------------------
TOTAL ASSETS......................................... $1,054,006 $1,042,322
------------------------
LIABILITIES
Deposits:
Demand.................................................... $ 123,992 $ 103,846
Interest-bearing demand................................... 137,169 127,541
Savings................................................... 148,461 149,407
Time...................................................... 466,374 472,713
------------------------
Total deposits....................................... 875,996 853,507
Interest, taxes and other liabilities....................... 10,417 11,455
Federal funds purchased..................................... -- 2,705
Securities sold under agreements to repurchase.............. 47,680 52,351
Other indebtedness.......................................... 18,176 24,444
------------------------
TOTAL LIABILITIES.................................... 952,269 944,462
------------------------
STOCKHOLDERS' EQUITY
Common stock, $1 par value in 1998 and 1997, 10,000,000
shares authorized; 7,193,909 shares issued in 1998 and
1997, respectively; 7,014,042 and 7,063,665 shares
outstanding in 1998 and 1997, respectively................ 7,194 7,194
Additional paid-in capital.................................. 36,122 36,122
Retained earnings........................................... 60,250 54,564
Treasury stock, at cost..................................... (1,403) (1,271)
Unallocated ESOP shares..................................... (1,664) --
Accumulated other comprehensive income...................... 1,238 1,251
------------------------
TOTAL STOCKHOLDERS' EQUITY........................... 101,737 97,860
------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........... $1,054,006 $1,042,322
------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
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LOGOFirst Community Bancshares Logo
<PAGE> 25
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
- --------------------------------------------------------------------------------
(Amounts in Thousands, Except Share and Per Share Data)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
----------------------------------------
1998 1997 1996
----------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans............................ $62,323 $59,753 $50,553
Interest on securities available for sale............. 9,060 9,128 7,556
Interest on investment securities:
U.S. Treasury securities............................ 117 337 778
U.S. Government agencies and corporations........... 1,034 2,333 3,307
States and political subdivisions, tax exempt....... 3,989 3,205 2,520
Other securities.................................... 90 85 82
Interest on federal funds sold........................ 1,594 949 117
Interest on deposits in banks......................... 3,006 44 28
----------------------------------------
TOTAL INTEREST INCOME.......................... 81,213 75,834 64,941
----------------------------------------
INTEREST EXPENSE
Interest on deposits.................................. 34,374 28,773 23,158
Interest on short-term borrowings..................... 2,295 2,623 2,898
Interest on other indebtedness........................ 1,459 1,494 877
----------------------------------------
TOTAL INTEREST EXPENSE......................... 38,128 32,890 26,933
----------------------------------------
NET INTEREST INCOME............................ 43,085 42,944 38,008
----------------------------------------
Provision for loan losses............................. 6,250 4,963 2,273
----------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN
LOSSES...................................... 36,835 37,981 35,735
----------------------------------------
NON-INTEREST INCOME
Fiduciary income...................................... 1,682 1,678 1,731
Service charges on deposit accounts................... 3,746 3,289 2,976
Other service charges, commissions and fees........... 2,935 2,979 2,283
Net securities (losses) gains......................... 25 6 (128)
Other operating income................................ 1,732 709 758
Pension termination gain.............................. 1,062 -- 1,450
----------------------------------------
TOTAL NON-INTEREST INCOME...................... 11,182 8,661 9,070
----------------------------------------
NON-INTEREST EXPENSE
Salaries and employee benefits........................ 12,242 11,336 9,580
Occupancy expense of bank premises.................... 1,943 1,679 1,596
Furniture and equipment expense....................... 1,965 1,642 1,212
Check collection losses............................... -- -- 3,365
Goodwill and core deposit amortization................ 2,061 1,379 315
Other operating expense............................... 10,541 8,636 8,290
----------------------------------------
TOTAL NON-INTEREST EXPENSE..................... 28,752 24,672 24,358
----------------------------------------
Income before income taxes............................ 19,265 21,970 20,447
Income tax expense.................................... 6,164 6,876 6,530
----------------------------------------
NET INCOME..................................... $13,101 $15,094 $13,917
----------------------------------------
Other comprehensive (loss) income, net of tax......... (13) 818 41
----------------------------------------
Comprehensive income.................................. $13,088 $15,912 $13,958
----------------------------------------
WEIGHTED AVERAGE BASIC AND DILUTED SHARES
OUTSTANDING......................................... 7,040,437 7,063,033 7,028,349
----------------------------------------
BASIC AND DILUTED EARNINGS PER COMMON SHARE........... $1.86 $2.14 $1.98
----------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
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25
<PAGE> 26
CONSOLIDATED STATEMENTS OF CASH FLOW
- --------------------------------------------------------------------------------
(Amounts in Thousands)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
----------------------------------------
1998 1997 1996
----------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Cash flows from operating activities:
Net income............................................ $ 13,101 $ 15,094 $ 13,917
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses........................ 6,250 4,963 2,273
Depreciation of premises and equipment........... 1,514 1,192 856
Amortization of intangibles...................... 1,915 647 625
Net investment amortization and accretion........ 32 (332) 271
Net (gain) loss on the sale of assets............ (1,375) (103) 12
Decrease (increase) in interest receivable....... 658 (358) 285
Decrease (increase) in other assets.............. 2,958 1,046 (3,323)
Decrease in other liabilities.................... (1,033) (2,857) (887)
Other, net....................................... 88 (51) (274)
----------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES............. 24,108 19,241 13,755
----------------------------------------
INVESTING ACTIVITIES
Cash flows from investing activities:
Proceeds from sales of securities available for
sale................................................ -- 18 15,868
Proceeds from maturities and calls of securities
available for sale.................................. 100,920 24,762 14,771
Proceeds from maturities and calls of investment
securities.......................................... 25,488 26,509 27,723
Proceeds from sale of credit card loans............... 15,590 -- --
Purchase of securities available for sale............. (132,381) (35,090) (45,641)
Purchase of investment securities..................... (300) (26,447) (2,915)
Net decrease (increase) in loans made to customers.... 37,664 (27,014) (64,044)
Cash provided by branch acquisitions, net............. -- 39,658 18,735
Purchase of premises and equipment.................... (726) (2,018) (439)
Proceeds from sale of equipment....................... 287 16 159
----------------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES... 46,542 394 (35,783)
----------------------------------------
FINANCING ACTIVITIES
Cash flows from financing activities:
Net increase (decrease) in demand and savings
deposits............................................ 28,556 (8,507) (10,328)
Net (decrease) increase in time deposits.............. (6,351) 30,398 10,263
Net (decrease) increase in short-term debt............ (7,376) (23,443) 28,294
Repayment of long-term debt........................... (7,768) (2,412) (10)
Proceeds from long-term borrowings.................... 1,500 11,500 --
Acquisition of treasury stock......................... (1,796) -- (170)
Reissuance of treasury stock.......................... -- 17 1,499
Cash paid in lieu of fractional shares................ (27) (22) --
Dividends paid........................................ (7,415) (7,345) (6,422)
----------------------------------------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES... (677) 186 23,126
----------------------------------------
CASH AND CASH EQUIVALENTS
Net increase in cash and cash equivalents............. 69,973 19,821 1,098
Cash and cash equivalents at beginning of year........ 47,141 27,320 26,222
----------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR.............. $ 117,114 $ 47,141 $ 27,320
----------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
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LOGOFirst Community Bancshares Logo
<PAGE> 27
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
(Amounts in Thousands, Except Share and Per Share Information)
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL UNALLOCATED OTHER
COMMON PAID-IN RETAINED TREASURY ESOP COMPREHENSIVE
STOCK CAPITAL EARNINGS STOCK SHARES INCOME
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995........ $ 30,217 $13,128 $39,320 $(2,646) $ -- $ 392
Net income........................ -- -- 13,917 -- -- --
Common dividends declared
($.91 per share)................ -- -- (6,422) -- -- --
Purchase of 6,375 treasury shares
at $26.80 per share............. -- -- -- (170) -- --
Reissuance of 62,286 treasury
shares at $24.06 per share...... -- (29) -- 1,528 -- --
Comprehensive income, net of
tax............................. -- -- -- -- -- 41
-------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1996........ 30,217 13,099 46,815 (1,288) -- 433
Net income........................ -- -- 15,094 -- -- --
Common dividends declared ($1.04
per share)...................... -- -- (7,345) -- -- --
Change from $5.00 par value to
$1.00 par value................. (23,023) 23,023 -- -- -- --
Reissuance of 727 treasury shares
at $23.70 per share............. -- -- -- 17 -- --
Comprehensive income, net of
tax............................. -- -- -- -- -- 818
-------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997........ 7,194 36,122 54,564 (1,271) -- 1,251
Net income........................ -- -- 13,101 -- -- --
Common dividends declared ($1.05
per share)...................... -- -- (7,415) -- -- --
Purchase 44,731 ESOP shares at a
weighted cost of $37.20 per
share........................... -- -- -- -- (1,664) --
Purchase 4,125 treasury shares at
$31.87 per share................ -- -- -- (132) -- --
Comprehensive income, net of
tax............................. -- -- -- -- -- (13)
-------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998........ $ 7,194 $36,122 $60,250 $(1,403) $(1,664) $1,238
-------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
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27
<PAGE> 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accounting and reporting policies of First Community Bancshares, Inc.
and subsidiaries (First Community or the Company) conform to generally accepted
accounting principles and to predominant practices within the banking industry.
In preparing financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities as of the
date of the balance sheet and revenues and expenses for the period. Actual
results could differ from those estimates. Assets held in an agency or fiduciary
capacity are not assets of the Company and are not included in the accompanying
consolidated balance sheets.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of First Community include the
accounts of all wholly-owned subsidiaries. All significant intercompany balances
and transactions have been eliminated in consolidation. In the Parent Company
financial statements, the investment in subsidiaries is stated at equity in the
net assets of such subsidiary increased by the unamortized portion of the excess
of fair value over the cost of net assets acquired, where applicable.
SECURITIES AVAILABLE FOR SALE
Securities to be held for indefinite periods of time including securities
that management intends to use as part of its asset/liability management
strategy, and that may be sold in response to changes in interest rates, changes
in prepayment risk, or other similar factors are classified as available for
sale and are recorded at market value. Unrealized appreciation or depreciation
in market value above or below amortized cost is included in stockholders'
equity net of income taxes which is entitled "Other Comprehensive Income."
Premiums and discounts are amortized to expense or accreted to income over the
lives of the securities. Gain or loss on sale is based on the specific
identification method.
INVESTMENT SECURITIES
Investments in debt securities which management has the ability and intent
to hold to maturity or on a long-term basis are carried at cost. Premiums and
discounts are amortized to expense and accrued to income over the lives of the
securities. Gain or loss on the call or maturity of investment securities, if
any, is on the specific identification method. At December 31, 1998 and 1997, no
securities were held for trading purposes and no trading account was maintained.
RESERVE FOR LOAN LOSSES
The reserve for loan losses is available to absorb future loan charge-offs.
The allowance is increased by provisions charged to operations and reduced by
losses, net of recoveries. The amount charged to operations is based on several
factors including: (1) analytical reviews of significant commercial and
commercial mortgage loans and loan loss experience in relationship to
outstanding loans to determine an adequate reserve for loan losses required for
outstanding loans; (2) a continuing review of loans evaluated by the loan review
process as less than satisfactory, all non-performing loans and overall
portfolio quality; (3) regular examinations and appraisals of the loan portfolio
conducted by federal and state supervisory authorities; and (4) management's
judgment with respect to current and expected economic conditions, the level of
delinquencies and non-accrual loans, trends in the volume and term of loans,
anticipated impact from changes in lending policies and procedures, changes in
lending management, and any concentration of credit in certain industries or
geographic areas.
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LOGOFirst Community Bancshares Logo
<PAGE> 29
In 1995, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 114, "Accounting by Creditors for Impairment of a Loan," which
requires an allowance to be established as a component of the reserve for loan
losses for certain loans (using the discounted cash flows or fair value of
collateral) when it is probable that all amounts due pursuant to contractual
terms of the loan will not be collected and the recorded investment in the loan
exceeds the fair value. Management reviews the impairment status of all loans
designated as non-accrual or which have been classified as "substandard" or
"doubtful" by the Company's loan review process. Management does not
individually evaluate certain smaller balance, homogeneous loans, such as
consumer installment loans and residential mortgage loans for impairment. These
loans are evaluated on an aggregate basis using a formula-based approach in
accordance with the Company's policy. All of the loans deemed to be impaired
were evaluated using the fair value of the collateral as the measurement
standard.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation of both buildings and improvements as well as for equipment is
computed on the straight-line method over estimated useful lives. Maintenance
and repairs are charged to current operations while betterments are capitalized.
Disposition gains and losses are reflected in current operations.
Long-lived assets to be held and those to be disposed of and certain
intangibles are evaluated for impairment in accordance with Statement of
Financial Accounting Standards (SFAS) No. 121 "Accounting for the Impairment of
Long-Lived Assets or for Long-Lived Assets to be Disposed of".
INCOME ON LOANS
Accrual of interest on loans is based generally on the daily amount of
principal outstanding. It is the Company's policy to discontinue the accrual of
interest on loans based on their payment status and evaluation of the related
collateral and the financial strength of the borrower. The accrual of interest
income is normally discontinued when a loan becomes 90 days past due as to
principal or interest. Management may elect to continue the accrual of interest
when the loan is well secured and in process of collection. When interest
accruals are discontinued, interest accrued and not collected in the current
year is reversed and interest accrued and not collected from prior years is
charged to the reserve for possible loan losses. Credit card loans which become
180 days past due are automatically charged to the reserve for possible loan
losses.
LOAN FEE INCOME
Loan origination fees are recorded as a reduction of direct costs
associated with loan processing, including salaries, review of legal documents,
obtainment of appraisals, and other direct costs. Fees in excess of those
related costs are deferred and amortized over the life of the related loan. Loan
commitment fees are deferred and amortized over the related commitment period.
OTHER REAL ESTATE OWNED
Other real estate owned and acquired through foreclosure is stated at the
lower of cost or fair market value less estimated costs to sell. Loan losses
arising from the acquisition of such properties are charged against the reserve
for possible loan losses. Expenses incurred in connection with operating the
properties, subsequent write-downs and gains or losses upon sale are included in
other non-interest income and expense. General reserves for loss on the
disposition of other real estate are established through charges against current
operations.
UNALLOCATED ESOP SHARES
The cost of unallocated employee stock ownership plan shares are included
as a component of stockholders' equity. The plan shares will be allocated to
participant accounts over a period not to exceed seven years based upon relative
employee compensation.
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29
<PAGE> 30
INTANGIBLE ASSETS
The investment in subsidiaries and branches in excess of amounts
attributable to tangible and identified intangible assets at dates of
acquisition is recorded as goodwill and is being amortized to operations over a
period of fifteen years using the straight-line method. The unamortized balance
of goodwill was $23,684,000 and $24,986,000 at December 31, 1998 and 1997,
respectively. A portion of the cost of purchased subsidiaries has been allocated
to values associated with the future earnings potential of acquired deposits and
is being amortized over the estimated lives of the deposits which range from
seven to ten years. The unamortized balance of identified intangibles associated
with acquired deposits was $662,000 and $788,000 at December 31, 1998 and 1997,
respectively.
INCOME TAXES
The Company accounts for taxes using the provisions of SFAS No. 109,
"Accounting for Income Taxes," which, under the asset and liability method,
provides deferred income taxes which are recognized for the tax consequences of
"temporary differences" by applying enacted statutory tax rates to the
differences between the financial statement carrying amounts and the tax bases
of existing assets and liabilities. Under SFAS No. 109, the effect on deferred
taxes of a change in tax rates is recognized in income in the period that
includes the enactment date.
RECLASSIFICATIONS
Certain amounts included in the 1997 and 1996 financial statements have
been reclassified to conform with the presentation used in preparation of the
1998 financial statements.
RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standard (SFAS) No. 131 was issued in
June 1997. SFAS No. 131 established standards for the way that public business
enterprises report information about different operating segments. This
Statement is effective for fiscal years beginning after December 15, 1997 and
need not be applied to interim financial statements in the initial year of
application. First Community Bancshares, Inc. currently operates only one
segment which represents bank financial services.
Statement of Financial Accounting Standard (SFAS) No. 132 was issued in
February 1998. SFAS No. 132 standardizes the disclosure requirements for
pensions and other postretirement benefits in order to provide information that
is more comparable, understandable and concise. This statement supersedes the
disclosure requirements in several other Financial Accounting Standards Board
statements. The Statement is effective for fiscal years beginning after December
15, 1997.
Statement of Financial Accounting Standard (SFAS) No. 133 was issued in
June 1998. SFAS No. 133 sets forth a comprehensive approach to addressing the
accounting for derivative instruments, including certain derivative instruments
embedded in other contracts, and hedging activities. This standard addresses the
type of activities which are included within the definition of derivatives and
imbedded derivatives and identifies the methods to be used for valuation and
income recognition. In addition to the derivative and hedging activities
addressed, the standard also allows a one time transfer of securities from the
held-to-maturity to the available-for-sale or the trading category which can
only be applied at the date of initial application of the Statement. This
Statement is effective for all fiscal quarters of all fiscal years beginning
after June 15, 1999. Earlier application of the provisions of this Statement is
encouraged but is permitted only as of the beginning of any fiscal quarter that
begins after issuance of this Statement. Management is currently in the process
of evaluating the impact of this Statement.
In October 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 134. This Statement
addresses the Accounting for Mortgage-Backed Securities Retained after the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise.
This Statement amends FASB Statements No. 65 and No. 115. This Statement is
effective for the first fiscal
- --------------------------------------------------------------------------------
LOGOFirst Community Bancshares Logo
<PAGE> 31
quarter beginning after December 15, 1998. The provisions of this Statement are
not currently applicable to the business or operations of the bank.
CASH FLOWS
In 1998, 1997 and 1996 for purposes of reporting cash flows, cash and cash
equivalents include cash and due from banks, federal funds sold, and interest
bearing balances available for immediate withdrawal. Interest and income taxes
paid in 1998, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
(Amounts in Thousands)
<S> <C> <C> <C>
Interest....................................... $38,267 $32,726 $26,615
Income taxes................................... 6,744 6,433 7,911
SUPPLEMENTAL SCHEDULE OF NON-CASH TRANSACTIONS
Transfers of loans to other real estate
owned........................................ $ 3,588 $ 862 $ 2,190
Unrealized loss (gain) on securities available
for sale..................................... 21 (1,375) (69)
</TABLE>
NOTE 2. MERGER AND ACQUISITIONS
On July 3, 1996, First Community acquired Citizens Bank of Tazewell
(Citizens), headquartered in Tazewell, Virginia. As of the merger date, Citizens
had approximately $52.2 million in total assets and $46.2 million in total
deposits. Pursuant to the Agreement and Plan of Merger, First Community
exchanged 3.51 shares of its common stock for each share of Citizens' common
stock, which totaled 263,159 shares upon consummation.
This transaction was accounted for as a pooling of interests. The pooling
of interests method requires the combining of the financial information of the
merging companies as though they had always been combined. Consequently, the
results of operations of First Community and Citizens for 1996 has been restated
to properly reflect this combination.
On April 9, 1997, the Company acquired 100% of the common stock of Blue
Ridge Bank (Blue Ridge), headquartered in Sparta, North Carolina. Blue Ridge was
a $105 million state-chartered bank with offices located in Sparta, Elkin, Hays
and Taylorsville, North Carolina. Pursuant to the Agreement and Plan of Merger,
the Company exchanged cash of $19.50 for each of Blue Ridge's 1,212,148 common
shares. In conjunction with the acquisition, Blue Ridge canceled outstanding
stock options through the payment of $727,948 representing the difference
between $19.50 and the respective option prices. Total consideration, including
the payment for cancellation of the options, was $24.4 million and resulted in
an intangible asset of approximately $14.1 million which is being amortized over
a 15-year period. The acquisition was partially funded with loan proceeds of
$11.5 million which the Company borrowed from an outside source. The acquisition
was accounted for under the purchase method of accounting. Accordingly, results
of operations of Blue Ridge are included in consolidated results from the date
of acquisition. Subsequent to the merger, Blue Ridge operates as a wholly-owned
subsidiary of First Community.
On July 24, 1997, the Company expanded its Virginia operations through the
acquisition of three bank branches located in Fort Chiswell, Pound, and
Clintwood. The acquisition of these branches added $44 million in new deposits
and assets to the existing Virginia subsidiary. The branch acquisitions were
accounted for under the purchase method of accounting. Accordingly, the results
of operations of the branches are included in consolidated results only from the
date of acquisition. The excess purchase price of the branches, over the fair
value of tangible assets acquired, totaled $4.6 million and is being amortized
over a 15-year period.
At the close of business on September 26, 1997, First Community Bank, Inc.,
a subsidiary of the Company, acquired the Man, West Virginia branch of
Huntington National Bank, West Virginia. The acquisition of this branch added
approximately $51 million in deposits. The intangible value of this transaction
totaled approximately $4.9 million which is being amortized over a 15-year
period. This acquisition was accounted for under the purchase method of
accounting; therefore, the operations of the Man branch are included in
consolidated results of operations only from the date of acquisition.
- --------------------------------------------------------------------------------
31
<PAGE> 32
The following unaudited proforma financial information shows the effect of
the Blue Ridge acquisition as if the transaction were consummated on January 1,
1996.
FIRST COMMUNITY BANCSHARES, INC.
Proforma Unaudited Supplemental Financial Information
(Amounts in thousands except per share data)
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Net Interest Income..................................... $43,665 $41,709
Net Income.............................................. 15,078 13,958
Basic and diluted Earnings Per Common Share............. 2.14 1.98
</TABLE>
NOTE 3. SECURITIES AVAILABLE FOR SALE
As of December 31, the amortized cost and market value of securities
classified as available for sale are as follows:
<TABLE>
<CAPTION>
1998
-------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- --------
(Amounts in Thousands)
<S> <C> <C> <C> <C>
U.S. Government agency
securities................... $119,236 $ 713 $ (441) $119,508
States and political
subdivisions................. 36,458 1,470 (585) 37,343
Other securities............... 35,437 915 (9) 36,343
-------- ------ ------- --------
Total..................... $191,131 $3,098 $(1,035) $193,194
======== ====== ======= ========
</TABLE>
<TABLE>
<CAPTION>
1997
-------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- --------
(Amounts in Thousands)
<S> <C> <C> <C> <C>
U.S. Government and agency
securities................... $131,892 $1,127 $ (273) $132,746
States and political
subdivisions................. 21,668 926 (18) 22,576
Other securities............... 6,151 322 -- 6,473
-------- ------ ------- --------
Total..................... $159,711 $2,375 $ (291) $161,795
======== ====== ======= ========
</TABLE>
Securities available for sale with market values of $65,421,000 and
$64,454,000 at December 31, 1998 and 1997, respectively, were pledged to secure
public deposits, securities sold under agreements to repurchase and other
short-term borrowings and for other purposes.
The amortized cost and market value of securities available for sale at
December 31, 1998, by contractual maturity, are shown below. Expected maturities
will differ from contractual maturities because issuers may have the right to
call or prepay obligations with or without call or prepayment penalties. During
1997, sales of securities available for sale resulted in gains of $6,000. During
1996, the sale of securities available for sale resulted in gains of $90,000 and
losses of $225,000. There were no sales of securities available for sale during
1998. During 1998, calls of securities available for sale resulted in a gain of
approximately $4,000. The proceeds from sales of securities available for sale
were $18,000 and $15,868,000 for 1997 and 1996, respectively. The basis for
evaluating the gain or loss realized is the amortized cost. The following table
- --------------------------------------------------------------------------------
LOGOFirst Community Bancshares Logo
<PAGE> 33
presents maturities of investments securities available for sale by type on both
an amortized cost and market value basis at December 31, 1998:
<TABLE>
<CAPTION>
U.S. STATES TAX
GOVERNMENT AND EQUIVALENT
AGENCIES & POLITICAL OTHER PURCHASE
CORPORATIONS SUBDIVISIONS SECURITIES TOTAL YIELD
------------ ------------ ---------- -------- ----------
(Amounts in Thousands)
<S> <C> <C> <C> <C> <C>
AMORTIZED COST
Maturity:
Within one year........................ $ 2,000 $ 280 $ -- $ 2,280 6.42%
After one year through five years...... 10,416 1,616 -- 12,032 6.06%
After five years through ten years..... 26,343 9,931 29,073 65,347 6.79%
After ten years........................ 80,477 24,631 6,364 111,472 6.49%
-------- ------- ------- --------
Total book value.................... $119,236 $36,458 $35,437 $191,131
======== ======= ======= ========
Tax equivalent purchase yield............ 6.30% 8.05% 5.94% 6.56%
Average maturity (in years).............. 17.21 13.25 12.52 15.59
MARKET VALUE
Maturity:
Within one year........................ $ 2,012 $ 284 $ -- $ 2,296
After one year through five years...... 10,402 1,663 -- 12,065
After five years through ten years..... 26,813 10,622 29,360 66,795
After ten years........................ 80,281 24,774 6,983 112,038
-------- ------- ------- --------
Total market value.................. $119,508 $37,343 $36,343 $193,194
======== ======= ======= ========
</TABLE>
NOTE 4. INVESTMENT SECURITIES
The amortized cost and approximate market values of investment securities
as of December 31 are as follows:
<TABLE>
<CAPTION>
1998
----------------------------------------------
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- --------
(Amounts in Thousands)
<S> <C> <C> <C> <C>
U.S. Treasury securities............ $ 100 $ 1 $ -- $ 101
U.S. Government agencies and
corporations...................... 7,546 50 (16) 7,580
States and political subdivisions... 75,009 4,191 -- 79,200
Other securities.................... 1,361 14 -- 1,375
-------- ------ ----- --------
Total.......................... $ 84,016 $4,256 $ (16) $ 88,256
======== ====== ===== ========
</TABLE>
<TABLE>
<CAPTION>
1997
----------------------------------------------
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- --------
(Amounts in Thousands)
<S> <C> <C> <C> <C>
U.S. Treasury securities............ $ 4,098 $ 1 $ (8) $ 4,091
U.S. Government agencies and
corporations...................... 26,377 115 (114) 26,378
States and political subdivisions... 77,641 3,081 (2) 80,720
Other securities.................... 1,058 18 (2) 1,074
-------- ------ ------- --------
Total.......................... $109,174 $3,215 $ (126) $112,263
======== ====== ======= ========
</TABLE>
- --------------------------------------------------------------------------------
33
<PAGE> 34
Various investment securities with an amortized cost of approximately
$27,875,000 and $34,871,000, respectively, were pledged at December 31, 1998 and
1997 to secure public deposits and for other purposes required by law. During
1998, calls of held-to-maturity investment securities resulted in gains of
$21,000. There were no gains from calls of investment securities
held-to-maturity during 1997. Proceeds from the calls of held-to-maturity
investment securities were $1,020,700 and $1,950,000 during 1998 and 1997,
respectively. The following table presents maturities of investments by type on
both an amortized cost and market value basis at December 31, 1998:
<TABLE>
<CAPTION>
U.S. TAX
GOVERNMENT STATES & EQUIVALENT
U.S. AGENCIES & POLITICAL OTHER PURCHASE
TREASURY CORPORATIONS SUBDIVISIONS SECURITIES TOTAL YIELD
-------- ------------ ------------ ---------- ------- ----------
(Amounts in Thousands)
<S> <C> <C> <C> <C> <C> <C>
AMORTIZED COST
Maturity:
Within one year.................. $ -- $2,524 $ 1,377 $ -- $ 3,901 7.43%
After one year through five
years......................... 100 3,151 2,516 1,061 6,828 6.79%
After five years through ten
years......................... -- 1,417 25,538 300 27,255 8.22%
After ten years.................. -- 454 45,578 -- 46,032 8.79%
---- ------ ------- ------ -------
Total amortized cost.......... $100 $7,546 $75,009 $1,361 $84,016
==== ====== ======= ====== =======
Tax equivalent purchase yield...... 6.01% 6.00% 8.63% 7.76% 8.38%
Average maturity (in years)........ 1.5 3.00 10.86 5.02 10.05
MARKET VALUE
Maturity:
Within one year.................. $ -- $2,530 $ 1,399 $ -- $ 3,929
After one year through five
years......................... 101 3,157 2,567 1,075 6,900
After five years through ten
years......................... -- 1,427 26,970 300 28,697
After ten years.................. -- 466 48,264 -- 48,730
---- ------ ------- ------ -------
Total market value............ $101 $7,580 $79,200 $1,375 $88,256
==== ====== ======= ====== =======
</TABLE>
NOTE 5. LOANS
Loans consist of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
-------- --------
(Amounts in Thousands)
<S> <C> <C>
Real estate -- commercial............................ $170,669 $202,625
Real estate -- construction.......................... 8,988 9,612
Real estate -- residential........................... 228,218 227,465
Commercial, financial and agricultural............... 77,233 82,445
Loans to individuals for household and other consumer
expenditures....................................... 125,491 148,485
All other loans...................................... 894 1,185
-------- --------
$611,493 $671,817
======== ========
</TABLE>
Banking subsidiaries of the Company are parties to financial instruments
with off-balance sheet risk in the normal course of business to meet the
financing needs of their 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 in excess of the amount recognized on the balance sheet.
The contractual amounts of those instruments reflect the extent of involvement
the Company has in particular classes of financial instruments.
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LOGOFirst Community Bancshares Logo
<PAGE> 35
The Company's exposure to credit loss in the event of non-performance by
the other party to the financial instrument for commitments to extend credit and
standby letters of credit and financial guarantees written is represented by the
contractual amount of those instruments. The Company uses the same credit
policies in making commitments and conditional obligations as it does for
on-balance sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long
as there is not a violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Company, upon extension of credit is based on
management's credit evaluation of the counterparts. Collateral held varies but
may include accounts receivable, inventory, property, plant and equipment, and
income-producing commercial properties.
Standby letters of credit and financial guarantees written 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 at December 31, 1998.
Financial instruments whose contract amounts represent credit risk at
December 31, 1998 are commitments to extend credit (including availability of
lines of credit and undrawn credit card availability) -- $85.9 million, and
standby letters of credit and financial guarantees written -- $2.8 million. At
December 31, 1998, neither the Company nor its subsidiaries have any amounts
outstanding representing futures, forward exchange contracts or interest swaps.
In the normal course of business, the Company originates loan commitments.
Loan commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. The Company evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral deemed
necessary by the Company is based on management's credit evaluation and
underwriting guidelines for the particular loan. The total commitments
outstanding at December 31, 1998 are summarized as follows:
<TABLE>
<CAPTION>
1998
--------------------------
NOTIONAL
AMOUNT RATE
-------- ------------
(Amounts in Thousands)
<S> <C> <C>
Real estate -- commercial (fixed).................. $ 3,159 7.50 - 10.50%
Real estate -- commercial (variable)............... 15,986 5.75 - 12.00%
Real estate -- construction (fixed)................ 2,145 8.49 - 9.50%
Real estate -- construction (variable)............. 2,327 7.75 - 9.75%
Real estate -- residential (fixed)................. 2,241 7.00 - 12.50%
Real estate -- residential (variable).............. 6,611 7.75 - 12.75%
Commercial, financial, agricultural (fixed)........ 6,660 6.05 - 16.00%
Commercial, financial, agricultural (variable)..... 18,632 5.75 - 13.00%
Loans to individuals for household and other
consumer expenditures (fixed).................... 29,584 6.30 - 18.00%
Loans to individuals for household and other
consumer expenditures (variable)................. 1,326 7.41 - 14.50%
Other (fixed)...................................... 30 7.11 - 9.50%
-------
TOTAL......................................... $88,701
=======
</TABLE>
Presently, the Company has no significant concentrations of credit risk
other than geographic concentrations. Most loans in the current portfolio are
made and collateralized in West Virginia and the surrounding Mid Atlantic area.
Although portions of the West Virginia economy are closely related to coal and
timber, they are supplemented by service industries. The current economies of
the Company's markets are seen as relatively stable and are not seen as highly
subject to volatile economic change. The Company's wholly-
- --------------------------------------------------------------------------------
35
<PAGE> 36
owned subsidiaries, Blue Ridge Bank in North Carolina and First Community Bank
of Southwest Virginia, provide additional geographic diversification against
concentrations of credit risk.
In the normal course of business, the banking subsidiaries of the Company
have made loans to directors and executive officers of the Company and its
subsidiaries. All loans and commitments made to such officers and directors and
to companies in which they are officers or have significant ownership interest
have been made on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
other persons. The aggregate dollar amount of such loans was $9.8 million and
$11.3 million at December 31, 1998 and 1997, respectively. New loans and
payments attributable to the change from 1997 to 1998 total $3.0 million and
$4.5 million, respectively.
NOTE 6. RESERVE FOR LOAN LOSSES
Activity in the reserve for loan losses was as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- ------
(Amounts in Thousands)
<S> <C> <C> <C>
Balance, January 1......................... $11,406 $ 8,987 $8,321
Recoveries credited to reserve............. 736 673 574
Provision for the year charged to
operations............................... 6,250 4,963 2,273
Reserve acquired in acquisitions........... -- 1,981 --
------- ------- ------
18,392 16,604 11,168
Loans charged-off.......................... 6,988 5,198 2,181
------- ------- ------
Balance, December 31....................... $11,404 $11,406 $8,987
======= ======= ======
</TABLE>
The following table presents the Company's investment in loans considered
to be impaired and related information on those impaired loans (in thousands):
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Recorded investment in loans considered to impaired...... $5,266 $7,508
Loans considered to be impaired that were on a
non-accrual basis...................................... 5,266 7,321
Allowance for loan losses related to loans considered to
be impaired............................................ 1,019 1,575
Average recorded investment in impaired loans............ 5,023 5,226
Total interest income recognized on impaired loans....... 148 115
Interest income on impaired loans recognized on a cash
basis.................................................. -- --
</TABLE>
NOTE 7. PREMISES AND EQUIPMENT
Premises and equipment are comprised of the following as of December 31:
<TABLE>
<CAPTION>
1998 1997
------- -------
(Amounts in Thousands)
<S> <C> <C>
Land................................................... $ 4,552 $ 4,624
Bank premises.......................................... 20,124 20,197
Equipment.............................................. 13,906 14,705
------- -------
38,582 39,526
Less: accumulated depreciation and amortization........ 20,596 20,393
------- -------
Total............................................. $17,986 $19,133
======= =======
</TABLE>
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LOGOFirst Community Bancshares Logo
<PAGE> 37
NOTE 8. LONG-TERM DEBT
Long-term debt consists of a $7.9 million note to a commercial bank with
principal repayments of $300,000 per quarter, through April 1, 2007. The note
accrues interest at a fluctuating rate of interest equal to one hundred thirty
basis points in excess of the LIBOR Rate. The loan agreement contains certain
covenants that may restrict the payment of dividends to stockholders in the
event of default along with other customary borrowing provisions.
Two of the Company's subsidiaries are members of the Federal Home Loan Bank
("FHLB") of Pittsburgh, Pennsylvania. Long-term advances from the FHLB and
principal payments on long-term debt as of December 31, 1998 and 1997 mature as
follows:
<TABLE>
<CAPTION>
1998 1997
------------------------- -------------------------
WEIGHTED WEIGHTED
AMOUNT AVERAGE RATE AMOUNT AVERAGE RATE
------- ------------- ------ ------------
(Amounts in Thousands)
<S> <C> <C> <C> <C>
1998........................................... $ -- -- $ 6,200 5.74%
1999........................................... 1,200 6.61% 1,200 6.90%
2000........................................... 1,200 6.61% 1,200 6.90%
2001........................................... 1,200 6.61% 1,200 6.90%
2002........................................... 1,200 6.61% 1,200 6.90%
2003........................................... 9,200 6.04% 9,200 6.07%
2004........................................... 1,200 6.61% 1,200 6.90%
2005........................................... 700 6.61% 700 6.90%
2008........................................... 2,000 6.27% 2,000 6.27%
------- ---- ------- ----
$17,900 6.28% $24,100 6.23%
======= ==== ======= ====
</TABLE>
The acquisition loan used to acquire Blue Ridge Bank is secured by 1.2
million outstanding shares of common stock of Blue Ridge Bank. Advances from the
FHLB are secured by stock in the FHLB of Pittsburgh, qualifying first mortgage
loans, mortgage-backed securities and certain investment securities. Certain of
these advances are subject to restrictions or penalties in the event of
prepayment. Other various debt obligations of the Company totaled $276,000 at
December 31, 1998 and $344,000 at December 31, 1997.
NOTE 9. DEPOSITS
At December 31, 1998, the scheduled maturities of certificates of deposits
are as follows:
<TABLE>
<CAPTION>
(Amounts in Thousands)
<S> <C>
1999............................................ $336,937
2000............................................ 77,498
2001............................................ 24,900
2002............................................ 12,771
2003 and thereafter............................. 14,268
--------
$466,374
========
</TABLE>
Time deposits include Certificates of Deposit issued in denominations of
$100,000 or more which amounted to $113.4 million and $117.4 million at December
31, 1998 and 1997, respectively. Interest expense on these certificates was $6.5
million, $5.5 million, and $3.1 million for 1998, 1997, and 1996, respectively.
NOTE 10. PER SHARE AMOUNTS
Basic earnings per share is based upon the weighted average number of
shares of common stock outstanding during the year. In February 1997, the FASB
issued Statement No. 128, "Earnings Per Share." Statement No. 128 requires the
presentation of basic and diluted earnings per share. The Company currently has
no dilutive securities or stock arrangements. First Community adopted Statement
No. 128 effective December 31, 1997, and all prior period amounts presented have
been restated to comply with Statement No. 128. The Company's common stock was
split five shares for four on March 31, 1997 and five shares for
- --------------------------------------------------------------------------------
37
<PAGE> 38
four again on March 31, 1998. All share and per share data have been
retroactively adjusted to reflect these stock splits. The following table sets
forth the net income used to determine net income per common share for the
applicable years:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
(Amounts in Thousands,
Except Per Share Data)
<S> <C> <C> <C>
Net income...................................... $13,101 $15,094 $13,917
Basic and diluted earnings per common share..... 1.86 2.14 1.98
</TABLE>
NOTE 11. EMPLOYEE BENEFITS
Through 1995, the Company and its subsidiaries maintained three qualified
employee benefit plans. On January 1, 1996, the 401(k) and ESOP plans were
merged into a single plan. In October 1996, the third of these three plans, a
non-contributory defined benefit pension plan was terminated and the Company
recorded a curtailment gain for the pending termination of the defined benefit
pension plan of $1,450,000. Additionally, in the first quarter of 1998, after
distributing all participant accrued benefits and paying required excise taxes
on the dissolution of the defined benefit plan, an additional $1,062,000
termination gain was recognized. Benefits under the plan were based on length of
service and qualifying compensation. The Company's funding policy was to
contribute pension costs accrued. There was no pension cost for the 1998 year.
Net periodic pension expense in 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1997 1996
------ --------
(Amounts in Thousands)
<S> <C> <C>
Service cost -- benefits earned during the year......... $ -- $ 326
Interest expense on projected benefit obligation........ 496 607
Expected return on plan assets.......................... (879) (1,390)
Net amortization and deferral........................... (56) 622
----- -------
Net periodic pension (income) expense................... $(439) $ 165
===== =======
</TABLE>
The following table sets forth the plan's funded status and amounts
recognized in the Company's consolidated balance sheets at December 31, 1997,
based upon a measurement date of December 31. The plan was fully liquidated at
December 31, 1998.
<TABLE>
<CAPTION>
1997
-------
(Amounts in Thousands)
<S> <C>
Accumulated benefit obligation.......................... $ 7,038
-------
Vested benefit obligation............................... 7,038
-------
Projected benefit obligation............................ 7,038
Plan assets at fair value............................... 12,854
-------
Plan assets in excess of projected benefit obligation... 5,816
Unrecognized net gain................................... (2,638)
Unrecognized prior service cost......................... --
-------
Prepaid pension expense................................. $ 3,178
=======
</TABLE>
The weighted average discount rate and the rate of increase in future
compensation levels used in determining the actuarial present value of the
projected benefit obligation was 7.25% and 6.0% respectively.
EMPLOYEE STOCK OWNERSHIP PLAN
The Company maintains an Employee Stock Ownership Plan. Coverage under the
plan is provided to all employees meeting minimum eligibility requirements.
Annual contributions to the plan are made at the discretion of the Board of
Directors, and are allocated to plan participants on the basis of relative
compensation. Substantially all plan assets are invested in common stock of the
Company. Total expense
- --------------------------------------------------------------------------------
LOGOFirst Community Bancshares Logo
<PAGE> 39
recognized by the Company related to the Employee Stock Ownership Plan was
$947,000, $767,000 and $454,000 in 1998, 1997 and 1996, respectively.
EMPLOYEE SAVINGS PLAN
The Company provides a 401(k) Savings Plan available to substantially all
employees meeting minimum eligibility requirements. This plan was merged with
the Employee Stock Ownership Plan on January 1, 1996 creating a KSOP. The cost
of Company contributions under the Savings Plan was $99,000, $116,000, and
$59,000 in 1998, 1997 and 1996, respectively. The Company's matching
contributions are at the discretion of the Board up to 50% of elective deferrals
of no more than 6% of compensation. The Company matching rate was 25% for 1998,
1997 and 1996.
EMPLOYEE WELFARE PLAN
The Company provides various medical, dental, life, accidental death and
dismemberment and long-term disability insurance benefits to all full-time
employees who elect coverage under this program (basic life, accidental death
and dismemberment, and long-term disability coverage is automatic).
During 1998, the Company adopted the First Community Bancshares Employee
Insurance Plan and Trust, a partially self-funded medical, dental and
prescription welfare plan. The health plan is managed by a third party
administrator (TPA). Monthly employer and employee contributions are made to the
newly established employee welfare trust, against which, the TPA processes and
pays claims. Stop loss insurance coverage limits the Company's funding
requirements and risk of loss to $50,000 and $863,000 for individual and
aggregate claims, respectively. In order to establish a reserve for run-off
claims, in the event of plan termination, the Company is funding additional
contributions to the trust equivalent to 25% of expected annual claims.
The Company adopted Financial Accounting Standards Board Statement 106
"Employers Accounting for Postretirement Benefits Other Than Pensions" as of
January 1, 1993. The adoption of Statement 106 resulted in the recognition of a
postretirement benefit obligation at the date of adoption (transition
obligation). The Company elected to recognize the obligation over the average
remaining life expectancy of the participants. The transition obligation totaled
$634,000 and will be recognized over 17 years. This obligation only applies to a
selected group of retirees as retiree benefits were phased out through 1993.
DEFERRED COMPENSATION PLAN
A subsidiary of the Company has deferred compensation agreements with
certain current and former officers providing for benefit payments over various
periods commencing upon retirement or death. The balance sheet liability at
December 31, 1998 was approximately $858,000. The expenses associated with this
plan for 1998, 1997 and 1996 were $(11,000), $58,000 and $32,000, respectively.
As a result of an actuarial adjustment to the life expectancies and the discount
rate used in computing the present value of the future benefits, the current
period reflected a reduction in total benefit cost.
NOTE 12. COMPENSATING BALANCES
Pursuant to agreements with the Federal Reserve Bank, the Company is
required to maintain cash balances of approximately $1.3 million in lieu of
charges for check clearing and other services.
NOTE 13. LITIGATION
In the normal course of business, there are various outstanding commitments
and contingent liabilities such as threatened legal action and legal proceedings
in which the Company and its subsidiaries are defendants.
The most significant matter of litigation which is currently active
involves a civil suit filed by heirs of one of the Company's trust customers
which seeks to overturn the establishment of a private foundation for which the
Company's trust and financial services division serves as Trustee. This suit
seeks a total of $6 million in compensatory and punitive damages as well as the
termination of the foundation. The Company and the Trustee believe the creation
and operation of the foundation represent the intent and will of the donor,
- --------------------------------------------------------------------------------
39
<PAGE> 40
accordingly, the Company has entered a vigorous defense of this suit and the
continuation of the foundation's purpose. On October 15, 1998, the plaintiffs in
the matter filed a motion for summary judgment. In a hearing on this motion, the
Court requested that the Company, as defendant, file a motion for summary
dismissal and further ordered that discovery in this case be halted pending
receipt of the motion for summary dismissal. The motion for summary dismissal
was filed with the Court on January 14, 1999, and in a subsequent ruling, the
Court partially granted the bank's motion for summary judgment finding no
wrongdoing by the bank in its discretionary use of principal in this matter.
Both management and the Company's legal counsel are of the opinion that the
remainder of this suit is without merit and will be successfully defended with
no material adverse impact on the Company's financial condition or results of
operations.
Other legal actions have arisen primarily out of commercial lending
transactions and collection activities. Each of these actions involving
significant damage allegations or material disputes of issues are detailed in
Item 3, Legal Proceedings, in the Company's 1998 Report on Form 10-K.
Additionally, the Company is also subject to certain asserted and
unasserted potential claims encountered in the normal course of business. In the
opinion of management, neither the resolution of these claims nor the funding of
credit commitments will have a material effect on the Company's financial
position or results of operations.
NOTE 14. DIVIDENDS
The primary source of funds for dividends paid by First Community is
dividends received from its subsidiary banks. Dividends paid by the banks are
subject to restrictions by banking regulations and a loan agreement with a
commercial bank. The loan agreement with the bank restricts dividends in the
event of default on the note. The most restrictive provision requires approval
by regulatory bodies if dividends declared in any year exceed the year's net
income, as defined, plus retained net profit of the two preceding years. At
December 31, 1998, subsidiary earnings available for distribution as dividends
to the Company without prior approval were $1.5 million.
NOTE 15. REGULATORY CAPITAL REQUIREMENTS AND RESTRICTIONS
First Community Bancshares, Inc., First Community Bank, Inc., First
Community Bank of Mercer County, Inc., First Community Bank of Southwest
Virginia, Inc., and Blue Ridge Bank (collectively referred to as "the Banks")
are subject to various regulatory capital requirements administered by the
federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory--and possibly additional discretionary--actions by
regulators that, if undertaken, could have a direct material effect on the
Company's financial statements. Under the capital adequacy guidelines and the
regulatory framework for prompt corrective action, which applies only to the
Banks, the banks must meet specific capital guidelines that involve quantitative
measures of the entities' assets, liabilities, and certain off-balance sheet
items as calculated under regulatory accounting practices. The entities' capital
amounts and classifications are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require First Community Bancshares, Inc. and the Banks to maintain minimum
amounts and ratios (set forth in the table on page 41) for total and Tier I
capital (as defined in the regulations) to risk-weighted assets (as defined),
and of Tier I capital (as defined) to average assets (as defined). Management
believes, as of December 31, 1998, that the Company meets all capital adequacy
requirements to which it is subject.
As of December 31, 1998 and 1997, the most recent notifications from the
Federal Reserve Board categorized the Banks as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Banks must maintain minimum total risk-based, Tier I
risk-based, and Tier I leverage ratios as set forth in the table. There are no
conditions or events since those notifications that management believes have
changed the institutions category.
- --------------------------------------------------------------------------------
LOGOFirst Community Bancshares Logo
<PAGE> 41
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-----------------------------------------------------
TO BE WELL
CAPITALIZED
UNDER PROMPT
FOR CAPITAL CORRECTIVE
ADEQUACY ACTION
ACTUAL PURPOSES PROVISIONS
--------------- --------------- ---------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
TOTAL CAPITAL TO RISK-WEIGHTED ASSETS:
First Community Bancshares, Inc............. $84,130 13.25% $50,782 8.00% $ N/A N/A
First Community Bank, Inc................... 27,985 12.62% 17,741 8.00% 22,177 10.00%
First Community Bank of Mercer County,
Inc....................................... 45,279 15.45% 23,447 8.00% 29,309 10.00%
First Community Bank of Southwest Virginia,
Inc....................................... 6,777 12.39% 4,377 8.00% 5,471 10.00%
Blue Ridge Bank............................. 11,705 16.10% 5,817 8.00% 7,272 10.00%
-----------------------------------------------------
TIER 1 CAPITAL TO RISK-WEIGHTED ASSETS:
First Community Bancshares, Inc............. $76,153 12.00% $25,391 4.00% $ N/A N/A
First Community Bank, Inc................... 25,196 11.36% 8,871 4.00% 13,306 6.00%
First Community Bank of Mercer County,
Inc....................................... 41,592 14.19% 11,724 4.00% 17,585 6.00%
First Community Bank of Southwest Virginia,
Inc....................................... 6,093 11.14% 2,188 4.00% 3,283 6.00%
Blue Ridge Bank............................. 10,795 14.85% 2,909 4.00% 4,363 6.00%
-----------------------------------------------------
TIER 1 CAPITAL TO AVERAGE ASSETS (LEVERAGE):
First Community Bancshares, Inc............. $76,153 7.37% $30,998 3.00% $ N/A N/A
First Community Bank, Inc................... 25,196 6.42% 11,770 3.00% 19,616 5.00%
First Community Bank of Mercer County,
Inc....................................... 41,592 8.92% 13,981 3.00% 23,302 5.00%
First Community Bank of Southwest Virginia,
Inc....................................... 6,093 6.11% 3,988 4.00% 4,985 5.00%
Blue Ridge Bank............................. 10,795 9.69% 4,454 4.00% 5,567 5.00%
-----------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------------------------------------
TO BE WELL
CAPITALIZED
UNDER PROMPT
FOR CAPITAL CORRECTIVE
ADEQUACY ACTION
ACTUAL PURPOSES PROVISIONS
--------------- --------------- ---------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
TOTAL CAPITAL TO RISK-WEIGHTED ASSETS:
First Community Bancshares, Inc............. $79,178 11.96% $52,975 8.00% $ N/A N/A
First Community Bank, Inc................... 22,911 10.78% 17,009 8.00% 21,262 10.00%
First Community Bank of Mercer County,
Inc....................................... 43,541 13.71% 25,399 8.00% 31,748 10.00%
First Community Bank of Southwest Virginia,
Inc....................................... 6,793 12.11% 4,486 8.00% 5,608 10.00%
Blue Ridge Bank............................. 11,167 12.22% 7,308 8.00% 9,135 10.00%
-----------------------------------------------------
TIER 1 CAPITAL TO RISK-WEIGHTED ASSETS:
First Community Bancshares, Inc............. $70,862 10.70% $26,488 4.00% $ N/A N/A
First Community Bank, Inc................... 20,232 9.52% 8,505 4.00% 12,757 6.00%
First Community Bank of Mercer County,
Inc....................................... 39,557 12.46% 12,699 4.00% 19,049 6.00%
First Community Bank of Southwest Virginia,
Inc....................................... 6,093 10.86% 2,243 4.00% 3,365 6.00%
Blue Ridge Bank............................. 10,068 11.02% 3,654 4.00% 5,481 6.00%
-----------------------------------------------------
TIER 1 CAPITAL TO AVERAGE ASSETS (LEVERAGE):
First Community Bancshares, Inc............. $70,862 6.96% $30,549 3.00% $ N/A N/A
First Community Bank, Inc................... 20,232 5.26% 11,542 3.00% 19,237 5.00%
First Community Bank of Mercer County,
Inc....................................... 39,557 8.80% 13,481 3.00% 22,468 5.00%
First Community Bank of Southwest Virginia,
Inc....................................... 6,093 5.97% 4,084 4.00% 5,105 5.00%
Blue Ridge Bank............................. 10,068 9.15% 4,042 4.00% 5,503 5.00%
-----------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
41
<PAGE> 42
NOTE 16. INCOME TAXES
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
------------------------------
1998 1997 1996
------ ------ ------
(Amounts in Thousands)
<S> <C> <C> <C>
INCOME TAXES ARE AS FOLLOWS:
Income exclusive of securities gains (losses).... $6,154 $6,874 $6,581
Net securities gains (losses).................... 10 2 (51)
------ ------ ------
$6,164 $6,876 $6,530
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
------------------------------
1998 1997 1996
------ ------ ------
(Amounts in Thousands)
<S> <C> <C> <C>
INCOME TAX PROVISIONS CONSISTS OF:
Current tax expense.............................. $6,605 $6,520 $6,143
Deferred tax (benefit) expense................... (441) 356 387
------ ------ ------
$6,164 $6,876 $6,530
====== ====== ======
</TABLE>
Deferred income taxes reflect the net effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts deducted for income tax purposes. The tax effects of
significant items comprising the Company's net deferred tax asset of December
31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
------- -------
(Amounts in Thousands)
<S> <C> <C>
DEFERRED TAX ASSETS:
Reserve for loan losses............................... $4,463 $4,448
Unrealized asset losses............................... 248 229
Deferred compensation................................. 956 892
Deferred insurance premiums........................... 344 399
------ ------
Total deferred tax assets.......................... $6,011 $5,968
------ ------
DEFERRED TAX LIABILITIES:
Purchase accounting adjustments....................... 2,306 2,072
Depreciation.......................................... 331 374
Gain on pension termination........................... 497 565
Unrealized gain on securities available for sale...... 825 833
Other................................................. 592 347
------ ------
Total deferred tax liabilities..................... 4,551 4,191
------ ------
Net deferred tax assets............................ $1,460 $1,777
====== ======
</TABLE>
The reconciliation between the federal statutory tax rate and the effective
income tax rate is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
--------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Tax at statutory rate................................. 35.0% 35.0% 35.0%
Increases (reductions) resulting from:
Tax-exempt interest on investment securities and
loans............................................ (9.6%) (6.7%) (6.7%)
State income taxes, net of federal benefit.......... 1.3% 1.1% 1.0%
Amortization of purchase accounting adjustments..... 2.3% 1.6% .5%
Other, net.......................................... 3.0% .3% 2.1%
---- ---- ----
Effective tax rate.................................... 32.0% 31.3% 31.9%
==== ==== ====
</TABLE>
- --------------------------------------------------------------------------------
LOGOFirst Community Bancshares Logo
<PAGE> 43
NOTE 17. OTHER COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, "Reporting Comprehensive Income," which requires businesses to disclose
comprehensive income and its components in their general purpose financial
statements. This statement requires the reporting of all items of comprehensive
income in a financial statement that is displayed with the same prominence as
other financial statements. This statement is effective for fiscal years
beginning after December 15, 1997, with reclassification of comparative
financial statements and is applicable to interim periods. The Company currently
has one component of other comprehensive income which includes unrealized gains
or losses on securities available for sale and is detailed as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ----
(Amounts in Thousands)
<S> <C> <C> <C>
OTHER COMPREHENSIVE INCOME:
Holding (losses) gains arising during the period..... $ (17) $1,381 $(66)
Tax benefit or (expense)............................. 6 (559) 26
------ ------ ----
Holding (losses) gains arising during the period, net
of tax............................................. (11) 822 (40)
Reclassification adjustment for (gains) losses
realized in net income, net of tax................. (4) (6) 135
Tax expense (benefit) of reclassifications........... 2 2 (54)
------ ------ ----
Other comprehensive income........................... (13) 818 41
Beginning accumulated other comprehensive income..... 1,251 433 392
------ ------ ----
Ending accumulated other comprehensive income........ $1,238 $1,251 $433
====== ====== ====
</TABLE>
NOTE 18. OTHER OPERATING EXPENSES
Included in other operating expenses are certain functional costs, the
total of which exceeds one percent of combined interest income and non-interest
income. Following are such costs for the years indicated:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
------------------------------
1998 1997 1996
------ ------ ------
(Amounts in Thousands)
<S> <C> <C> <C>
Credit card fees paid.............................. $1,315 $1,671 $1,149
Supplies cost...................................... 959 * *
</TABLE>
* Cost did not exceed one percent for the reported period.
NOTE 19. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 107, "Disclosures About Fair Value of Financial
Instruments" (SFAS 107). The pronouncement requires disclosure of fair value
information about financial instruments, whether or not recognized on the
balance sheet, for which it is practical to estimate the value. SFAS 107 defines
a financial instrument as cash, evidence of ownership in an entity, or a
contract that conveys or imposes on an entity that contractual right or
obligation to either receive or deliver cash for another financial instrument.
Fair value is defined as the amount at which a financial instrument could be
exchanged in a current transaction between willing parties, other than in a
forced sale or liquidation, and is best evidenced by a quoted market price if
one exists.
The following summary presents the methodologies and assumptions used to
estimate the fair value of the Company's financial instruments presented below.
The information used to determine fair value is highly subjective and judgmental
in nature and, therefore, the results may not be precise. Subjective factors
include, among other things, estimates of cash flows, risk characteristics,
credit quality, and interest rates all of which are subject to change. Since the
fair value is estimated as of the balance sheet date, the amounts which will
- --------------------------------------------------------------------------------
43
<PAGE> 44
actually be realized or paid upon settlement or maturity on these various
instruments could be significantly different.
<TABLE>
<CAPTION>
1998 1997
------------------------ ------------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
(Amounts in Thousands)
<S> <C> <C> <C> <C>
ASSETS:
Cash and due from banks......................... $ 91,484 $ 91,484 $ 34,762 $ 34,762
Securities available for sale................... 193,194 193,194 161,795 161,795
Investment securities........................... 84,016 88,256 109,174 112,263
Federal funds sold.............................. 25,630 25,630 12,406 12,406
Loans (net of reserve for loan losses).......... 600,089 601,205 660,441 661,396
Interest receivable............................. 7,030 7,030 7,688 7,688
LIABILITIES:
Demand deposits................................. 123,992 123,992 103,846 103,846
Interest-bearing demand deposits................ 137,169 137,169 127,541 127,541
Savings deposits................................ 148,461 148,461 149,407 149,407
Time deposits................................... 466,374 467,054 472,713 472,589
Securities sold under agreements to
repurchase................................... 47,680 47,680 52,351 52,351
Interest, taxes and other obligations........... 10,417 10,417 11,455 11,455
Other indebtedness.............................. 18,176 18,179 24,444 24,517
</TABLE>
FINANCIAL INSTRUMENTS WITH BOOK VALUE EQUAL TO FAIR VALUE
The book values of cash and due from banks, federal funds sold and
purchased, securities sold under agreements to repurchase, interest receivable,
and interest, taxes and other liabilities are considered to be equal to fair
value as a result of the short-term nature of these items.
SECURITIES AVAILABLE FOR SALE
For securities available for sale, fair value is based on current market
quotations, where available. If quoted market prices are not available, fair
value has been based on the quoted price of similar instruments.
INVESTMENT SECURITIES
For investment securities, fair value has been based on current market
quotations, where available. If quoted market prices are not available, fair
value has been based on the quoted price of similar instruments.
LOANS
For all categories of loans, such as some residential mortgages, fair value
is estimated by discounting the future cash flows using the current rates for
similar loans.
DEPOSITS
Deposits without a stated maturity, including demand, interest-bearing
demand, and savings accounts, are reported at their carrying value in accordance
with SFAS 107. No value has been assigned to the franchise value of these
deposits. For other types of deposits with fixed maturities, fair value has been
estimated by discounting future cash flows based on interest rates currently
being offered on deposits with similar characteristics and maturities.
OTHER INDEBTEDNESS
Fair value has been estimated based on interest rates currently available
to the Company for borrowings with similar characteristics and maturities.
- --------------------------------------------------------------------------------
LOGOFirst Community Bancshares Logo
<PAGE> 45
COMMITMENTS TO EXTEND CREDIT, STAND-BY LETTERS OF CREDIT, AND FINANCIAL
GUARANTEES
The amount of off-balance sheet commitments to extend credit, stand-by
letters of credit, and financial guarantees, is considered equal to fair value.
Because of the uncertainty involved in attempting to assess the likelihood and
timing of commitments being drawn upon, coupled with the lack of an established
market and the wide diversity of fee structures, the Company does not believe it
is meaningful to provide an estimate of fair value that differs from the given
value of the commitment.
NOTE 20. PARENT COMPANY FINANCIAL INFORMATION
Condensed financial information related to First Community Bancshares, Inc.
as of December 31, 1998 and 1997, and for the years ended December 31, 1998,
1997 and 1996 are as follows:
CONDENSED BALANCE SHEETS
- --------------------------------------------------------------------------------
(Amounts in Thousands)
<TABLE>
<CAPTION>
DECEMBER 31
----------------------
1998 1997
-------- --------
<S> <C> <C>
ASSETS
Cash........................................................ $ 832 $ 1,353
Investment in subsidiaries.................................. 108,889 102,781
Other assets................................................ 1,506 3,260
-------- --------
TOTAL ASSETS......................................... $111,227 $107,394
======== ========
LIABILITIES
Other liabilities........................................... $ 9,490 $ 9,534
STOCKHOLDERS' EQUITY
Common stock................................................ 7,194 7,194
Additional paid-in capital.................................. 36,122 36,122
Retained earnings........................................... 61,488 55,815
Treasury stock.............................................. (1,403) (1,271)
Unallocated ESOP shares..................................... (1,664) --
-------- --------
TOTAL STOCKHOLDERS' EQUITY........................... 101,737 97,860
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........... $111,227 $107,394
======== ========
</TABLE>
CONDENSED STATEMENTS OF INCOME
- --------------------------------------------------------------------------------
(Amounts in Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
DECEMBER 31
---------------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Cash dividends received from subsidiary banks.............. $ 7,500 $25,050 $ 9,825
Revenue.................................................... 112 148 123
Operating expense.......................................... (1,143) (779) (267)
------- ------- -------
6,469 24,419 9,681
Income tax benefit (expense)............................... 331 210 51
Equity in undistributed earnings (loss) of subsidiaries
(Dividends in excess of earnings of subsidiaries)........ 6,301 (9,535) 4,185
------- ------- -------
Net Income................................................. $13,101 $15,094 $13,917
------- ------- -------
Basic and Diluted Earnings Per Share....................... $ 1.86 $ 2.14 $ 1.98
======= ======= =======
</TABLE>
- --------------------------------------------------------------------------------
45
<PAGE> 46
CONDENSED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
(Amounts in Thousands)
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31
------------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................... $ 13,101 $ 15,094 $ 13,917
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed earnings of subsidiaries
(Dividends in excess of earnings of
subsidiaries)..................................... (6,301) 9,535 (4,185)
Increase (decrease) in other assets................. 271 (136) (890)
(Decrease) increase in other liabilities............ (194) 98 (54)
Other, net............................................. -- -- 49
-------- -------- --------
Net cash provided by operating activities.............. 6,877 24,591 8,837
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of other investments............................ -- -- (1,745)
Proceeds from sale of securities available for sale...... -- 12 --
Payments for investments in and advances to
subsidiaries........................................... -- (27,695) --
-------- -------- --------
Net cash used in investing activities.................. -- (27,683) (1,745)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt................. 3,000 11,730 --
Repayment of long-term debt.............................. (2,851) (2,400) --
Acquisition of treasury stock............................ (132) -- (170)
Dividends paid........................................... (7,415) (7,345) (6,422)
Other, net............................................... -- (6) 1,499
-------- -------- --------
Net cash (used in) provided by financing activities.... (7,398) 1,979 (5,093)
-------- -------- --------
Net (decrease) increase in cash and cash equivalents..... (521) (1,113) 1,999
Cash and cash equivalents at beginning of year........... 1,353 2,466 467
-------- -------- --------
Cash and cash equivalents at end of year................. $ 832 $ 1,353 $ 2,466
======== ======== ========
</TABLE>
NOTE 21. SUBSEQUENT EVENTS
Early in 1999, the Company and its four affiliate banks entered into a
Merger and Reorganization Agreement which provides for the merger of the four
affiliate banks into a single national bank under the charter of First Community
Bank, Inc. which was converted to a national association as part of the
reorganization. From the effective date of the merger (expected completion on
April 30, 1999), all banking operations will be conducted under the charter and
title of First Community Bank, N.A., a national association supervised by the
Comptroller of the Currency.
- --------------------------------------------------------------------------------
LOGOFirst Community Bancshares Logo
<PAGE> 47
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
LOGO
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF FIRST COMMUNITY BANCSHARES, INC.
We have audited the accompanying consolidated balance sheets of First
Community Bancshares, Inc. and subsidiaries as of December 31, 1998 and 1997,
and the related consolidated statements of income and comprehensive income,
changes in stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1998. These financial statements are the
responsibility of First Community Bancshares Inc.'s management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of First Community Bancshares,
Inc. and subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche
- ---------------------
Pittsburgh, Pennsylvania
January 29, 1999
- --------------------------------------------------------------------------------
47
<PAGE> 48
REPORT ON MANAGEMENT'S RESPONSIBILITIES
- --------------------------------------------------------------------------------
The management of First Community Bancshares, Inc. is responsible for the
integrity of its financial statements and their preparation in accordance with
generally accepted accounting principles. To fulfill this responsibility
requires the maintenance of a sound accounting system supported by strong
internal controls. The Company believes it has a high level of internal control
which is maintained by the recruitment and training of qualified personnel,
appropriate divisions of responsibility, the development and communication of
accounting and other procedures, and comprehensive internal audits.
Our independent auditors (Deloitte & Touche LLP) are engaged to examine,
and render an opinion on, the fairness of our consolidated financial statements
in conformity with generally accepted accounting principles. Our independent
auditors obtain an understanding of our internal accounting control systems,
review selected transactions and carry out other auditing procedures before
expressing their opinion on our consolidated financial statements.
The Board of Directors has appointed an Audit Committee composed of outside
directors which periodically meets with the independent auditors, bank
examiners, management and internal auditors to review the work of each. The
independent auditors, bank examiners and the Company's internal auditors have
free access to meet with the Audit Committee without management's presence.
/s/ James L. Harrison, Sr.
- --------------------------
James L. Harrison, Sr.
President & Chief Executive Officer
/s/ John M. Mendez
- ------------------
John M. Mendez
Vice President & Chief Financial Officer
- --------------------------------------------------------------------------------
LOGOFirst Community Bancshares Logo
<PAGE> 49
BOARD OF DIRECTORS, FIRST COMMUNITY BANCSHARES, INC.
- --------------------------------------------------------------------------------
SAM CLARK
Agent, State Farm Insurance
ALLEN T. HAMNER
Professor of Chemistry, West Virginia Wesleyan College; Member Executive
Committee
JAMES L. HARRISON, SR.
President and Chief Executive Officer, First Community Bancshares, Inc.; Member
Executive Committee; President, First Community Bank, Inc., First Community Bank
of Mercer County, Inc., and First Community Bank of Southwest Virginia, Inc.;
Executive Vice President, Blue Ridge Bank
B. W. HARVEY
President, Highlands Real Estate Management, Inc.; Member Executive Committee
I. NORRIS KANTOR
Partner, Katz, Kantor & Perkins, Attorneys-at-Law
JOHN M. MENDEZ
Vice President, Chief Financial Officer and Secretary, First Community
Bancshares, Inc.; Vice President -- Finance & Chief Administrative Officer,
First Community Bank, Inc., First Community Bank of Mercer County, Inc., and
First Community Bank of Southwest Virginia, Inc.; Assistant Corporate Secretary,
Blue Ridge Bank
A. A. MODENA
Past Executive Vice President and Secretary, First Community Bancshares, Inc.;
Past President & Chief Executive Officer, The Flat Top National Bank of
Bluefield; Member Executive Committee
ROBERT E. PERKINSON, JR.
Vice President -- Operations, MAPCO Coal, Inc. -- Virginia Region
WILLIAM P. STAFFORD
President, Princeton Machinery Service, Inc.; Chairman, First Community
Bancshares, Inc.; Member Executive Committee and Audit Committee
WILLIAM P. STAFFORD, II
Attorney-at-Law, Brewster, Morhous & Cameron, PLLC
W. W. TINDER, JR.
Chairman of the Board and Chief Executive Officer, Tinder Enterprises, Inc.;
President, Tinco Leasing Corporation (Real Estate Holdings); Member Executive
Committee and Audit Committee
OFFICERS, FIRST COMMUNITY BANCSHARES, INC.
- --------------------------------------------------------------------------------
JAMES L. HARRISON, SR.
President and Chief Executive Officer
JOHN M. MENDEZ
Vice President, Chief Financial Officer and Secretary
ROBERT L. BUZZO
Vice President
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49
<PAGE> 50
DIRECTORS
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NICK AMELI, JR., CLU, CHFC
Sales Manager, New York Life Insurance
K. A. AMMAR, JR.*
President and Chief Executive Officer, Ammar's Inc. and Magic Mart
DR. JAMES P. BAILEY*
Veterinarian, Veterinary Associates, Inc.
PAUL BARKLEY
Self Employed Accountant
JACK BEBBER
Retired Manager, Carolina Tire
CLINT F. BEDSAUL++
President, BBC, Inc.; President, Truline Truss, Inc.
CLAUDE BILLINGS
Retired North Carolina House of Representatives; Poultry Farmer
BILL BLACKBURN
Owner, B & D Auto Supply
CLAUDE E. BLANKENSHIP
Officer, C and R Furniture; Former Mercer County Commissioner
W. C. BLANKENSHIP, JR.+
Chairman of the Board, First Community Bank of Southwest Virginia, Inc.; Agent,
State Farm Insurance
F. K. BLIZZARD
Retired, Blizzard's Inc.
G. ROSS BOYCE
Retired Senior Vice President, The Flat Top National Bank of Bluefield
D. L. BOWLING, JR.*
President, True Energy, Inc.
ROBERT L. BUZZO*
Vice President, First Community Bancshares, Inc.; Chief Executive Officer, First
Community Bank -- Bluefield
JUANITA G. BRYAN++
Homemaker
SAM CLARK**
Agent, State Farm Insurance
HENRY CHURCH
Owner, H & N Polled Hereford Farms
L. M. COMPTON
President, Compton Enterprises
LILLIAN S. COOKE
Private Investor
GEORGE R. CROUSE, JR.++
Farming
C. WILLIAM DAVIS*
Attorney at Law, Richardson & Davis
H. R. DAVIS
Auctioneer
MARK T. DAVIS
Attorney
THOMAS E. DOUGLAS++
Town Manager, Sparta, NC
FRANK FERRANTE*
Retired Owner of Frankie's LaSalute
LLOYD D. FEUCHTENBERGER, JR.
Retired Bakery Executive
CHESTER H. FRIEDL+
Pharmacist
H. A. GOODYKOONTZ, JR.
Retired Pharmacist
OWEN R. GRIFFITH, JR.
Retired President and Chief Executive Officer, First Community Bank, Inc.
ANTHONY A. GUM
Professor, Business and Economics, West Virginia Wesleyan College
ALLEN T. HAMNER, PH.D.**
Professor of Chemistry, West Virginia Wesleyan College
W. T. HANCOCK
Of Counsel, Richardson & Davis
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LOGOFirst Community Bancshares Logo
<PAGE> 51
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JAMES L. HARRISON, SR.** + ++
President and Chief Executive Officer, First Community Bancshares, Inc.;
President, First Community Bank, Inc., First Community Bank of Mercer County,
Inc., and First Community Bank of Southwest Virginia, Inc.; Executive Vice
President, Blue Ridge Bank
B. W. HARVEY**
President, Highlands Real Estate Management, Inc.
STEVE ICENHOUR
Owner, Trucking Company and Icenhour's Garage and Tire Service
CHAPMAN I. JOHNSTON, JR.
Retired Chairman of the Board, Bluefield Supply Company
I. NORRIS KANTOR**
Partner, Katz, Kantor & Perkins, Attorneys-at-Law
WALDEN M. KEENE+
Retired Coal Operator
DR. JOHN S. LAMBERT, JR.
Dentist
M. NEIL LOHR
Pharmacist, Princeton Pharmacy
RICHARD L. LOWRY
President, Murphy Insurance Agency
DR. B. J. MARTIN, D.M.D.
Martin Dental Associates
JOHN P. MCCABE
Retired Vice Chairman of the Board, First Community Bank
A. HERBERT MCCLAUGHERTY
President, The Dean Company
JOHN T. MCGLAMERY
Retired Merchant
KEITH MEADOWS
Plant Manager, Leviton Manufacturing/Southern Devices
DAVID MECIMORE
Owner, Taylorsville Precast Molds
JOHN M. MENDEZ** + ++
Vice President, Chief Financial Officer and Secretary, First Community
Bancshares, Inc.; Vice President -- Finance and Chief Administrative Officer,
First Community Bank, Inc., First Community Bank of Mercer County, Inc.; and
First Community Bank of Southwest Virginia, Inc.; Assistant Corporate Secretary,
Blue Ridge Bank
EDGAR L. MILLER, SR.
Owner, Edgar's Exxon Service Station
A. A. MODENA**
Past Executive Vice President and Secretary, First Community Bancshares, Inc.;
Past President and Chief Executive Officer, The Flat Top National Bank of
Bluefield
WAYNE V. MOORE++
Chief Executive Officer, Blue Ridge Bank
DR. SAMUEL A. MUSCARI, SR.
Physician
CHARLES C. MYERS
Owner, Cash & Carry Wholesale Grocery
AVERY NEAVES
CPA, Kemp & Neaves, PLLC
FRED NORMAN
Retired Realtor & Businessman
GARY B. PARLIER++
Owner, Custom Wall and Floor Covering
NORA BELLE PASLEY
Retired, Peoples Bank of Bluewell
ROBERT E. PERKINSON, JR.**
Vice President -- Operations, MAPCO Coal, Inc. -- Virginia Region
DR. EDUARDO D. PLAGATA+
Physician
CLAUDETTA POTTS
Retired Owner, Radio Station
ROBERT PREVETTE
Poultry Farmer; Contractor
BERNIE QUEEN
Retired, Amherst Coal Company
- --------------------------------------------------------------------------------
51
<PAGE> 52
- --------------------------------------------------------------------------------
CLYDE B. RATLIFF+
President, Gasco Drilling, Inc.
JIMMIE LEE REAVIS
Rural Carrier, U. S. Postal Service
JOE H. ROBERTS++
Farming
RON ROSEMAN
Partner, Alexvale Furniture Manufacturing
MICHAEL ROSS
President, Ross and Wharton Gas Co.
RICHARD G. RUNDLE*
Attorney at Law, Rundle and Rundle, LC
LARRY SCHRONCE
Owner, Larry Schronce Ford, Inc.
GILES D. SCOTT
Retired Restaurant Owner
GUY L. SCOTT, JR.++
President and Chairman of the Board, Blue Ridge Bank
GEORGE L. SHEETS++
President and Manager, Alleghany Cablevision; Owner, Sheets Jewelry
WILLIAM C. SHELL++
President, Shell Brothers Distributors, Inc.
HERMAN SHOOK
Retired Furniture Manufacturer
M. M. SHUMATE
Retired
E. T. SMITH
President, Smith Services, Inc.
JACK D. STAFFORD, P.E.
President, Stafford Consultants, Inc.
WILLIAM P. STAFFORD**
President, Princeton Machinery Service, Inc.
WILLIAM P. STAFFORD, II**
Attorney at Law, Brewster, Morhous and Cameron, PLLC
WILLIAM D. STARLING+
Retired Coal Operator
DR. THEODORE S. STERN++
Chairman Emeritus, Blue Ridge Bank
ROBERT R. STUART, JR.
Retired Bakery Executive
W. W. TINDER, JR.**
Chairman and Chief Executive Officer, Tinder Enterprises, Inc.
ROBERT J. WALLACE
Attorney at Law, Coleman & Wallace
DALE F. WOODY*
President, Woody Lumber Company
- ---------------
* Denotes Members of First Community Bank, Inc. & First Community Bank of
Mercer County, Inc. Boards
** Denotes Members of First Community Bancshares, Inc., First Community Bank,
Inc. and First Community Bank of Mercer County, Inc. Boards
+ Denotes Members of First Community Bank of Southwest Virginia, Inc. Board
++ Denotes Members of Blue Ridge Bank Board
- --------------------------------------------------------------------------------
LOGOFirst Community Bancshares Logo
<PAGE> 53
FIRST COMMUNITY BANK OF MERCER COUNTY, INC.
- --------------------------------------------------------------------------------
(A WEST VIRGINIA CORPORATION -- MEMBER FDIC)
1001 Mercer Street
Princeton, West Virginia
24740-5939
(304) 487-9000 or (304) 327-5175
Pine Plaza Branch (304) 425-7523
Matoaka Branch (304) 467-8860
211 Federal Street
Bluefield, West Virginia 24701-0950
(304) 325-7151
Mercer Mall Branch (304) 327-0431
Blue Prince Road, Green Valley
Bluefield, West Virginia 24701-6160
(304) 325-3641
Highway 52
Bluefield, West Virginia 24701-3068
(304) 589-3301
FIRST COMMUNITY BANK, INC.
- --------------------------------------------------------------------------------
(A WEST VIRGINIA CORPORATION -- MEMBER FDIC)
Corner of Bank and Cedar Streets
Pineville, West Virginia 24874-0269
(304) 732-7011
East Pineville Branch
(304) 732-7011
600 Guyandotte Avenue
Mullens, West Virginia 25882-1024
(304) 294-0700
Route 10, Cook Parkway
Oceana, West Virginia 24870-1680
(304) 682-8244
2 West Main Street
Buckhannon, West Virginia 26201-0280
(304) 472-1112
Tennerton
Route 20 South Tennerton
Buckhannon, West Virginia 26201
(304) 472-1112
100 Market Street
Man, West Virginia 25635
(304) 583-6525
77 North Morgan Boulevard
Logan, West Virginia 25601
(304) 752-8102
Corner of Main and Latrobe Streets
Grafton, West Virginia 26354-0278
(304) 265-1111
216 Lincoln Street
Grafton, West Virginia 26354-1442
(304) 265-5111
Main Street
Rowlesburg, West Virginia 26425
(304) 454-2431
16 West Main Street
Richwood, West Virginia 26261
(304) 846-2641
874 Broad Street
Summersville, West Virginia 26651
(304) 872-4402
Route 20 and Williams River Road
Cowen, West Virginia 26206
(304) 226-5924
Route 55, Red Oak Plaza
Craigsville, West Virginia 26205
(304) 742-5101
- --------------------------------------------------------------------------------
53
<PAGE> 54
FIRST COMMUNITY BANK OF SOUTHWEST VIRGINIA, INC.
- --------------------------------------------------------------------------------
(A VIRGINIA CORPORATION -- MEMBER FDIC)
643 E. Riverside Drive
Tazewell, Virginia 24651
(540) 988-5577
302 Washington Square
Richlands, Virginia 24641
(540) 964-7454
Chase Street & Alley 7
Clintwood, Virginia 24228
(540) 926-4671
Rt. 1, Box 408
Max Meadows, Virginia 24360
(540) 637-3122
8044 Main Street
Pound, Virginia 24279
(540) 796-5431
910 East Main Street
Wytheville, Virginia 24382
(540) 228-1901
BLUE RIDGE BANK
- --------------------------------------------------------------------------------
(A NORTH CAROLINA CORPORATION -- MEMBER FDIC)
101 Brookfall Dairy Road
Elkin, North Carolina 28621
(336) 835-2265
5519 Mountain View Road
Hays, North Carolina 28635
(910) 696-2265
57 N. Main Street
Sparta, North Carolina 28675
(336) 372-2265
150 N. Center Street
Taylorsville, North Carolina 28681
(828) 632-2265
FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
CORPORATE HEADQUARTERS
1001 Mercer Street
P. O. Box 5909
Princeton, West Virginia
24740-5909
(304) 487-9000
STOCK REGISTRAR AND TRANSFER AGENT
First Community Bank of Mercer County, Inc.
Trust and Financial Services Division
P. O. Box 950
Bluefield, West Virginia
24701-0950
(304) 325-7151
FORM 10-K
The Annual Report on Form 10-K, filed with the Securities and Exchange
Commission, is available to shareholders upon request to the Vice President &
Chief Financial Officer of First Community Bancshares, Inc.
FINANCIAL CONTACT
John M. Mendez
Vice President &
Chief Financial Officer,
First Community Bancshares, Inc.
P. O. Box 5909
Princeton, West Virginia
24740-5909
(304) 487-9000
INTERNET ACCESS
www.fcbinc.com
[email protected]
- --------------------------------------------------------------------------------
LOGOFirst Community Bancshares Logo
<PAGE> 1
Exhibit 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
333-63865 on form S-8 of First Community Bancshares, Inc. of our report dated
January 29, 1999, incorporated by reference in this Annual report on Form 10-K
of First Community Bancshares, Inc. for the year ended December 31, 1998.
/s/ DELOITTE & TOUCHE LLP
Pittsburgh, Pennsylvania
March 30, 1999
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<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 33,961
<INT-BEARING-DEPOSITS> 57,523
<FED-FUNDS-SOLD> 25,630
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 193,194
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<LOANS> 611,493
<ALLOWANCE> 11,404
<TOTAL-ASSETS> 1,054,006
<DEPOSITS> 875,996
<SHORT-TERM> 47,680
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0
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<COMMON> 7,194
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<NET-INCOME> 13,101
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<LOANS-NON> 7,763
<LOANS-PAST> 377
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