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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
For the Fiscal Year Ended December 31, 1999
or
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
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)
One Community Place, Bluefield, Virginia 24605-0989
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (540) 326-9000
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 13, 2000.
$125,609,748 based on the closing 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 13, 2000.
Common Stock, $1 par value- 8,725,596
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the First Community Bancshares, Inc. 1999 Annual Report to Security
Holders are incorporated by reference in Part I and II hereof.
Portions of the Proxy Statement for the annual meeting of shareholders to be
held April 11, 2000 is incorporated by reference in Part III of this Form 10-K.
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Form 10-K Information
Table of Contents
1999 Form 10-K Annual Report
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Part Page
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Item 1. Business...................................................................... 3
Item 2. Properties.................................................................... 16
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................................... 19
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.......................................................... 19
Part III
Item 10. Directors and Executive Officers of the Registrant............................ 19
Item 11. Executive Compensation........................................................ 19
Item 12. Security Ownership of Certain Beneficial Owners and Management................ 19
Item 13. Certain Relationships and Related Transactions................................ 19
Part IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............... 19
Signatures.................................................................... 21
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PART I
ITEM 1. BUSINESS
GENERAL
First Community Bancshares, Inc. (FCBI or Company, Corporation or Registrant)
was incorporated in September 1997 in the State of Nevada and serves as the
holding company for first Community Bank, N. A., a national association which
conducts commercial banking operations within the states of Virginia, West
Virginia and North Carolina. Prior to December 1997, the holding company
operated under the title FCFT, Inc. In order to facilitate a change in name to
First Community Bancshares, Inc. and to change the Company's state of domicile
from Delaware to Nevada, First Community Bancshares, Inc. was formed to serve as
the successor in merger to FCFT, Inc. thus facilitating the changes of name and
state of domicile. As a result of this merger and a series of acquisitions and
corporate reorganizations which are discussed in more detail in the following
paragraphs, First Community Bancshares, Inc. now operates as a one-bank holding
company through First Community Bank, N. A. First Community Bancshares, Inc. now
operates as a one-bank holding company through First Community Bank, N. A. First
Community Bancshares, Inc. and its wholly-owned subsidiary have total assets of
approximately $1.09 billion at December 31, 1999 and conduct commercial banking
business throughout the three-state area of Virginia, West Virginia and North
Carolina through 31 full-service banking operations and 11 mortgage offices
which are located throughout the state of Virginia.
On December 29, 1995, FCBI reorganized its then 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, consisted of
five divisions with offices in Princeton, Bluefield, and Bluewell, 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 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 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 $24.7 million and resulted in an intangible
asset of approximately $13.2 million, which is being amortized over a 15-year
period. The acquisition was 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
Bank 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 and is being amortized over a 15-year period.
Effective with the close of business on April 30, 1999, First Community Bank,
Inc. was converted to a National Association entitled First Community Bank, N.A.
(FCBNA). Concurrent with this conversion, FCBNA acquired the outstanding stock
of Blue Ridge Bank from First Community Bancshares, Inc. and the operations of
First Community Bank of Mercer County, Inc. and First Community Bank of
Southwest Virginia, Inc. were merged with and into FCBNA. Additionally, the
Corporate headquarters of FCBI and FCBNA were relocated to the new Corporate
center located in Bluefield, Virginia.
In September 1999, the Company's wholly owned banking subsidiary, FCBNA,
acquired United First Mortgage, Inc. (UFM). UFM is a mortgage brokerage business
organized under the laws of the State of Virginia. UFM conducts operations
through eleven facilities situated in eastern Virginia.
Currently, the Registrant is a 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 subsidiary 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 subsidiary banking
operations.
The Registrant currently derives substantially all of its revenues from
dividends paid by its subsidiary bank. Dividend payments by the bank 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, N.A. (A National Association)
FCBNA is a nationally chartered bank organized under the banking laws of the
United States. FCBNA engages in general commercial and retail banking business
in West Virginia, Virginia and North Carolina through 31 full service banking
facilities. It provides safe deposit services and makes all types of loans,
including commercial, mortgage and personal loans. FCBNA also provides trust
services and its deposits are insured by the FDIC. FCBNA is a member of the
Federal Reserve System and is a member of the Federal Home Loan Bank (FHLB) of
Atlanta. Regulatory oversight of the banking subsidiary is conducted by the
Office of the Comptroller of the Currency (OCC).
LENDING ACTIVITIES
The Company's banking subsidiary generates 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 67.3% of average earning assets and present a higher
level of credit risk to the Company when contrasted with investment securities.
The principal lending activities of the bank are concentrated primarily within
its market areas in West Virginia, Virginia, North Carolina and the surrounding
mid-Atlantic area. These are areas with which bank personnel are most acquainted
and are within reasonable distances of the bank which allows for timely
communications with customers as well as periodic inspections of collateral.
Loan portfolios total $704.1 million at December 31, 1999 and are comprised of
commercial, real estate and consumer loans including home equity loans.
Commercial and commercial real estate loans comprise 42.7% of the total loan
portfolio. Commercial loans include loans to small to mid-size industrial,
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 Loan 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 35.7% 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
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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 18.1% of the total loan portfolio. Collateral for these
loans include automobiles, boats, recreational vehicles, and other personal
property. Personal loans and home equity loans 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, which
was substantially curtailed in 1998, led to a significant increase in consumer
loan charge-offs in 1997 and 1998. During 1998, the Company sold $14 million in
credit card revolving loan accounts and terminated its credit card operations
due to strong competition for this form of business, rising consumer
delinquencies and higher loss ratios.
The average yield on a tax equivalent basis on all loans in 1999 was 9.17% and
average loans expressed as a percentage of average deposits were 75% in 1999.
This percentage is consistent with the prior year level of 74% in 1998, however,
this represents a lower level of outstanding loans when compared with the loan
to deposit ratio of 81% in 1997.
EMPLOYEES
The Registrant and its subsidiaries had 489 employees at December 31, 1999.
Management considers employee relations to be excellent.
COMPETITION
The Corporation's subsidiaries face substantial competition in their operations
from banking and nonbanking institutions, including savings and loan
associations, credit unions, money market funds and other investment vehicles,
mutual fund advisory companies, brokerage firms, insurance companies, leasing
companies, credit card issuers, mortgage banking companies, investment banking
companies, finance companies and other types of financial services providers.
The Company's subsidiary has been able to compete effectively with other
financial institutions in its respective market areas. The subsidiary emphasizes
customer service in an effort to establish long-term customer relationships and
build customer loyalty. The subsidiary of the Company has consolidated services
such as data processing, accounting, loan review and compliance, and internal
audit services to enhance its ability to compete effectively in its respective
markets.
SUPERVISION AND REGULATION
GENERAL
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
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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 under the Home Mortgage Disclosure Act 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.
The earnings of the Corporation's subsidiary, and therefore the earnings of the
Corporation, are affected by general economic conditions, management policies
and the legislative and governmental actions of various regulatory authorities,
including the Federal Reserve Board, the OCC and the FDIC. In addition, there
are numerous governmental requirements and regulations which affect the
activities of the Corporation and its subsidiary.
PAYMENT OF DIVIDENDS
The Corporation is a legal entity separate and distinct from its banking
subsidiary. A major portion of the revenues of the Corporation result from
amounts paid as dividends to the Corporation by its national bank subsidiary.
The prior approval of the Comptroller is required if the total of all dividends
declared by a national bank in any calendar year will exceed the sum of such
bank's net profits for that year and its retained net profits for the preceding
two calendar years, less any required transfers to surplus. Federal law also
prohibits national banks from paying dividends which would be greater than the
bank's undivided profits after deducting statutory bad debts in excess of the
bank's allowance for loan losses.
In addition, the Corporation and its banking subsidiary are subject to various
general regulatory policies and requirements relating to the payment of
dividends, including requirements to maintain adequate capital above regulatory
minimums. The appropriate federal regulatory authority is authorized to
determine under certain circumstances relating to the financial condition of a
bank or bank holding company that the payment of dividends would be an unsafe or
unsound practice and to prohibit payment thereof. The appropriate federal
regulatory authorities have indicated that paying dividends that deplete a
bank's capital base to an inadequate level would be an unsound and unsafe
banking practice and that banking organizations should generally pay dividends
only out of current operating earnings.
CAPITAL ADEQUACY
Under the risk-based capital requirements for bank holding companies, the
minimum requirement for the ratio of capital to risk-weighted assets (including
certain off-balance-sheet activities, such as standby letters of credit) is
eight percent. At least half of the total capital is to be composed of common
stockholders' equity, retained earnings, a limited amount of qualifying
perpetual preferred stock and minority interests in the equity accounts of
consolidated subsidiaries, less goodwill and certain intangibles ("tier 1
capital" and together with tier 2 capital "total capital"). The remainder of
total capital may consist of mandatory convertible debt securities and a limited
amount of subordinated debt, qualifying preferred stock and loan loss allowance
("tier 2 capital"). At December 31, 1999, the Corporation's tier 1 capital and
total capital ratios were 11.96 percent and 13.22 percent, respectively.
In addition, the Federal Reserve Board has established minimum leverage ratio
guidelines for bank holding companies. These requirements provide for a minimum
leverage ratio of tier 1 capital to adjusted average quarterly assets less
certain amounts ("leverage ratio") equal to three percent for bank holding
companies that meet certain specified criteria, including having the highest
regulatory rating. All other bank holding companies will generally be required
to maintain a leverage ratio of from at least four to five percent. The
Corporation's leverage ratio at December 31, 1999, was 8.25 percent. The
guidelines also provide that bank holding companies experiencing internal growth
or making acquisitions will be expected to maintain strong capital positions
substantially above the minimum supervisory levels without significant reliance
on intangible assets. Furthermore, the guidelines indicate that the Federal
Reserve Board
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will continue to consider a "tangible tier 1 leverage ratio" (deducting all
intangibles) in evaluating proposals for expansion or new activity.
The Corporation's subsidiary bank is subject to similar capital requirements
adopted by the Comptroller of the Currency. The capital ratios of the bank
subsidiary of the Corporation are set forth on page 43 in the Annual Report and
are incorporated herein by reference.
SUPPORT OF SUBSIDIARY BANK
The Federal Deposit Insurance Corporation Improvement Act, as amended
("FDICIA"), among other things, imposes liability on an institution the deposits
of which are insured by the FDIC, such as the Corporation's subsidiary bank, for
certain potential obligations to the FDIC incurred in connection with other
FDIC-insured institutions under common control with such institution.
Under the National Bank Act, if the capital stock of a national bank is impaired
by losses or otherwise, the Comptroller is authorized to require payment of the
deficiency by assessment upon the bank's stockholders, pro rata, and to the
extent necessary, if any such assessment is not paid by any stockholder after
three months notice, to sell the stock of such stockholder to make good the
deficiency. Under Federal Reserve Board policy, the Corporation is expected to
act as a source of financial strength to its subsidiary bank and to commit
resources to support the subsidiary. This support may be required at times when,
absent such Federal Reserve Board policy, the Corporation may not find itself
able to provide it.
Any capital loans by a bank holding company to its subsidiary bank are
subordinate in right of payment to deposits and to certain other indebtedness of
such subsidiary bank. In the event of a bank holding company's bankruptcy, any
commitment by the bank holding company to a federal bank regulatory agency to
maintain the capital of a subsidiary bank will be assumed by the bankruptcy
trustee and entitled to a priority of payment.
DEPOSITOR PREFERENCE STATUTE
Under federal law, deposits and certain claims for administrative expenses and
employee compensation against an insured depository institution would be
afforded a priority over other general unsecured claims against such an
institution, including federal funds and letters of credit, in the "liquidation
or other resolution" of such an institution by any receiver.
BORROWINGS BY THE CORPORATION
The banking subsidiary of the Registrant is subject to certain restrictions by
regulatory bodies which limit the amounts and the manner in which it may loan
funds to the Registrant. The bank is 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 bank 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 the 1999 Consolidated Financial
Statements incorporated herein by reference.)
PROMPT CORRECTIVE ACTION
The FDICIA, among other things, requires the federal banking agencies to take
"prompt corrective action" in respect of depository institutions that do not
meet minimum capital requirements. FDICIA establishes five capital tiers: "well
capitalized", "adequately capitalized", "undercapitalized", "significantly
undercapitalized" and "critically undercapitalized". A depository institution's
capital tier will depend upon where its capital levels compare to various
relevant capital measures and certain other factors, as established by
regulation.
Federal regulatory authorities have adopted regulations establishing relevant
capital measures and relevant capital levels applicable to FDIC-insured banks.
The relevant capital measures are the total capital ratio, the tier 1 capital
ratio and the leverage ratio. Under the regulations, an FDIC-insured bank will
be: (i) "well capitalized" if it has a total capital ratio of ten percent or
greater, a tier 1 capital ratio of six percent or greater and a leverage ratio
of five percent or greater and is not subject to any order or written directive
by any such regulatory authority to meet and maintain a specific capital level
for any capital measure; (ii) "adequately capitalized" if it has a total capital
ratio of eight percent or greater, a tier 1 capital ratio of four percent or
greater and a leverage ratio of four percent or greater (three percent in
certain circumstances) and is not "well capitalized"; (iii) "undercapitalized"
if it has a total capital ratio of less than
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eight percent, a tier 1 capital ratio of less than four percent or a leverage
ratio of less than four percent (three percent in certain circumstances); (iv)
"significantly undercapitalized" if it has a total capital ratio of less than
six percent, a tier 1 capital ratio of less than three percent or a leverage
ratio of less than three percent; and (v) "critically undercapitalized" if its
tangible equity is equal to or less than two percent of average quarterly
tangible assets. An institution may be downgraded to, or deemed to be in, a
capital category that is lower than is indicated by its capital ratios if it is
determined to be in an unsafe or unsound condition or if it receives an
unsatisfactory examination rating with respect to certain matters. As of
December 31, 1999, the Corporation's deposit-taking subsidiary bank had capital
levels that qualify it as being "well capitalized" under such regulations.
The FDICIA generally prohibits an FDIC-insured depository institution from
making any capital distribution (including payment of a dividend) or paying any
management fee to its holding company if the depository institution would
thereafter be "undercapitalized". "Undercapitalized" depository institutions are
subject to growth limitations and are required to submit a capital restoration
plan. The federal banking agencies may not accept a capital plan without
determining, among other things, that the plan is based on realistic assumptions
and is likely to succeed in restoring the depository institution's capital. In
addition, for a capital restoration plan to be acceptable, the depository
institution's parent holding company must guarantee that the institution will
comply with such capital restoration plan. The aggregate liability of the parent
holding company is limited to the lesser of (i) an amount equal to five percent
of the depository institution's total assets at the time it became
"undercapitalized", and (ii) the amount which is necessary (or would have been
necessary) to bring the institution into compliance with all capital standards
applicable with respect to such institution as of the time it fails to comply
with the plan. If a depository institution fails to submit an acceptable plan,
it is treated as if it is "significantly undercapitalized".
"Significantly undercapitalized" depository institutions may be subject to a
number of requirements and restrictions, including orders to sell sufficient
voting stock to become "adequately capitalized", requirements to reduce total
assets and cessation of receipt of deposits from correspondent banks.
"Critically undercapitalized" institutions are subject to the appointment of a
receiver or conservator. A bank that is not "well capitalized" is subject to
certain limitations relating to so-called "brokered" deposits.
INTERSTATE BANKING AND BRANCH LEGISLATION
The Reigle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the
"IBBEA"), authorized interstate acquisitions of banks and bank holding companies
without geographic limitation beginning one year after enactment. In addition,
it authorized, beginning June 1, 1997, a bank to merge with a bank in another
state as long as neither of the states opted out of interstate branching between
the date of enactment of the IBBEA and May 31, 1997. In addition, a bank may
establish and operate a de novo branch in a state in which the bank does not
maintain a branch if that state expressly permits de novo branching.
RECENT LEGISLATION
Effective March 11, 2000, pursuant to authority granted under the
Gramm-Leach-Bliley Act, a bank holding company may elect to become a financial
holding company and thereby to engage in a broader range of financial and other
activities than are permissible for traditional bank holding companies. In order
to qualify for the election, all of the depository institution subsidiaries of
the bank holding company must be well capitalized and well managed, as defined
by regulation, and all of its insured depository institution subsidiaries have
achieved a rating of "satisfactory" or better with respect to meeting community
credit needs. Pursuant to the Gramm-Leach-Bliley Act, financial holding
companies will be permitted to engage in activities that are "financial in
nature" or incidental or complementary thereto, as determined by the Federal
Reserve Board. The Gramm-Leach-Bliley Act identifies several activities as
"financial in nature," including, among others, insurance underwriting and
agency, investment advisory services, merchant banking and underwriting, and
dealing or making a market in securities. FCBI has not, at this time, made any
decisions with respect to the extent to which it will become a financial holding
company under the Act.
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GOVERNMENTAL MONETARY POLICIES AND ECONOMIC CONTROLS
The earnings of the Registrant and its subsidiary 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 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.
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I. DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY, INTEREST RATES
AND INTEREST DIFFERENTIAL
A. & B. AVERAGE BALANCE SHEETS--NET INTEREST INCOME ANALYSIS
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(Amounts in Thousands, except %)
1999 1998 1997
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AVERAGE INTEREST YIELD/RATE AVERAGE INTEREST YIELD/RATE AVERAGE INTEREST YIELD/RATE
BALANCE (1) (1) BALANCE (1) (1) BALANCE (1) (1)
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Earning Assets:
Loans (2)
Taxable $ 626,868 $57,346 9.15% $ 634,342 $61,355 9.67% $601,492 $58,676 9.76%
Tax-Exempt 10,043 1,062 10.58% 13,425 1,490 11.10% 15,993 1,657 10.36%
---------- ------- ----- ---------- ------- ----- -------- ------- -----
Total 636,911 58,408 9.17% 647,767 62,845 9.70% 617,485 60,333 9.77%
Reserve for Loan
Losses (11,239) (11,731) (9,770)
---------- ------- ----- ---------- ------- ----- -------- ------- -----
Net Total 625,672 58,408 9.34% 636,036 62,845 9.88% 607,715 60,333 9.93%
Securities Available For
Sale:
Taxable 186,379 11,417 6.13% 121,704 7,750 6.37% 122,326 8,226 6.72%
Tax-Exempt 35,627 2,769 7.77% 26,056 2,015 7.73% 17,162 1,388 8.09%
---------- ------- ----- ---------- ------- ----- -------- ------- -----
Total 222,006 14,186 6.39% 147,760 9,765 6.61% 139,488 9,614 6.89%
Investment Securities:
Taxable 6,782 465 6.86% 20,221 1,307 6.46% 45,581 2,820 6.19%
Tax-Exempt 73,938 5,983 8.09% 74,766 6,036 8.07% 59,547 4,830 8.11%
---------- ------- ----- ---------- ------- ----- -------- ------- -----
Total 80,720 6,448 7.99% 94,987 7,343 7.73% 105,128 7,650 7.28%
Interest-Bearing
Deposits 9,866 482 4.89% 56,136 3,007 5.36% 418 44 10.53%
Federal Funds Sold 8,800 403 4.58% 29,628 1,593 5.38% 17,127 949 5.54%
---------- ------- ----- ---------- ------- ----- -------- ------- -----
Total Earning Assets 947,064 79,927 8.44% 964,547 84,553 8.77% 869,876 78,590 9.03%
------- ----- ------- ----- ------- -----
Other Assets 95,119 93,984 79,604
---------- ---------- --------
Total $1,042,183 $1,058,531 $949,480
========== ========== ========
Interest-Bearing
Liabilities:
Demand Deposits $ 137,816 2,974 2.16% $134,195 3,732 2.78% $111,177 3,064 2.76%
Savings Deposits 145,526 3,257 2.24% 150,749 4,452 2.95% 141,827 4,350 3.07%
Time Deposits 451,079 22,913 5.08% 474,263 26,196 5.52% 406,208 21,359 5.26%
Short-Term Borrowings 58,365 2,326 3.99% 51,457 2,288 4.45% 59,462 2,623 4.41%
Long-Term Borrowings 12,905 781 6.05% 23,468 1,459 6.22% 22,654 1,494 6.59%
---------- ------- ----- ---------- ------- ----- -------- ------- -----
Total Interest-Bearing
Liabilities 805,691 32,251 4.00% 834,132 38,127 4.57% 741,328 32,890 4.43%
------- ----- ------- ----- ------- -----
Demand Deposits 119,576 111,565 100,158
Other Liabilities 13,070 12,236 13,955
Stockholders' Equity 103,846 100,598 94,039
---------- ---------- --------
Total $1,042,183 $1,058,531 $949,480
========== ========== ========
Net Interest Income $47,676 $46,426 $45,700
======= ======= ======
Net Interest Rate Spread (3) 4.44% 4.20% 4.60%
===== ===== =====
Net Interest Margin (4) 5.03% 4.81% 5.25%
===== ===== =====
</TABLE>
(1) Fully Taxable Equivalent-Using the Federal statutory rate of 35%.
(2) Non-accrual loans are included in average balances outstanding but with no
related interest income.
(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.
10
<PAGE> 11
C. RATE AND VOLUME ANALYSIS OF INTEREST (1)
<TABLE>
<CAPTION>
(Amounts in Thousands)
1999 Compared to 1998 1998 Compared to 1997
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 $(1,076) $(3,361) $(4,437) $ 2,902 $ (390) $ 2,512
Investment securities available
for sale 4,716 (295) 4,421 649 (498) 151
Investment securities
held to maturity (984) 89 (895) (405) 98 (307)
Interest bearing deposits
with other banks (2,282) (243) (2,525) 2,995 (32) 2,963
Federal funds sold (983) (207) (1,190) 673 29 644
------- ------- ------- ------- ------- -------
Total interest earning
assets (609) (4,017) (4,626) 6,814 (851) 5,963
------- ------- ------- ------- ------- -------
Interest Paid On:
Demand deposits 98 (856) (758) 640 28 668
Savings deposits (150) (1,045) (1,195) 267 (165) 102
Time deposits (1,242) (2,041) (3,283) 3,718 1,119 4,837
Short-term borrowings 289 (251) 38 (356) 31 (325)
Long-term debt (640) (38) (678) 53 (98) (45)
------- ------- ------- ------- ------- -------
Total interest bearing
liabilities (1,645) (4,231) (5,876) 4,322 915 5,237
------- ------- ------- ------- ------- -------
Change in net interest
income $ 1,036 $ 214 $ 1,250 $ 2,492 $(1,766) $ 726
======= ======= ======= ======= ======= =======
</TABLE>
(1) Fully Taxable Equivalent-using the federal statutory rate of 35%.
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.
11
<PAGE> 12
II. INVESTMENT PORTFOLIO
A. Amortized Cost of Investment Securities Held to Maturity:
<TABLE>
<CAPTION>
December 31
-----------
(Amounts in Thousands) 1999 1998 1997
------- -------- --------
<S> <C> <C> <C>
U.S. Treasury securities $ 100 $ 100 $ 4,098
U.S. Government agencies and corporations 3,663 7,546 26,377
States and political subdivisions 73,640 75,009 77,641
Other securities 1,365 1,361 1,058
------- -------- --------
$78,768 $ 84,016 $109,174
======= ======== ========
</TABLE>
Market Value of Securities Available for Sale:
<TABLE>
<CAPTION>
December 31
-----------
(Amounts in Thousands) 1999 1998 1997
------- -------- --------
<S> <C> <C> <C>
U.S. Government agencies and corporations $143,636 $119,508 $132,746
States and political subdivisions 33,355 37,343 22,576
Other securities 35,114 36,343 6,473
-------- -------- --------
$212,105 $193,194 $161,795
======== ======== ========
</TABLE>
B. Maturity and Yields
The required information is incorporated by reference to pages 32 through 34 of
the 1999 Annual Report.
C. There are no issues included in obligations of states and political
subdivisions or other securities that exceed ten percent of
stockholders' equity.
III. LOAN PORTFOLIO
A. Loan Summary
<TABLE>
<CAPTION>
December 31
-----------
Amounts in Thousands) 1999 1998 1997 1996 1995
-------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Commercial, Financial and
Agricultural $ 92,379 $ 77,233 $ 82,445 $ 79,278 $ 71,441
Real Estate - Commercial 208,228 170,683 202,625 166,787 152,579
Real Estate - Construction 24,684 8,988 9,612 10,589 5,608
Real Estate - Residential 251,332 228,540 227,465 171,455 155,282
Consumer 128,541 127,169 151,429 120,720 100,843
Other 62 894 1,185 552 519
-------- ------- -------- -------- --------
Total 705,586 613,507 674,761 549,381 486,272
Less : Unearned Income 1,490 2,014 2,944 1,678 1,121
-------- ------- -------- -------- --------
704,096 611,493 671,817 547,703 485,151
Less: Reserve for Loan Losses 11,900 11,404 11,406 8,987 8,321
-------- ------- -------- -------- --------
Net Loans $692,196 $600,089 $660,411 $538,716 $476,830
======== ======== ======== ======== ========
</TABLE>
12
<PAGE> 13
B. Maturities and Rate Sensitivity of Loan Portfolio at December 31, 1999:
<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 $ 42,515 $ 30,928 $ 19,296 $ 92,739 13.17%
Real Estate - Commercial 60,905 67,030 80,292 208,227 29.57%
Real Estate - Construction 10,972 10,473 3,239 24,684 3.51%
Real Estate - Mortgage 27,005 95,496 128,656 251,157 35.67%
Consumer 19,321 96,813 11,093 127,227 18.07%
Other -0- 49 13 62 0.01%
-------- -------- -------- ------- ------
$160,718 $300,789 $242,589 $704,096 100.00%
======== ======== ======== ======== ======
Rate Sensitivity:
Pre-determined Rate $ 82,660 $270,180 $189,275 $542,115 76.99%
Floating or Adjustable Rate 78,058 30,609 53,314 161,981 23.01%
-------- -------- -------- ------- ------
$160,718 $300,789 $242,589 $704,096 100.00%
======== ======== ======== ======== ======
22.83% 42.72% 34.45% 100.00%
======== ======== ======== ========
</TABLE>
C. Risk Elements. The required information for risk elements is included
below and incorporated by reference to pages 16 and 17 of the 1999
Annual Report.
Nonperforming Assets:
<TABLE>
<CAPTION>
December 31
-----------
(Amounts in Thousands) 1999 1998 1997 1996 1995
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Non-accruing Loans $7,889 $7,763 $9,988 $5,476 $4,371
Loans Past Due Over 90
Days 1,259 377 4,391 780 673
Restructured Loans Per-
forming in Accordance
With Modified Terms 505 509 534 401 440
Gross Interest Income Which
Would Have Been Recorded
Under Original Terms of
Non-Accruing and Re-
Structured Loans 436
Actual Interest Income During
the Period 78
Commitments to Lend
Additional Funds on Non-
Performing Assets --
</TABLE>
Management believes that the extent of problem loans at December 31, 1999 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
believes that the non-performing asset carrying values will be substantially
recoverable, taking into consideration the
13
<PAGE> 14
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, 1999 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, Virginia and North Carolina and the surrounding
mid-Atlantic area. Although portions of the Company's market area 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
-----------
(Amounts in Thousands) 1999 1998
------ ------
<S> <C> <C>
Commercial, financial and agricultural $5,585 $5,112
Real estate-mortgage 266 154
------ ------
Total investment in loans considered to be impaired $5,851 $5,266
====== ======
</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.
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) 1999 1998 1997 1996 1995
------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
Balance of reserve at beginning of period ............... $11,404 $11,406 $ 8,987 $8,321 $8,479
Reserve of subsidiaries at date of acquisition........... -- -- 1,981 -- --
Charge-offs:
Commercial, financial and agricultural .............. 562 3,602 2,052 369 1,875
Real estate- residential ............................ 268 367 385 275 109
Installment ......................................... 2,178 3,019 2,761 1,537 899
------- ------- ------- ------ ------
Total Charge-offs ............................... 3,008 6,988 5,198 2,181 2,883
------- ------- ------- ------ ------
Recoveries:
Commercial, financial and agricultural .............. 74 190 130 249 126
Real estate-residential ............................. 60 31 31 26 35
Installment ......................................... 477 515 512 299 329
------- ------- ------- ------ ------
Total Recoveries ................................ 611 736 673 574 490
------- ------- ------- ------ ------
Net charge-offs ......................................... 2,397 6,252 4,525 1,607 2,393
Provision charged to operations ......................... 2,893 6,250 4,963 2,273 2,235
------- ------- ------- ------ ------
Balance of reserve at end of period ..................... $11,900 $11,404 $11,406 $8,987 $8,321
======= ======= ======= ====== ======
Ratio of net charge-offs to average loans
outstanding ......................................... .38% .97% .73% .31% .54%
======= ======= ======= ====== ======
Ratio of reserve to total loans outstanding ............. 1.69% 1.86% 1.70% 1.64% 1.72%
======= ======= ======= ====== ======
</TABLE>
14
<PAGE> 15
A. 2. The required information is incorporated by reference to pages 16 and
17 of the 1999 Annual Report.
B. Allocation of Reserve for Loan Losses:
<TABLE>
<CAPTION>
(Amounts in Thousands, Except Percent Data) December 31
-----------
1999 1998 1997 1996 1995
-------------- -------------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial, Financial
and Agricultural $ 4,919 43% $ 4,054 40% $ 4,795 42% $3,167 45% $3,465 46%
Real Estate - Mortgage 2,578 39% 2,297 39% 2,819 35% 1,956 33% 1,751 33%
Consumer 1,413 18% 1,378 21% 1,979 23% 1,567 22% 1,280 21%
Unallocated 2,990 N/A 3,675 N/A 1,813 N/A 2,297 N/A 1,825 N/A
------- --- ------- --- ------- --- ------ --- ------ ---
Total $11,900 100% $11,404 100% $11,406 100% $8,987 100% $8,321 100%
======= === ======= === ======= === ====== === ====== ===
</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 9 of this report.
B. Not applicable.
C. Not applicable.
D. The required information is incorporated by reference to page 38 of the
1999 Annual Report and as follows:
Maturities of Time Deposits of $100,000 or more
<TABLE>
<CAPTION>
(Amounts in Thousands)
1999
--------
<S> <C>
Three months or less................... $ 34,958
Over Three to Six Months............... 24,644
Over Six to Twelve Months.............. 29,738
Over Twelve Months..................... 21,487
--------
Total............. $110,827
========
</TABLE>
E. Not applicable.
VI. RETURN ON EQUITY AND ASSETS
A. The required information is incorporated by reference to page 10 of the
1999 Annual Report.
15
<PAGE> 16
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>
1999 1998 1997
------------------- ------------------ ------------------
Amount Rate Amount Rate Amount Rate
-------- ---- -------- ---- -------- ----
<S> <C> <C> <C> <C> <C> <C>
At year-end $127,762 3.99% $47,680 3.97% $55,056 4.28%
Average during year 58,365 3.26% 51,457 4.45% 59,462 4.41%
Maximum month-end
balance 127,762 55,755 63,782
</TABLE>
B. Long-Term Advances From the FHLB and Long-Term Debt
The Company's banking subsidiary is a member of the FHLB and as such has 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, 1999 and December 31, 1998. 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.
ITEM 2. PROPERTIES
FIRST COMMUNITY BANK, N. A.
The principal offices of the Corporation and FCBNA are located at One Community
Place, Bluefield, Virginia, where the Company owns and occupies approximately
36,000 square feet of office space. Additional details regarding the physical
location and number of banking offices is located on pages 54 - 55 in the 1999
Annual Report and incorporated herein by reference. The Corporation's banking
subsidiary owns in fee 30 offices while others are leased or are located on
leased land. United First Mortgage, Inc., a wholly-owned subsidiary of FCBNA,
maintains ten leased office facilities in eastern Virginia throughout a
geographic area ranging from Virginia Beach, Virginia to Harrisonburg, Virginia.
ITEM 3. LEGAL PROCEEDINGS
The Registrant and its subsidiary (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 for the protection and
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 funds held in a marital trust. 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 the date of this report. Depositions and discovery in this matter are
continuing and a court
16
<PAGE> 17
ordered mediation is scheduled for May 2, 2000. A trial date is also set for
October 2, 2000. Management and the Company's legal counsel are both 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.
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 claimed to have purchased rolling stock from co-defendants pursuant to
an oral contract. The suit sought $150,000 in compensatory and punitive damages.
The Company had no knowledge of arrangements between the two plaintiffs and was
not a party to the oral contract. This civil suit was dismissed by Agreed Order
on October 20, 1999.
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 1998 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.
On February 9, 2000, the Company was named as the defendant in Civil Action No.
100-0105 styled Allegheny Wesleyan Methodist Stewardship Foundation, Inc. vs.
First Community Bank, N. A. The suit alleges the defendant, as Trustee, failed
to execute certain investment transactions requested by plaintiff in a timely
manner resulting in an approximate $475,000 loss in value of a trust for the
benefit of plaintiff. The complaint further alleges the Trustee assessed account
management fees beyond the value of services to the trust account. The suit
seeks recovery of the aforementioned alleged losses, loss of income of $33,000,
removal of the defendant as Trustee, and unspecified punitive damages. The
Company, as defendant, is currently assessing this matter and is preparing for
defense of this suit. While the ultimate outcome of this matter cannot be
determined, both the Company and legal counsel believe the Bank has strong
defenses to the allegations and believe that it is unlikely that an adverse
outcome in this suit would result in a material adverse effect on the financial
condition or results of operation of the Company.
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 1999.
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 1998 and 1999. Also, presented
below are the book value and cash dividends paid per share as of and for each
quarter of 1998 and 1999. The number of common stockholders of record on
December 31, 1999 was 2,182 and outstanding shares totaled 8,726,836.
<TABLE>
<CAPTION>
Bid Book Value Cash Dividends
1998 High Low Per Share Per Share
- - ---- ---- --- --------- ---------
<S> <C> <C> <C> <C>
First Quarter $23.68 $19.58 $11.34 $.20
Second Quarter 34.40 28.80 11.21 .20
Third Quarter 34.20 24.80 11.48 .20
Fourth Quarter 27.00 21.20 11.60 .24
----
$.84
====
1999
- - ----
First Quarter $23.20 $20.70 $11.75 $.20
Second Quarter 22.90 18.50 11.60 .21
Third Quarter 23.50 18.88 11.74 .22
Fourth Quarter 21.38 18.00 11.86 .25
----
$.88
====
</TABLE>
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, and 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 subsidiary 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, 1999, the net profits available for distribution to the
shareholders as dividends without regulatory approval were approximately $8.4
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 10 of the 1999
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 8 through 22 of
the 1999 Annual Report.
18
<PAGE> 19
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The required information is incorporated by reference to pages 19 and 20 of the
1999 Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The required information is incorporated by reference to pages 24 through 50 of
the 1999 Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
A Form 8-K was previously filed on February 28, 2000 and is incorporated herein
by reference.
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 2000 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 through 9 of the Proxy Statement relating to the
2000 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
through 11 of the Proxy Statement relating to the 2000 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 2000
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
2000 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 28, 2000 are incorporated by reference to pages 24
through 50 of the 1999 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 1999 Consolidated Financial Statements.
(b) No reports on Form 8-K were filed during the last quarter of the period
covered by this report.
19
<PAGE> 20
(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.
(10) Material contracts - to be filed by amendment
(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
1999 Annual Report to Stockholders and is incorporated herein by
reference.
(13) Annual Report to Security Holders
(21) Subsidiary of Registrant:
First Community Bank, N.A. ( a National Association organized under the
laws of the United States)
(23) Independent Auditors' Consent
(27) Financial Data Schedule
20
<PAGE> 21
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/ James L. Harrison, Sr.
-------------------------------------
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/ John M. Mendez
-------------------------------------
Principal Accounting Officer
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Sam Clark Director 03/29/2000
- - -------------------------------------
(Sam Clark)
/s/ Allen T. Hamner Director 03/29/2000
- - -------------------------------------
(Allen T. Hamner)
/s/ James L. Harrison, Sr. President, Chief Executive Officer 03/29/2000
- - ------------------------------------- and Director (Principal Executive
(James L. Harrison, Sr.) Officer)
/s/ B.W. Harvey Director 03/29/2000
- - -------------------------------------
(B.W. Harvey)
/s/ I. Norris Kantor Director 03/29/2000
- - -------------------------------------
(I. Norris Kantor)
/s/ John M. Mendez Vice President, Chief Financial 03/29/2000
- - ------------------------------------- Officer and Director (Principal
(John M. Mendez) Financial Officer)
/s/ A. A. Modena Director 03/29/2000
- - -------------------------------------
(A. A. Modena)
/s/ Robert E. Perkinson, Jr. Director 03/29/2000
- - -------------------------------------
(Robert E. Perkinson, Jr.)
/s/ William P. Stafford Chairman of the Board and Director 03/29/2000
- - -------------------------------------
(William P. Stafford)
/s/ William P. Stafford, II Director 03/29/2000
- - -------------------------------------
(William P. Stafford, II)
/s/ W. W. Tinder, Jr. Director 03/29/2000
- - -------------------------------------
(W. W. Tinder, Jr.)
</TABLE>
21
<PAGE> 1
Exhibit 13
FINANCIAL HIGHLIGHTS
- - --------------------------------------------------------------------------------
(Amounts in Thousands, Except Percent and Per Share Data)
LOGO
EARNINGS AND DIVIDENDS
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
------------------------------------
<S> <C> <C> <C>
Net income............................................. $ 16,852 $ 13,101 $ 15,094
Basic earnings per share*.............................. 1.92 1.49 1.71
Cash earnings per share*............................... 2.12 1.69 1.85
Cash dividends per share*.............................. .88 .84 .83
Return on average equity............................... 16.23% 13.02% 16.05%
Return on average assets............................... 1.62% 1.24% 1.59%
- - ---------------------------------------------------------------------------------------------
</TABLE>
BALANCE SHEET DATA AT YEAR-END
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------------------
<S> <C> <C> <C>
Total assets.......................................... $1,088,162 $1,053,988 $1,042,304
Earning assets........................................ 996,366 971,856 955,337
Deposits.............................................. 833,258 875,996 853,507
Securities sold under agreements to repurchase........ 41,062 47,680 52,351
Stockholders' equity.................................. 103,488 101,719 97,842
- - ----------------------------------------------------------------------------------------------
</TABLE>
* The per share data for 1998 and 1997 have been restated to reflect the five
shares for four stock split on March 31, 1999.
- - --------------------------------------------------------------------------------
1
<PAGE> 2
TABLE OF CONTENTS
- - --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Message to Stockholders..................................... 3
Management's Discussion and Analysis........................ 7
Consolidated Financial Statements........................... 23
Board of Directors.......................................... 52
</TABLE>
LOGO
First Community Bancshares Logo
- - --------------------------------------------------------------------------------
<PAGE> 3
MESSAGE TO STOCKHOLDERS
- - --------------------------------------------------------------------------------
TO OUR STOCKHOLDERS:
First Community Bancshares enjoyed record setting financial performance
during 1999. At the same time, significant progress was realized on several of
the major initiatives of the Company's Five-Year Plan adopted in mid-1998. The
Y2K issue which plagued much of corporate America during 1999 was a non-issue
for your Company as we entered the Year 2000 effortlessly. With all the good
news, however, the market for our stock did not escape the broad devaluation for
stocks in the financial services sector with values returning to our mid-1997
levels. In the paragraphs which follow, these items as well as some additional
areas of interest are presented in more detail. 1999 was a wonderful year and
sets the stage for an even more exciting 2000 and the years to follow.
Net income of $16,852,000 for 1999 represents a 28.6% increase over the
$13,101,000 reported for the prior year. Record setting income was the result of
carefully managed net interest margins coupled with reduced provisions for loan
losses and our continuing vigil in the management of operating costs. Net
interest income when expressed as net interest margin for 1999 was 5.03%
compared with 4.81% in 1998. The provision for loan losses for 1999 was
$2,893,000 or .41% of total loans as compared with $6,250,000 for 1998 or .96%
of average loans. 1998's provision for loan losses included a one-time charge of
$2.9 million related to a single loan relationship secured by a commercial
manufacturing facility which was foreclosed upon in the second quarter of 1998.
Non-interest expense represents 2.5% of total assets as compared with 2.7% for
1998 and, when taken with total non-interest income, converts to an efficiency
ratio of 44.2% continuing to place First Community Bancshares in a leadership
position as to operational efficiency. Net income expressed as Return on Average
Equity, which measures the effective use of stockholders' equity to produce
income, was 16.23% for 1999 as compared with 13.02% for 1998. When expressed as
Return on Average Assets, which measures efficiency in the use of assets to
produce income, net income for 1999 was 1.62%, a 30.7% increase over Return on
Average Assets of 1.24% for 1998.
<TABLE>
<CAPTION>
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Return on Average Equity 16.77% 16.26% 16.05% 13.02% 16.23%
Return on Average Assets 1.70% 1.73% 1.59% 1.24% 1.62%
</TABLE>
Basic earnings per common share of $1.92 for 1999 represent a 28.9%
increase over the $1.49 reported for 1998. Cash earnings per common share of
$2.12 for 1999 represent a $.43 per share increase over the $1.69 earned for the
year 1998. Cash earnings per share is projected to become a more important
measurement of the true economic financial performance of the Corporation as
alternative methods of accounting for business combinations used in the past
will be no longer available with the final implementation of a new business
combination standard expected to be released in the fourth quarter of 2000. Cash
dividends per share of $.88 for 1999 represent a 4.76% increase over dividends
paid of $.84 per share for the 1998 year and a 4.82% cash on cash return based
on ending market values.
- - --------------------------------------------------------------------------------
3
<PAGE> 4
<TABLE>
<CAPTION>
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Dividends Per Share $0.62 $0.73 $0.83 $0.84 $0.88
Basic Earnings Per Share $1.46 $1.58 $1.71 $1.49 $1.92
</TABLE>
During 1999, the market for stocks in the financial services sector
experienced one of the worst performance years in history. The market for
financial industry stocks softened during the last two quarters of 1998 and then
suffered substantial decline in 1999 and, as of the date of this letter,
continued falling early into 2000. As a result of notable disappointments in
earnings projections by several highly visible banking companies, concern with
rising interest rates and the ability of banks to respond favorably to higher
rates, concern over the Y2K issue as we approached the end of 1999, increasing
concern about credit quality and the impact of rising interest rates on asset
quality, as well as concern about the new intense competitive environment in
which banks must operate, bank stocks appear to be out of favor with the
investor community and many are trading at their 1995 to 1996 price levels.
Industry price-earnings ratios in single digits represent the lowest since the
late 1980's when there were real asset quality issues directly impacting bank
valuations. The banking industry in total continues to set records for financial
performance, the industry has clearly survived both in a rising and a falling
rate environment with only temporary impact on earnings, and preparation of data
processing systems for the Year 2000 was both well understood and well executed.
The impact of increasing interest rates on credit quality short of a recession
should not be a concern as the industry is better prepared for a downturn in
credit quality with low levels of problem assets, relatively high reserve
levels, and higher pre-provision profitability than 10 years ago. The industry
has always been able to address competition head-on demonstrating a high degree
of resiliency coupled with substantial capital resources and net income
necessary to reposition successfully. Given these facts, however, bank stocks
continue to be out of favor with investors and the stock of your Company has not
escaped their wrath. At December 31, the year-end market value of First
Community Bancshares, Inc. was $18.25, a 22% reduction from the $23.40 at the
end of 1998 (after giving retroactive impact to the stock split in March 1999),
and approximately a 26% decrease from the $24.36 at the end of 1997. Our
year-end 1999 stock value represents a price earnings multiple of 9.5 as
compared with 15.7 at the end of 1998. While the performance of FCBC stock is
disappointing, it must be recognized that we participate in a broader market for
investor dollars and as goes the financial services sector of that market, so do
we.
<TABLE>
<CAPTION>
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C> <C>
Market Value Per Share $ 16.90 $ 17.66 $ 24.36 $ 23.40 $ 18.25
Stockholders' Equity $80,393 $89,258 $97,842 $101,719 $103,488
</TABLE>
Included in net income for 1999 was $1.1 million partial recovery of the
$3.4 million charge-off in 1996 related to a check kiting scheme. The $1.1
million recognized in 1999 was net of tax with the total recovery of $1.8
million recognized in the fourth quarter of 1999, or 52.9% of the 1996 loss. The
terms of the agreement with the customer group who perpetrated the fraud calls
for payments in addition to that recognized in 1999 of approximately $2 million
to be realized over the next 10 years. The present value of all consideration
received and to be received in this settlement agreement is estimated to be in
excess of $3.2 million representing 94% of the $3.4 million in losses charged
off in 1996.
First Community Bank began preparing for the Year 2000 conversion in
mid-1997. Internal hardware and software used by the Company is state-of-the-art
and remediation to prepare for the end of 1999 was minimal. As was the case for
the financial services sector, First Community experienced no Y2K disrup-
LOGO
First Community Bancshares Logo
- - --------------------------------------------------------------------------------
<PAGE> 5
tions and midnight on December 31, 1999 was simply another routine nightly
processing evening with the "only ball dropped being the one in Times Square."
During April 1999 all four banking subsidiaries of your Company were merged
into a newly chartered national association, First Community Bank, N. A.
Consolidation of the banking subsidiaries not only resulted in some initial
efficiencies, but over time will allow for substantial restructuring which will
enable us to enjoy additional efficiencies while providing increased services.
In addition, in April the Company moved to its new corporate offices located in
Bluefield, Virginia. This 36,000 square foot facility will ultimately house all
Corporate support personnel as well as our Trust and Financial Services
Division. Consolidating operations previously housed in four separate facilities
into the Corporate Center will not only improve internal communication but will
also provide for a much more effective use of both human and other resources. In
the future, the addition of other support personnel will allow non-customer
sensitive operations to be consolidated so that local banking personnel will be
able to devote their full time and attention to customer service.
<TABLE>
<CAPTION>
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
(Amounts in millions)
<S> <C> <C> <C> <C> <C>
Total Assets $780.2 $837.6 $1,042.3 $1,054.0 $1,088.2
Earnings Assets $723.6 $775.2 $ 955.3 $ 971.9 $ 996.4
</TABLE>
On September 28, 1999, the Company acquired United First Mortgage, Inc.
("UFM"), a Richmond, Virginia-based mortgage brokerage firm. UFM operates nine
offices throughout Virginia and specializes in governmental residential lending
programs. The combination of UFM's expertise in mortgage origination together
with the products which First Community offers will result in increased
residential mortgage loan business for the Company as well as provide new
opportunities for other banking products and services to be offered in UFM's
primary markets.
The Company's Five-Year Plan calls for increased fee-based activities as
well as compensation programs which are purely performance based. Initiatives
completed during 1999 include the Company's purchase of an equity interest in
the Virginia Bankers Insurance Center, LLC adding to our array of financial
services and providing new sources of fee-based revenue. Development of
executive retention programs, which were completed in 1999, represent an attempt
to provide your Corporation with the human resource leadership critical for
success in the future. Although in the initial stages, a new stakeholders
focused compensation and incentive program provides the mechanisms necessary to
migrate the Company from a traditional financial services compensation program
to one which is strictly based on pay for performance. Creating new sources of
fee-based services and ensuring that compensation dollars are expended based
upon performance both will ultimately result in the creation of increased long-
term shareholder value.
The financial services industry continues on a path of consolidation where
the very large become even larger in pursuit of critical mass, anticipating
operational efficiencies which would all but guarantee future success. While
these operational efficiencies were never anticipated to be immediate, in a
significant number of cases such efficiencies simply have not been realized and,
to compound the problem, the level of customer service has suffered. Our
Five-Year Plan calls for an internal revolution with every staff member at First
Community Bank focused on raising the level of customer service to a place
second to none in our industry and developing meaningful, mutually beneficial
relationships with our most valuable customers. The quality of service not only
includes the availability of various access channels for customers, both brick
and mortar and electronic, but even more importantly it includes the attitude of
all of the individuals at First Community's end of the service equation. Raising
the bar on service quality is a never ending process but one that is necessary
for our success in the future. First Community enjoys a wonderful heritage full
of history and values. Our transition into a more powerful financial institution
which will continue to enjoy success in the new millennium is being carefully
orchestrated so as not to damage that rich heritage.
- - --------------------------------------------------------------------------------
5
<PAGE> 6
In this the first year of the new century, success depends on being both
relevant to our customers and communities and efficient in our operations.
Change is not an event but it is our way of life, our only certainty in the
world today. To ensure success, reacting to change positively is not good
enough; we must become proactive agents of change, causing it to happen. Every
process, every procedure must continually be on trial as we search for more
effective and more efficient ways to provide meaningful products and services to
an ever increasingly sophisticated customer base which continually raises its
expectations. First Community is well equipped with the economic and human
resources necessary to turn the challenges of the future into financial success.
With the rich heritage we enjoy, with roots deep in the communities we serve,
with shareholders focused on long-term success, and with employees who react to
challenges as unrecognized opportunities, we look forward to a future of
continued record setting performance.
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
PHOTO
The Officers of First Community Bancshares, Inc. from left to right:
ROBERT L. BUZZO, VICE PRESIDENT
JOHN M. MENDEZ, VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
seated: JAMES L. HARRISON, SR., PRESIDENT AND CHIEF EXECUTIVE OFFICER
LOGO
First Community Bancshares Logo
- - --------------------------------------------------------------------------------
<PAGE> 7
MANAGEMENT'S DISCUSSION AND ANALYSIS
- - --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Introduction................................................ 8
Reorganization and Acquisitions............................. 8
Stock Splits................................................ 8
Summary Financial Results................................... 8
Five-Year Selected Financial Data........................... 10
Market Price and Dividends.................................. 10
Net Interest Margin......................................... 11
Net Interest Income......................................... 12
Provision for Loan Losses................................... 12
Non-Interest Income......................................... 13
Non-Interest Expense........................................ 13
Income Tax Expense.......................................... 14
Investment Securities....................................... 15
Securities Available for Sale............................... 15
Loan Portfolio.............................................. 16
Reserve for Loan Losses..................................... 16
Non-Performing Assets....................................... 17
Deposits.................................................... 18
Short-Term Borrowings....................................... 18
Other Indebtedness.......................................... 18
Stockholders' Equity........................................ 18
Trust and Investment Management Services.................... 18
Liquidity................................................... 19
Interest Rate Sensitivity, Interest Rate Risk and
Asset/Liability Management................................ 19
Virginia Bankers Insurance Center........................... 20
Recent Legislation.......................................... 21
Year 2000 Century Date Change............................... 22
</TABLE>
- - --------------------------------------------------------------------------------
7
<PAGE> 8
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 First
Community Bancshares, Inc. (the "Company" or "First Community") 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
forward-looking statements.
First Community is currently a multi-state holding company headquartered in
Bluefield, Virginia. With total resources of $1.088 billion at December 31,
1999, First Community provides financial, mortgage brokerage and origination and
trust services to individuals and commercial customers through 31 full-service
banking locations in West Virginia, Virginia and North Carolina as well as nine
mortgage brokerage facilities operated by United First Mortgage, Inc.
REORGANIZATION AND ACQUISITIONS
Effective with the close of business on April 30, 1999, the Company completed
the merger of all affiliate banks of First Community Bancshares, Inc. into a
single national association. Subsequent to the merger, all banking operations
are being conducted within First Community Bank, N.A., a national association
subject to the supervision of the Office of the Comptroller of the Currency. The
merger was designed to enhance operational efficiency and streamline regulatory
considerations.
On September 28, 1999, First Community Bank, N.A. ("FCBNA"), the Company's
wholly-owned banking subsidiary, acquired 100% of the common stock of United
First Mortgage, Inc. ("UFM") headquartered in Richmond, Virginia. The addition
of the mortgage brokerage operations of UFM added nine additional facilities to
the Virginia operations of FCBNA. The operations of UFM cover a geographic
region along a corridor of Interstates 64 and 81 that range from Virginia Beach,
Virginia to Harrisonburg, Virginia. The acquisition was accounted for as a
"purchase" transaction. "Purchase" accounting does not require restatement of
prior years' results and, accordingly, the results of operation of UFM are
reflected from the date of acquisition forward.
STOCK SPLITS
The Company's common stock was split five shares for four on March 31, 1997,
March 31, 1998, and on March 31, 1999. All share and per share data in this
report have been retroactively adjusted to reflect the affect of these three
stock splits, all of which were effected through 25% stock dividends.
SUMMARY FINANCIAL RESULTS
<TABLE>
<CAPTION>
NET INCOME
----------
<S> <C>
'95 $12.8
'96 13.9
'97 15.1
'98 13.1
'99 16.9
</TABLE>
Net income for 1999 was $16.9 million, up $3.75 million from $13.1 million in
1998 and up $1.76 million from 1997 net income of $15.1 million. Basic earnings
per share also increased to a record level of $1.92 per share, up from $1.49 and
$1.71 in 1998 and 1997, respectively. Cash earnings per share for 1999 were
$2.12, up from $1.69 in 1998 and $1.85 in 1997. Cash earnings per share
represent earnings per share (EPS) adjusted for non-cash charges such as
amortization of goodwill and other intangibles.
LOGO
First Community Bancshares Logo
- - --------------------------------------------------------------------------------
<PAGE> 9
The increase in net income between 1998 and 1999 represents a combination of
positive factors including growth of $1.2 million in net interest income, a $3.4
million reduction in the provision for loan losses and a $1.3 million reduction
in operating expenses. The Company also realized a $1.8 million recovery on
check clearing losses dating back to 1996.
During the current year, a greater emphasis was placed on deposit rates and
liability management, which led to a reduction in interest expense and the
overall cost of funds. The Company also realized significant increases in the
loan portfolio and improved asset quality, resulting in an increase in the net
interest margin from 4.81% in 1998 to the 1999 level of 5.03%. The increase in
net interest margin is reflective of the reduction in interest cost on deposits
and an increase in the Company's loan-to-deposit ratio.
The $1.99 million decrease in net income between 1997 and 1998 is attributable
to a $2.9 million charge to the provision for loan losses associated with a
commercial loan foreclosure in 1998 and an approximate $4.0 million increase in
operating costs and intangible amortization associated, in part, with bank and
branch acquisitions throughout 1997.
<TABLE>
<CAPTION>
RETURN ON AVERAGE ASSETS (%)
----------------------------
<S> <C>
1995 1.7%
1996 1.73
1997 1.59
1998 1.24
1999 1.62
</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 1.62%, up
from 1.24% in 1998 and 1.59% in 1997. These increases in ROA relate, in large
part, to an increased emphasis in controlling deposit costs as well as
operational efficiency improvements and the previously discussed recovery of
check collection losses, which were incurred in 1996. ROE for the Company
remained strong in 1999 at 16.23% and reflects an increase from 13.02% in 1998
and 16.05% in 1997. The ROE reflects the combined affects of strong operational
earnings performance and check clearing recoveries in 1999.
<TABLE>
<CAPTION>
RETURN ON AVERAGE EQUITY (%)
----------------------------
<S> <C>
1995 16.77%
1996 16.26
1997 16.05
1998 13.02
1999 16.23
</TABLE>
- - --------------------------------------------------------------------------------
9
<PAGE> 10
FIVE-YEAR SELECTED FINANCIAL DATA
- - --------------------------------------------------------------------------------
(Amounts in Thousands, Except Percent and Per Share Data)
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
---------- ---------- ---------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET SUMMARY (AT END OF
PERIOD):
Loans, net of unearned income....... $ 704,096 $ 611,493 $ 671,817 $547,703 $485,151
Reserve for loan losses............. 11,900 11,404 11,406 8,987 8,321
Securities.......................... 290,873 277,210 270,969 236,441 246,578
Total assets........................ 1,088,162 1,053,988 1,042,304 837,597 780,235
Deposits............................ 833,258 875,996 853,507 643,497 622,723
Other indebtedness.................. 10,218 18,176 24,330 15,000 15,000
Stockholders' Equity................ 103,488 101,719 97,842 89,258 80,393
SUMMARY OF EARNINGS:
Total interest income............... $ 76,492 $ 81,213 $ 75,834 $ 64,941 $ 58,954
Total interest expense.............. 32,250 38,128 32,890 26,933 23,482
Provision for loan losses........... 2,893 6,250 4,963 2,273 2,235
Non-interest income................. 10,732 11,182 8,661 9,070 7,214
Non-interest expense................ 27,457 28,752 24,672 24,358 22,694
Income tax expense.................. 7,772 6,164 6,876 6,530 4,968
Net Income.......................... 16,852 13,101 15,094 13,917 12,789
PER SHARE DATA:
Basic earnings per common share..... $ 1.92 $ 1.49 $ 1.71 $ 1.58 $ 1.46
Diluted earnings per common share... 1.91 1.49 1.71 1.58 1.46
Cash earnings per share............. 2.12 1.69 1.85 1.63 1.52
Cash dividends...................... .88 .84 .83 .73 .62
Book value at year-end.............. 11.86 11.60 11.08 10.11 9.20
SELECTED RATIOS:
Return on average assets............ 1.62% 1.24% 1.59% 1.73% 1.70%
Return on average equity............ 16.23% 13.02% 16.05% 16.26% 16.77%
Dividend payout..................... 45.83% 56.38% 48.54% 46.20% 42.47%
Average equity to average assets.... 9.96% 9.50% 9.90% 10.64% 10.12%
Risk based capital to risk adjusted
assets............................ 13.22% 13.25% 11.96% 17.02% 17.29%
Leverage ratio...................... 8.25% 7.37% 6.96% 10.33% 9.86%
- - ------------------------------------------------------------------------------------------------
</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, 1999, First Community's common
stock price was $18.25, a decrease of 22.0% from the split-adjusted December 31,
1998 closing price of $23.40.
Book value per common share was $11.86 at December 31, 1999, compared with
$11.60 at December 31, 1998, and $11.08 at the close of 1997. The year-end
market price for First Community common stock of $18.25 represents 154% of the
Company's book value as of the close of the year and reflects total market
capitalization of $159.3 million. Utilizing the year-end market price and 1999
basic earnings per share, First Community common stock closed the year trading
at a price/earnings multiple of 9.5 times basic earnings per share.
Dividends for 1999 totaled $.88 per share, up $.04 or 4.76% from the $.84 paid
in 1998. The 1999 dividends resulted in a cash yield on year-end market of
4.82%.
LOGO
First Community Bancshares Logo
- - --------------------------------------------------------------------------------
<PAGE> 11
<TABLE>
<CAPTION>
DIVIDENDS PER SHARE
-------------------
<S> <C>
1995 $0.62
1996 0.73
1997 0.83
1998 0.84
1999 0.88
</TABLE>
MARKET PRICE AND DIVIDENDS
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
BID BOOK
---------------- VALUE CASH DIVIDENDS
1999 HIGH LOW PER SHARE PER SHARE
- - ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
First Quarter................................. $23.20 $20.70 $11.75 $.20
Second Quarter................................ 22.90 18.50 11.60 .21
Third Quarter................................. 23.50 18.88 11.74 .22
Fourth Quarter................................ 21.38 18.00 11.86 .25
- - ---------------------------------------------------------------------------------------------------
$.88
- - ---------------------------------------------------------------------------------------------------
1998
- - ---------------------------------------------------------------------------------------------------
First Quarter................................. $23.68 $19.58 $11.34 $.20
Second Quarter................................ 34.40 28.80 11.21 .20
Third Quarter................................. 34.20 24.80 11.48 .20
Fourth Quarter................................ 27.00 21.20 11.60 .24
- - ---------------------------------------------------------------------------------------------------
$.84
- - ---------------------------------------------------------------------------------------------------
</TABLE>
NET INTEREST MARGIN
Net interest margin measures net interest income as a percentage of average
earning assets. In 1999, net interest margin recovered to 5.03% for the year
from 4.81% in 1998 but below the 5.25% level attained in 1997. The current
year's increase was due in large part to deposit rate control measures
instituted in the latter part of 1998 and a $92.6 million increase in
outstanding loans. The cost of funds declined from 4.57% in 1998 to 4.0% in 1999
and contributed to a 4.9% decrease in retail deposits. Also during 1999,
additional funds were invested in the securities portfolio in maturity and
sector distributions to enhance the portfolio performance. In the second half of
1999, significant increases in the loan portfolio were then funded with
wholesale advances from the Federal Home Loan Bank.
- - --------------------------------------------------------------------------------
11
<PAGE> 12
<TABLE>
<CAPTION>
NET INTEREST MARGIN
-------------------
<S> <C>
1995 5.38%
1996 5.39
1997 5.25
1998 4.81
1999 5.03
</TABLE>
NET INTEREST INCOME
The primary source of the Company's earnings is net interest income, 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 $1,250,000 or 2.7% in
1999 and $726,000 or 1.6% in 1998. Average earning assets decreased 1.8% in 1999
after increasing 10.9% in 1998. The current year decrease of $17.5 million in
earning assets was primarily the result of reductions in interest bearing
balances and federal funds sold. This occurred in reaction to deposit level
decreases and the general repricing of the interest bearing deposit portfolio to
achieve desired net interest margins.
The increase in tax equivalent net interest income for 1999 was driven by the
declining cost of funds which exceeded the overall decline in asset yield by
approximately 24 basis points and resulted in an additional $1.3 million in tax
equivalent net interest income during 1999. The modest increase in tax
equivalent net interest income in 1998 was impacted by the sale of approximately
$14.0 million in credit card revolving loan accounts during 1998 which reduced
interest and fees on loans approximately $747,000 in comparison to 1997. 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 from the credit
card line of business.
<TABLE>
<CAPTION>
EQUIVALENT NET INTEREST INCOME
------------------------------
<S> <C>
1995 $37,759
1996 40,395
1997 45,700
1998 46,426
1999 47,676
</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 type,
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 $2.9 million in 1999, $6.3 million in 1998
and $5.0 million in 1997. 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
was curtailed in 1998 and losses associated with these types of retail lending
have been substantially reduced.
The current year provision of $2.9 million, although substantially reduced in
comparison to 1998
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First Community Bancshares Logo
- - --------------------------------------------------------------------------------
<PAGE> 13
and 1997, reflects provisions in response to increases in outstanding loan
balances at December 31, 1999 and management's estimate of the risk profile of
the portfolio.
NON-INTEREST INCOME
Non-interest income consists primarily of fiduciary income on trust services
and service charges on deposit accounts. Non-interest income totaled $10.7
million in 1999, a $450,000 decrease or 4.5% from the $11.2 million in 1998 and
a $2.0 million or 23.0% improvement over the 1997 total of $8.7 million.
The reduction in total non-interest revenue in 1999 of $450,000 is due largely
to a $1,357,000 decline in other charges and fees relative to the Company's
credit card portfolio which was sold in 1998, a $1,062,000 pension termination
gain occurring in the prior year and the recognition of a $1.2 million gain on
the sale of the credit card portfolio in 1998. These reductions are partially
offset by a $1.8 million recovery recognized in the current year of check
clearing losses which were incurred in 1996, and the acquisition of United First
Mortgage which added $931,000 in revenues on the origination and sale of
mortgage loans.
Total non-interest revenue from continuing sources increased slightly by
$160,000 which is largely due to an increase in fiduciary income of $410,000
less a $200,000 reduction in service charges on deposit accounts and other
service charges, commissions and fees.
Higher levels of non-interest income for 1998 over 1997 include a pension
termination gain of $1,062,000 (net of federal excise tax of $764,000) as a
result of the Company's termination of its Defined Benefit Pension Plan, which
was completed in the first quarter of 1998. Also 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 and by the end of 1999 the outstanding balance of these accounts was
reduced to $669,000.
Service charges on deposit accounts are the largest source of non-interest
income. Service charge income totaled $3.6 million in 1999, a decrease of
$106,000 or 2.8% from 1998. This contrasts with a 13.9% increase of $457,000
between 1998 and 1997 which is reflective of the full year of operations during
1998 of facilities added during 1997 which included Blue Ridge Bank in early
1997 and branches acquired later in that year.
Other service charges, commissions and fees declined by 50% in 1999 versus
1998. This decline was largely a result of the reduced transaction fees of
$1,357,000 related to the previously mentioned sale of the credit card
portfolio.
<TABLE>
<CAPTION>
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C> <C>
Fiduciary Revenues $1,621 $1,731 $1,678 $1,682 $2,092
</TABLE>
Fiduciary income totaled $2.1 million in 1999 versus $1.7 million in both 1998
and 1997. A modest increase in Trust assets, particularly in the area of
retirement accounts, plus an increase in estates under management, resulted in
the twenty-three percent increase in fiduciary income in 1999. 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 $27.5 million in 1999, compared with $28.8 million and $24.7 million in
1998 and 1997, respectively. The decline in non-interest expense in 1999 of $1.3
million relates largely to the elimination of the operating costs associated
with the
- - --------------------------------------------------------------------------------
13
<PAGE> 14
credit card division of $1.25 million. Additionally, savings were generated
through the application of a more centralized purchasing environment and the
introduction of technology for the electronic storage and retrieval of reports
which significantly reduced paper costs and the aggregate cost of supplies,
which declined by $425,000 in 1999. The substantial increase in 1998 operating
costs was attributable to the full year costs of Blue Ridge Bank and various
branches in 1998 versus the partial year of operation of these offices 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 1997 levels.
Salaries and employee benefits increased $890,000 or 7.3% when comparing 1999
with 1998 and $906,000 in 1998 in comparison to 1997. These increases relate
almost exclusively to the addition of United First Mortgage, Inc. in 1999 and
Blue Ridge Bank and various branches acquired in 1997. The effect of the three
months of operations of the UFM facilities in 1999 resulted in additional
personnel costs of approximately $811,000 in 1999. The effect of a full year of
operations of Blue Ridge Bank and branches acquired in 1997 resulted in an
additional $1.1 million in personnel costs in 1998 when compared to 1997. Blue
Ridge accounted for an additional $521,000 of this total while the branch
acquisitions added $597,000 in 1998.
Occupancy expense increased $185,000 or 9.5% between 1998 and 1999. The
acquisition of United First Mortgage resulted in an increase of $84,000 in the
current year while increases of $87,000 were noted in other categories including
maintenance, insurance, and depreciation. When comparing 1997 to 1998 occupancy
cost increased $264,000 or 15.7% as a result of the addition of Blue Ridge Bank
and branches acquired in 1997.
The $222,000 decrease in furniture and equipment cost in 1999 is reflective of
the reduced maintenance on newer equipment used in check processing, the
centralization of functions relative to the acquisition of Blue Ridge Bank and
branches in 1997 and the elimination of specialized equipment used in the credit
card processing function. The 1998 increase (19.7%) in furniture and equipment
expense of $323,000 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 introduction of electronic banking services implemented in
1997 and early 1998.
<TABLE>
<CAPTION>
NET OVERHEAD RATIO
------------------
<S> <C>
1995 2.27%
1996 2.22
1997 1.84
1998 2.06
1999 1.96
</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 1999, 1998 and 1997 were 1.96%, 2.06% and
1.84%, respectively.
The Company's efficiency ratio also measures management's ability to control
costs and maximize net revenues. The efficiency ratio is computed by dividing
non-interest expense by the sum of net interest income plus non-interest income
(all non-recurring items excluded). The efficiency ratios for 1999, 1998 and
1997 were 44.2%, 47.4%. and 42.2%, respectively.
INCOME TAX EXPENSE
Income tax expense totaled $7.8 million in 1999, compared with $6.2 million in
1998 and $6.9 million in 1997. The $1.6 million increase between 1998 and 1999
reflects the substantial increase in pre-tax earnings between the two periods as
a result of improved net interest income, reductions in loan loss provisions and
operating expenses as well as the $1.8 million recovery of check clearing
losses.
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<PAGE> 15
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 1999 was 31.6% as compared with
32.0% for 1998 and 31.3% in 1997.
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 Federal Home
Loan Bank (FHLB), Federal National Mortgage Association (FNMA), Government
National Mortgage Association (GNMA), Student Loan Marketing Association (SLMA),
Federal Farm Credit Bank (FFCB), and Federal Home Loan Mortgage Corporation
(FHLMC).
Obligations of States and Political Subdivisions totaling $73.6 million at
December 31, 1999 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 decreased from 10.05 years in
1998 to 9.63 years in 1999 with the tax equivalent yield increasing from 8.38%
at year-end 1998 to 8.46% at the close of 1999. The increase in yield reflects
the change in portfolio composition that shifted toward the municipal bond
sector.
The investment portfolio totaling $78.8 million decreased $5.2 million between
1998 and 1999. This decrease is the result of prepayments and calls occurring as
a result of the declining interest rate environment in 1998 and continuing into
mid-year 1999. Portions of these cash flows were invested in new loan
origination.
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, 1999, the Company had $212.1 million in securities available
for sale, compared with $193.2 million at year-end 1998. 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 and corresponding decreases in Federal Funds sold and
interest-bearing balances held at the Federal Home Bank.
The book value of securities available for sale exceeded market value at
year-end 1999 by $9.1 million. The decline in the market value of the securities
available for sale is a direct result of overall increases in the interest rate
environment, which has an inverse effect on the market value of the underlying
instruments. The tax equivalent purchase yield on securities available for sale
in 1999 was 6.53% and the tax equivalent purchase yield in 1998 was 6.56%. The 3
basis point decline in yield on the portfolio reflects the general decline in
interest rates, which triggered above average calls and prepayments during 1998
and which were then reinvested at prevailing lower market rates. This trend
continued through the first half of the current year but began to reverse in the
latter part of 1999 when interest rate increases were instituted by the Federal
Reserve.
The average maturity of the portfolio was 12.4 years and 15.6 years at
December 31, 1999 and 1998, respectively. The declining average maturity is also
the result of the above average number of calls in the agency portfolio and
mortgage-backed security prepayments as a result of the declining rate
environment and reinvestment in early 1999 in Agency securities with shorter
final maturities. Most longer-term securities have call provisions, which could
result in redemption prior to their final maturity.
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15
<PAGE> 16
LOAN PORTFOLIO
The loan portfolio is geographically diversified among loan types and industry
segments. Commercial and commercial real estate loans represent 42.7% of the
total portfolio. During 1999, commercial real estate loans increased as a
percentage of total loans and now comprise 29.6% of the portfolio. The
commercial and commercial real estate sectors increased by $53.1 million or
21.4% in 1999. Additionally, consumer loans increased by $1.7 million or 1.4%
from $125.5 million at December 31, 1998 to $127.2 million at the close of 1999.
Consumer loans represent 18.1% and 20.6% of the portfolio at the close of 1999
and 1998, respectively. The sector that experienced the largest percentage
change was the commercial real estate portfolio, which increased by $37.6
million or 40.6% of the total increase in the loan portfolio of $92.6 million.
Loans, net of unearned income, were $704.1 million at year-end 1999. The
increase of $92.6 million represents 15.1% growth from the $611.5 million level
at December 31, 1998. During 1999, a renewed emphasis on relationship management
and loan development resulted in a significant increase in the total loan
portfolio. In 1998 the Company experienced increased competition for commercial
loans by other banks and capital market groups which 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
during 1998. This trend reversed in 1999 as interest rates rose and capital
market financing slowed.
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 as the Company exited the credit card
line of business.
The loan-to-deposit ratio increased to 85% at December 31, 1999 from 70% at
December 31, 1998. The increase in the loan-to-deposit ratio is a result of the
increases in the loan portfolio of $92.6 million coupled with a $42.7 million
decline in total deposits.
<TABLE>
<CAPTION>
LOAN PORTFOLIO
REAL ESTATE - REAL ESTATE - REAL ESTATE -
COMMERCIAL, FINANCIAL & AGRICULTURAL CONSTRUCTION COMMERCIAL RESIDENTIAL LOANS TO INDIVIDUALS
- - ------------------------------------ ------------- ------------- ------------- --------------------
<S> <C> <C> <C> <C>
13.1% 3.5% 29.6% 35.7% 18.1%
</TABLE>
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 available for the
entire portfolio.
The reserve for loan losses represents 130% of non-performing loans at
year-end 1999 versus 140% and 79% at December 1998 and 1997, respectively. When
other real estate is combined with non-performing loans, reserves equal 107% of
non-
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<PAGE> 17
performing assets at the end of 1999 versus 98% and 72% at December 31, 1998 and
1997, respectively.
Net charge-offs were $2.4 million in 1999, as compared with $6.3 million in
1998 and $4.5 million in 1997, respectively. The $3.9 million decrease in net
charge-offs in 1999 is principally related to elevated charge-offs in 1998 as a
result of a commercial loan charge-off of $2.9 million relating to a failed
furniture assembly plant in Princeton, West Virginia in the second quarter of
1998 as well as a reduction in charge-offs associated with the credit card
portfolio that was sold in the latter part of 1998. Additionally, the current
year reflects an increase in the overall level of loan quality as a result of
termination of credit card lending in 1998 and a reduction in the level of
indirect auto financing. 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.
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 $11.1 million at December 31, 1999. The levels of
non-performing assets for the last five years are presented in the table below.
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------------------------------
1999 1998 1997 1996 1995
(Amounts in Thousands) ------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
Non-accrual Loans........................... $ 7,889 $ 7,763 $ 9,988 $5,476 $4,371
Loans 90 Days or more Past Due.............. 1,259 377 4,391 780 673
Other Real Estate Owned..................... 1,950 3,547 1,472 2,225 929
- - -----------------------------------------------------------------------------------------------
$11,098 $11,687 $15,851 $8,481 $5,973
- - -----------------------------------------------------------------------------------------------
Non-performing loans as a percentage of
total loans............................... 1.3% 1.3% 2.1% 1.1% 1.0%
Non-performing assets as a percentage of
total loans and other real estate owned... 1.6% 1.9% 2.4% 1.6% 1.2%
Reserve for loan losses as a percentage of
non-performing loans...................... 130.1% 140.1% 79.3% 143.7% 165.0%
Reserve for loan losses as a percentage of
non-performing assets..................... 107.2% 97.6% 72.0% 106.0% 139.3%
- - -----------------------------------------------------------------------------------------------
</TABLE>
Non-performing assets decreased $589,000 between 1998 and 1999 with a $1.6
million decrease in other real estate owned and increases reflected in both
ninety days past due and non-accrual loans. The small increase in non-accrual
loans is the result of the addition and removal of several commercial
relationships that were brought current or liquidated and removed from
non-accrual status. The volume of non-accrual loans remains near $8.0 million
due to several larger loan relationships, which are slow in resolution due to
pending Chapter 11 Bankruptcy proceedings. The increase in loans ninety days or
more past due is the result of the addition of an $892,000 commercial loan
relationship which is secured by real estate and partially backed by Farmer's
Home Administration (FmHA) and Small Business Administration (SBA) guarantees.
The decline in other real estate owned of $1.6 million is primarily attributable
to the sale of a commercial property that was acquired through foreclosure on a
furniture manufacturing company in southern West Virginia. The facility was sold
in March 1999 and resulted in a $275,000 recovery of amounts previously charged
off.
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17
<PAGE> 18
DEPOSITS
Total deposits at December 31, 1999 decreased $42.7 million or 4.9% when
compared to December 31, 1998. The decrease in deposits is the result of a
general repricing of deposits which was instituted in the latter part of 1998
and continued throughout 1999. The resultant effect was a decline in deposits,
deposit cost, and the cost of funds. As a result of decreases in deposit
liabilities, the Company utilized lower cost, short-term advances from the
Federal Home Loan Bank to supplement the funding needs of the Company. In 1999,
the average rate paid on interest bearing liabilities was 4.0%, down from 4.57%
in 1998.
Average deposits totaled $854.0 million for 1999 versus $870.8 million in
1998. The largest decrease in average deposits was experienced in interest-
bearing time deposits, which decreased 4.9% versus an overall deposit portfolio
decrease of 1.9%. Average savings deposit accounts also decreased 3.5%.
Alternatively, average non interest-bearing demand deposits increased 7.2% and
average interest-bearing demand deposits experienced a 2.7% increase.
SHORT-TERM BORROWINGS
The Company's short-term borrowings consist primarily of Federal Funds
purchased from the FHLB and securities sold under agreements to repurchase. This
category of funding is a source of moderately priced short-term funds.
Short-term borrowings increased on average $6.9 million or 13.4% from 1998
following a 13.5% decrease between 1998 and 1997. The increase in average
short-term borrowings in 1999 is a direct result of the increased emphasis on
liability management and controlling deposit cost to increase the net interest
margin. Short-term borrowings were used to fill the gap in funding due to
reduced levels of retail deposits.
OTHER INDEBTEDNESS
Other indebtedness, which represents long-term advances from the FHLB and
acquisition debt to a correspondent bank decreased by $8.0 million in 1999. The
decrease is attributable to the complete repayment of the acquisition debt in
the second quarter of 1999. Remaining indebtedness of $10.2 million is comprised
primarily of long-term advances from the FHLB to fund matched purchases of
earning assets.
STOCKHOLDERS' EQUITY
Risk-based capital ratios are a measure of the Company's capital adequacy. At
December 31, 1999, the Company's Tier I capital ratio was 11.96% compared with
12.0% in 1998. Risk-based capital ratios and the leverage ratio are used by
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 13.22% at the close of 1999 compared with 13.25% in
1998. Both of these ratios are well above the current minimum level of 8%
prescribed for bank holding companies as depicted on Page 43.
The leverage ratio is the measurement of total tangible equity to total
assets. The Company's leverage ratio at December 31, 1999 was 8.25% compared to
7.37% at December 31, 1998, both of which are well above the minimum levels
prescribed by the Federal Reserve as depicted on Page 43.
TRUST AND INVESTMENT MANAGEMENT SERVICES
The company offers trust management and estate administration services through
its Trust and Financial Services Division (Trust Division). The Trust Division
reported market value of assets under management of $368 million and $377
million at December 31, 1999 and 1998, respectively. The Trust Division manages
intervivos trusts and trusts under will, develops and administers employee
benefit plans and individual retirement plans and manages and settles estates.
Fiduciary fees for these services are charged on a schedule related to the size,
nature and complexity of the account.
The Trust Division employs 19 professionals and support staff with a wide
variety of estate and financial planning, investing and plan administration
skills. Trust Division operating expenses totaled $1.3 million in 1999 and 1998.
These costs are comprised primarily of salaries and related benefits, investment
services, asset custody fees and the cost of information processing systems. The
Trust Division is located within the Company's largest banking facility in
Bluefield, West Virginia. Services and Trust development activities to other
branch locations and primary markets are provided as an extension of this
division through professional staff who also serve as field Trust
Administrators.
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<PAGE> 19
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 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 that have been established at financial
institutions to meet cash needs.
Total liquidity of $372.1 million at December 31, 1999 is comprised of the
following: cash on hand and deposits with other financial institutions of $37.8
million; securities available for sale of $212.1 million; investment securities
held to maturity due within one year of $1.7 million; and Federal Home Loan Bank
credit availability of $120.5 million.
INTEREST RATE SENSITIVITY, INTEREST RATE RISK 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 while maintaining an acceptable level
of NII given the current interest rate environment.
The Company's primary component of operational revenue, NII, is subject to
variation as a result of changes in interest rate environments in conjunction
with unbalanced repricing opportunities 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 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, quarterly simulations
of NII are performed 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, 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. Specific strategies
for management of IRR have included shortening the amortized maturity of
fixed-rate loans, increasing the volume of adjustable rate loans to reduce the
average maturity of the Bank's interest-earning assets and monitoring the term
structure of liabilities to maintain a balanced mix of maturity and repricing
structures to mitigate the potential exposure. The simulation model used by the
Company captures all earning assets, interest bearing liabilities and all off
balance sheet financial instruments and combines the various factors affecting
rate sensitivity into an earnings outlook. Based upon the latest simulation, the
Company believes that it is slightly biased toward a liability sensitive
position. Absent adequate management, liability positions can negatively impact
net interest income in a rising rate environment or, alternatively, positively
impact net interest income in a falling rate environment.
The Company has established policy limits for tolerance of interest rate risk
that allow for no more than a ten-percent reduction in projected net interest
income based on quarterly income simulations. The most recent simulation
indicates that current exposure to interest rate risk does not exceed the
Company's defined policy limits.
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19
<PAGE> 20
The following table summarizes the impact on NII and the Market Value of
Equity (MVE) as of December 31, 1999 and 1998, respectively, of immediate and
sustained rate shocks in the interest rate environment of plus and minus 100 and
200 basis points from the flat rate simulation. The results of the rate shocks
depicted below differ from the results in quarterly simulations, in that, all
changes are assumed to take effect immediately; whereas, in the quarterly income
simulations, changes in interest rates take place gradually over a 24-month
horizon. This 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 over a twelve month time period.
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 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.
- - --------------------------------------------------------------------------------
(Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
1999
- - ----------------------------------------------------------------------------------------------------
CHANGE IN
INTEREST RATES NET INTEREST % MARKET VALUE %
(BASIS POINTS) INCOME CHANGE OF EQUITY CHANGE
- - -------------- ------------ ------ ------------ ------
<S> <C> <C> <C> <C>
200............................................... $43,040.5 -10.26 $ 68,527.3 -35.0
100............................................... 45,655.7 -4.81 87,584.3 -16.9
- - -0-............................................... 47,960.7 0.0 105,442.3 0.0
- - -100.............................................. 49,994.4 4.2 124,308.5 17.9
- - -200.............................................. 50,734.5 5.8 141,245.4 34.0
</TABLE>
<TABLE>
<CAPTION>
1998
- - ----------------------------------------------------------------------------------------------------
CHANGE IN
INTEREST RATES NET INTEREST % MARKET VALUE %
(BASIS POINTS) INCOME CHANGE OF EQUITY CHANGE
- - -------------- ------------ ------ ------------ ------
<S> <C> <C> <C> <C>
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
- - ----------------------------------------------------------------------------------------------------
</TABLE>
When comparing the impact of the rate shock analysis between 1999 and 1998,
the 1999 changes in net interest income reflect larger variances in projected
net interest income and MVE. The increased sensitivity is attributed to the
increased life of certain assets and the control measures taken in the fourth
quarter of 1998, which continued throughout 1999, to reduce deposit cost. As a
result, the deposit repricing led to a reduction in customer deposits, a
corresponding increase in short-term borrowings and an increase in the overall
duration of equity. Consequently, the hypothetical changes in interest rates
have a larger effect on net interest income and the market value of equity.
VIRGINIA BANKERS INSURANCE CENTER
In 1999 the company purchased a 3.17% interest in the Virginia Bankers
Insurance Center ("VBIC"), a limited liability company organized to provide
access to the insurance line of business for participating banks. This
consortium of over sixty banks resulted in the formation of a pool of capital
which will be used to enable the participating banks to collectively enter the
property, casualty, life, and health insurance sales market. It is expected that
insurance products will be available in the bank's branches through VBIC
sometime in late 2000. The company believes that through its extensive network
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- - --------------------------------------------------------------------------------
<PAGE> 21
of bank branches and its thousands of customer relationships, it will be in a
position to market significant volumes of insurance, particularly property and
casualty insurance for homes and automobiles. The company's entry into the
insurance line of business is designed to provide new sources of fee revenue and
further solidify the financial relationship between the company and its present
customers.
RECENT LEGISLATION
Congress completed this past year the long-awaited financial modernization
bill and the bill became law, known as the Gramm-Leach-Bliley Financial Services
Modernization Act of 1999 (the "Act") with an enactment date of November 12,
1999. The Act is expected to have a significant impact on financial services
companies, including banks such as First Community. The Act's most publicized
provisions, which generally take effect on March 11, 2000, include: a) the
elimination of many federal and state legal barriers to affiliations among
banks, securities firms, insurance companies and other financial services
providers; b) the establishment of a statutory framework pursuant to which full
affiliations can occur between these entities; and c) provision for financial
services organizations with flexibility in structuring new affiliations through
a Financial Holding Company ("FHC") structure with the Federal Reserve Bank as
the umbrella regulator. The overall thrust of the Act is to remove the historic
laws that separate commercial banking from other financial services
organizations.
The Act establishes the requirements for permitting a bank holding company to
engage in the new financial activities and affiliations. A bank holding company
may elect to become an FHC if all of its subsidiary banks are well capitalized
and well managed and have received a satisfactory or better Community
Reinvestment Act rating. Thereafter, an FHC may engage in either denovo or
through an acquisition, in any activity that has been, as defined by the Act,
and determined by the Federal Reserve Bank to be financial in nature or
incidental or complementary to such financial activity.
The Act also creates a new Investment Bank Holding Company ("IBHC") structure
under the Securities Exchange Act of 1934. This provision is designed to
implement a new concept of supervision by the Securities Exchange Commission of
broker/ dealer holding companies that do not control depository institutions.
The Act further provides for functional regulation of bank securities
activities. Among many other matters, it repeals the exemptions from the
definition of broker and dealer under the Federal Securities Law that currently
apply to banks, generally subjecting banks and their affiliates and subsidiaries
to the same regulation as all other providers of securities products. These
provisions take effect 18 months after the date of enactment. However, the Act
retains certain limited exemptions to facilitate certain activities in which
banks have traditionally engaged. These exemptions include third-party broker
arrangements, trust activities, traditional banking transactions such as
commercial paper and exempted securities, employer and shareholder benefit
plans, sweep accounts, affiliate transactions, private placements, safekeeping
and custody services, asset-backed securities, and identified banking products
such as traditional deposit accounts.
The Act amends the Investment Advisors Act of 1940 and the Investment Company
Act of 1940 to subject banks and bank holding companies that advise mutual funds
to the same regulatory scheme as other advisors to mutual funds. It also
requires banks to make additional disclosure when a mutual fund is sold or
advised by a bank. These regulatory and disclosure provisions likewise take
effect 18 months after the date of enactment.
If certain requirements are met and regulatory approval is obtained, national
banks of any size are permitted to engage, through a financial subsidiary, in
financial activities authorized by the Act, which specifically excludes certain
types of activities (including real estate investment and development) which may
be done only in FHCs.
- - --------------------------------------------------------------------------------
21
<PAGE> 22
The Act prohibits new unitary savings and loan holding companies from engaging
in non-financial activities or affiliating with non-financial entities. This
prohibition applies to a company that becomes a unitary savings and loan holding
company pursuant to applications filed after May 4, 1999. Previously chartered
unitary savings and loan holding companies and applicants are grandfathered.
Any federal savings association chartered or in operation before the date of
enactment or with branches in operation before the date of enactment in one or
more states, may convert, at its option, with the approval of the Office of the
Comptroller of the Currency or the appropriate state bank supervisor, into one
or more national state banks, each of which may encompass one or more of the
branches of the federal savings association in operation before the date of
enactment in one or more states. This conversion will be available only for
resulting national or state banks which meet specified financial and capital
requirements.
One of the more significant provisions of the Act is the authorization of
financial subsidiary activities which includes the establishment of insurance
agency activities for such subsidiaries without geographic restriction. The
Company does not presently maintain any financial subsidiaries as comprehended
by the Act and has not organized an FHC. The Company is presently evaluating
opportunities afforded under the Gramm-Leach-Bliley Act.
YEAR 2000 CENTURY DATE CHANGE
The arrival of the year 2000 and the associated century date change ("CDC")
were expected by many experts and the public, in general, to present potential
threats to business and many aspects of everyday life due to the possibility
that some information systems and imbedded computer chips might not function
properly due to truncated two-digit year date fields. In response to this
threat, the Company initiated an exhaustive study of information systems and
electronic devices with embedded chips utilized throughout the Company's
operations. This project involved the identification, remediation, testing and
implementation of new, upgraded or remediated systems and equipment to guard
against failures associated with the CDC threat. Through these efforts the
Company was able to successfully transcend the CDC with no interruption of
service, no processing failures, no loss of data or other negative consequences
associated with the CDC (Y2K) threat. In achieving this state of year 2000
compliance, the Company budgeted and expended approximately $150,000 on new
equipment, renovated systems and back-up processing arrangements. In addition,
the Company incurred human resource opportunity cost through the realignment of
duties of existing personnel to achieve compliance. However, the overall cost of
the project did not have a material financial impact on the results of
operations of the Company in any fiscal year.
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- - --------------------------------------------------------------------------------
<PAGE> 23
CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Consolidated Balance Sheets................................. 24
Consolidated Statements of Income........................... 25
Consolidated Statements of Cash Flow........................ 26
Consolidated Statements of Stockholders' Equity............. 27
Notes to Consolidated Financial Statements.................. 28
Independent Auditors' Report................................ 50
Report on Management's Responsibilities..................... 51
</TABLE>
- - --------------------------------------------------------------------------------
23
<PAGE> 24
CONSOLIDATED BALANCE SHEETS
- - --------------------------------------------------------------------------------
(Amounts in Thousands, Except Share Data)
<TABLE>
<CAPTION>
DECEMBER 31
------------------------
1999 1998
------------------------
<S> <C> <C>
ASSETS
Cash and due from banks..................................... $ 36,400 $ 33,943
Interest bearing balances -- FHLB........................... 1,391 57,523
Federal funds sold.......................................... 6 25,630
Securities available for sale (amortized cost of $221,226,
1999; $191,131, 1998)..................................... 212,105 193,194
Investment securities held to maturity:
U.S. Treasury securities.................................. 100 100
U.S. Government agencies and corporations................. 3,663 7,546
States and political subdivisions......................... 73,640 75,009
Other securities.......................................... 1,365 1,361
------------------------
Total investment securities (market value, $78,917,
1999; $88,256, 1998)................................ 78,768 84,016
Total loans, net of unearned income......................... 704,096 611,493
Less reserve for loan losses.............................. 11,900 11,404
------------------------
Net loans................................................... 692,196 600,089
Premises and equipment...................................... 18,630 17,986
Other real estate owned..................................... 1,950 3,547
Interest receivable......................................... 8,090 7,030
Other assets................................................ 15,178 6,684
Intangible assets........................................... 23,448 24,346
------------------------
TOTAL ASSETS......................................... $1,088,162 $1,053,988
------------------------
LIABILITIES
Deposits:
Demand.................................................... $ 115,288 $ 123,992
Interest-bearing demand................................... 133,073 137,169
Savings................................................... 138,107 148,461
Time...................................................... 446,790 466,374
------------------------
Total deposits....................................... 833,258 875,996
Interest, taxes and other liabilities....................... 13,436 10,417
Federal funds purchased..................................... 86,700 --
Securities sold under agreements to repurchase.............. 41,062 47,680
Other indebtedness.......................................... 10,218 18,176
------------------------
TOTAL LIABILITIES.................................... 984,674 952,269
------------------------
STOCKHOLDERS' EQUITY
Common stock, $1 par value in 1999 and 1998, 10,000,000
shares authorized; 8,991,586 shares issued in 1999 and
1998, respectively; 8,726,836 and 8,767,552 shares
outstanding in 1999 and 1998, respectively................ 8,992 8,992
Additional paid-in capital.................................. 34,264 34,306
Retained earnings........................................... 69,372 60,250
Treasury stock, at cost..................................... (2,945) (1,403)
Unallocated ESOP shares..................................... (722) (1,664)
Accumulated other comprehensive (loss) income............... (5,473) 1,238
------------------------
TOTAL STOCKHOLDERS' EQUITY........................... 103,488 101,719
------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........... $1,088,162 $1,053,988
------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
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- - --------------------------------------------------------------------------------
<PAGE> 25
CONSOLIDATED STATEMENTS OF INCOME
- - --------------------------------------------------------------------------------
(Amounts in Thousands, Except Share and Per Share Data)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
----------------------------------------
1999 1998 1997
----------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans............................ $58,036 $62,323 $59,753
Interest on securities available for sale............. 13,217 9,060 9,128
Interest on investment securities:
U.S. Treasury securities............................ 41 117 337
U.S. Government agencies and corporations........... 269 1,034 2,333
States and political subdivisions, tax exempt....... 3,940 3,989 3,205
Other securities.................................... 104 90 85
Interest on federal funds sold........................ 403 1,594 949
Interest on deposits in banks......................... 482 3,006 44
----------------------------------------
TOTAL INTEREST INCOME.......................... 76,492 81,213 75,834
----------------------------------------
INTEREST EXPENSE
Interest on deposits.................................. 29,137 34,374 28,773
Interest on short-term borrowings..................... 2,332 2,295 2,623
Interest on other indebtedness........................ 781 1,459 1,494
----------------------------------------
TOTAL INTEREST EXPENSE......................... 32,250 38,128 32,890
----------------------------------------
NET INTEREST INCOME............................ 44,242 43,085 42,944
----------------------------------------
Provision for loan losses............................. 2,893 6,250 4,963
----------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN
LOSSES...................................... 41,349 36,835 37,981
----------------------------------------
NON-INTEREST INCOME
Fiduciary income...................................... 2,092 1,682 1,678
Service charges on deposit accounts................... 3,640 3,746 3,289
Other service charges, commissions and fees........... 1,476 2,935 2,979
Net securities gains.................................. -- 25 6
Other operating income................................ 3,524 1,732 709
Pension termination gain.............................. -- 1,062 --
----------------------------------------
TOTAL NON-INTEREST INCOME...................... 10,732 11,182 8,661
----------------------------------------
NON-INTEREST EXPENSE
Salaries and employee benefits........................ 13,132 12,242 11,336
Occupancy expense of bank premises.................... 2,128 1,943 1,679
Furniture and equipment expense....................... 1,743 1,965 1,642
Goodwill and core deposit amortization................ 2,049 2,061 1,379
Other operating expense............................... 8,405 10,541 8,636
----------------------------------------
TOTAL NON-INTEREST EXPENSE..................... 27,457 28,752 24,672
----------------------------------------
Income before income taxes............................ 24,624 19,265 21,970
Income tax expense.................................... 7,772 6,164 6,876
----------------------------------------
NET INCOME..................................... $16,852 $13,101 $15,094
----------------------------------------
WEIGHTED AVERAGE BASIC SHARES OUTSTANDING............. 8,766,209 8,800,546 8,828,791
----------------------------------------
BASIC EARNINGS PER COMMON SHARE....................... $1.92 $1.49 $1.71
----------------------------------------
DILUTED EARNINGS PER COMMON SHARE..................... $1.91 $1.49 $1.71
----------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
- - --------------------------------------------------------------------------------
25
<PAGE> 26
CONSOLIDATED STATEMENTS OF CASH FLOW
- - --------------------------------------------------------------------------------
(Amounts in Thousands)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
--------------------------------------
1999 1998 1997
--------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Cash flows from operating activities:
Net income.............................................. $ 16,852 $ 13,101 $ 15,094
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses.......................... 2,893 6,250 4,963
Depreciation of premises and equipment............. 1,413 1,514 1,192
Amortization of intangibles........................ 2,020 1,915 647
Net investment amortization and accretion.......... 483 32 (332)
Net gain on the sale of assets..................... (832) (1,375) (103)
(Increase) decrease in interest receivable......... (1,060) 658 (358)
(Increase) decrease in other assets................ (3,668) 2,958 1,046
Decrease in other liabilities...................... (754) (1,033) (2,857)
Other, net......................................... 80 88 (51)
--------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES............... 17,427 24,108 19,241
--------------------------------------
INVESTING ACTIVITIES
Cash flows from investing activities:
Proceeds from sales of securities available for sale.... 8,203 -- 18
Proceeds from maturities and calls of securities
available for sale.................................... 30,881 100,920 24,762
Proceeds from maturities and calls of investment
securities............................................ 5,278 25,488 26,509
Proceeds from sale of credit card loans................. -- 15,590 --
Purchase of securities available for sale............... (69,611) (132,381) (35,090)
Purchase of investment securities....................... -- (300) (26,447)
Net (increase) decrease in loans made to customers...... (87,986) 37,664 (27,014)
Cash (used in ) provided by branch acquisitions, net.... (1,417) -- 39,658
Purchase of premises and equipment...................... (2,222) (726) (2,018)
Proceeds from sale of equipment......................... 82 287 16
--------------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES..... (116,792) 46,542 394
--------------------------------------
FINANCING ACTIVITIES
Cash flows from financing activities:
Net (decrease) increase in demand and savings
deposits.............................................. (23,154) 28,556 (8,507)
Net (decrease) increase in time deposits................ (19,579) (6,351) 30,398
Net increase (decrease) in short-term debt.............. 80,082 (7,376) (23,443)
Repayment of long-term debt............................. (7,993) (7,768) (2,412)
Proceeds from long-term borrowings...................... -- 1,500 11,500
Acquisition of treasury stock........................... (1,542) (1,796) --
Reissuance of treasury stock............................ -- -- 17
Cash paid in lieu of fractional shares.................. (18) (27) (22)
Dividends paid.......................................... (7,730) (7,415) (7,345)
--------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES..... 20,066 (677) 186
--------------------------------------
CASH AND CASH EQUIVALENTS
Net (decrease) increase in cash and cash equivalents.... (79,299) 69,973 19,821
Cash and cash equivalents at beginning of year.......... 117,096 47,123 27,302
--------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR................ $ 37,797 $ 117,096 $ 47,123
--------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
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<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 (LOSS) TOTAL
- - ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996..... $ 32,015 $11,283 $46,815 $(1,288) $ -- $ 433 $ 89,258
Comprehensive income:
Net income................... -- -- 15,094 -- -- -- 15,094
Other comprehensive income:
Unrealized holding gains on
securities
available-for-sale, net
of tax................... -- -- -- -- -- 822 822
Less reclassification
adjustment for gains
realized in net income,
net of tax............... -- -- -- -- -- (4) (4)
------- ------- --------
Comprehensive income..... -- -- 15,094 -- -- 818 15,912
Common dividends declared ($.83
per share)................... -- -- (7,345) -- -- -- (7,345)
Change from $5.00 par value to
$1.00 par value.............. (23,023) 23,023 -- -- -- -- --
Reissuance of 909 treasury
shares at $18.96 per share... -- -- -- 17 -- -- 17
-------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997..... 8,992 34,306 54,564 (1,271) -- 1,251 97,842
Comprehensive income:
Net income..................... -- -- 13,101 -- -- -- 13,101
Other comprehensive income:
Unrealized holding losses
on securities
available-for-sale, net
of tax................... -- -- -- -- -- (11) (11)
Less reclassification
adjustment for gains
realized in net income,
net of tax............... -- -- -- -- -- (2) (2)
------- ------- --------
Comprehensive income..... -- -- 13,101 -- -- (13) 13,088
Common dividends declared ($.84
per share)................... -- -- (7,415) -- -- -- (7,415)
Purchase 55,914 ESOP shares at
a weighted cost of $29.76 per
share........................ -- -- -- -- (1,664) -- (1,664)
Purchase 5,156 treasury shares
at $25.50 per share.......... -- -- -- (132) -- -- (132)
-------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998..... 8,992 34,306 60,250 (1,403) (1,664) 1,238 101,719
Comprehensive income:
Net income..................... -- -- 16,852 -- -- -- 16,852
Other comprehensive income:
Unrealized holding losses
on securities
available-for-sale, net
of tax................... -- -- -- -- -- (6,711) (6,711)
Less reclassification
adjustment for gains
realized in net income,
net of tax............... -- -- -- -- -- -- --
------- ------- --------
Comprehensive income..... -- -- 16,852 -- -- (6,711) 10,141
Common dividends declared ($.88
per share)................... -- -- (7,730) -- -- -- (7,730)
Purchase 71,589 treasury shares
at $21.54 per share.......... -- -- -- (1,542) -- -- (1,542)
Allocation of ESOP shares...... -- (42) -- -- 942 -- 900
-------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1999..... $ 8,992 $34,264 $69,372 $(2,945) $ (722) $(5,473) $103,488
-------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
- - --------------------------------------------------------------------------------
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 subsidiary (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 its wholly owned subsidiary. All significant intercompany balances
and transactions have been eliminated in consolidation. In the Parent Company
financial statements, the investment in subsidiary is stated at equity in the
net assets of the 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
life of the security. 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 are carried at cost. Premiums and discounts are amortized to
expense and accreted 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, 1999 and 1998, 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 real estate 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, and any
concentration of credit in certain industries or geographic areas.
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<PAGE> 29
Impaired loans are evaluated in accordance with 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. Consumer revolving credit loans
that become 180 days past due are automatically charged to the reserve for 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 are allocated to
participant accounts over a period not to exceed seven years based upon relative
employee compensation.
- - --------------------------------------------------------------------------------
29
<PAGE> 30
INTANGIBLE ASSETS
The investment in subsidiary 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
$22,913,000 and $23,684,000 at December 31, 1999 and 1998, 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 $535,000 and $662,000 at December 31, 1999 and 1998,
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 1998 and 1997 financial statements have
been reclassified to conform to the presentation used in preparation of the 1999
financial statements.
RECENT ACCOUNTING PRONOUNCEMENT
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities", 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 embedded 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 will be effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000. Earlier application
of the provisions of this Statement is encouraged but is permitted only as of
the beginning of any fiscal quarter. Management is currently in the process of
evaluating the impact of Statement No. 133.
CASH FLOWS
In 1999, 1998 and 1997 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 1999, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
(Amounts in Thousands)
<S> <C> <C> <C>
Interest....................................... $33,175 $38,267 $32,726
Income taxes................................... 8,195 6,744 6,433
SUPPLEMENTAL SCHEDULE OF NON-CASH TRANSACTIONS
Transfers of loans to other real estate
owned........................................ $ 1,667 $ 3,588 $ 862
Unrealized loss (gain) on securities available
for sale..................................... 11,184 21 (1,375)
</TABLE>
LOGO
First Community Bancshares Logo
- - --------------------------------------------------------------------------------
<PAGE> 31
NOTE 2. ACQUISITIONS
On September 28, 1999, First Community Bank, N.A. ("FCBNA"), the Company's
wholly-owned banking subsidiary acquired 100% of the common stock of United
First Mortgage, Inc. ("UFM"), headquartered in Richmond, Virginia. UFM is a
mortgage brokerage company and when acquired had assets of approximately $6.4
million and 9 offices located in a geographic region along a corridor of
Interstates 64 and 81 and ranging from Virginia Beach, Virginia to Harrisonburg,
Virginia. Pursuant to the Agreement, FCBNA exchanged cash of $1.95 million for
all of UFM's outstanding 3,000 common shares with provisions for additional
consideration contingent upon the financial performance of UFM in subsequent
years. The total initial consideration paid resulted in an intangible asset of
approximately $1.2 million, which is being amortized on a straight-line basis
over a 15-year period. The contingent payments to be made in subsequent years
will be capitalized as goodwill upon the determination of the contingent payment
amounts and amortized over the remaining useful life, if any, of the original
goodwill purchase. The acquisition was accounted for under the purchase method
of accounting. Accordingly, results of operations of UFM are included in the
consolidated results from the date of acquisition. Subsequent to the merger, UFM
operates as a wholly owned subsidiary of FCBNA. Presently, all loans originated
by UFM are classified as held for sale and are included in total loans
outstanding as of December 31, 1999. The loans are reviewed individually and
presented at the lower of cost or market value, however, due to the short
turnaround on outstanding commitments to sell these loans, and the fact that
investors are identified at the point of the loan commitment, the market value
is generally greater than cost. UFM does not securitize the loans that are
available for sale and UFM does not retain servicing on any of the loans sold.
The following unaudited proforma financial information shows the effect of
the UFM acquisition as if the transaction had been consummated on January 1,
1998:
FIRST COMMUNITY BANCSHARES, INC.
Proforma Unaudited Supplemental Financial Information
(Amounts in thousands except per share data)
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Net Interest Income..................................... $44,208 $43,037
Net Income.............................................. 16,718 13,371
Basic Earnings Per Common Share......................... 1.89 1.50
</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>
1999
----------------------------------------------
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- --------
(Amounts in Thousands)
<S> <C> <C> <C> <C>
U.S. Government agency
securities..................... $149,020 $ 73 $ (5,457) $143,636
States and political
subdivisions................... 35,068 340 (2,053) 33,355
Other securities................. 37,138 518 (2,542) 35,114
-------- ------ -------- --------
Total....................... $221,226 $ 931 $(10,052) $212,105
======== ====== ======== ========
</TABLE>
<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>
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31
<PAGE> 32
Securities available for sale with market values of $175,911,000 and
$65,421,000 at December 31, 1999 and 1998, respectively, were pledged to secure
public deposits, securities sold under agreements to repurchase and other
short-term borrowings and for other purposes.
As a condition to membership in the Federal Home Loan Bank System, the
Company's wholly owned banking subsidiary, FCBNA, is required to subscribe to a
minimum level of stock in the Federal Home Loan Bank ("FHLB"). At December 31,
1999, FCBNA owned approximately $5.1 million in stock in the FHLB of Atlanta,
which is classified as available for sale.
The amortized cost and market value of securities available for sale by
contractual maturity, at December 31, 1999, are shown below. Expected maturities
may 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; the
proceeds from these sales were $18,000. There were no sales of securities
available for sale during 1998 or 1999. During 1998, calls of securities
available for sale resulted in a gain of approximately $4,000. The basis for
evaluating the gain or loss realized is the amortized cost. The following table
presents maturities of investment securities available for sale by type on both
an amortized cost and market value basis at December 31, 1999:
<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........................ $ 4,858 $ 380 $ -- $ 5,238 5.33%
After one year through five years...... 30,395 4,998 -- 35,393 6.08%
After five years through ten years..... 50,144 5,087 29,027 84,258 6.48%
After ten years........................ 63,623 24,603 8,111 96,337 6.81%
-------- ------- ------- --------
Total amortized cost................ $149,020 $35,068 $37,138 $221,226
======== ======= ======= ========
Tax equivalent purchase yield............ 6.23% 8.21% 4.67% 6.53%
Average maturity (in years).............. 12.16 12.56 12.96 12.36
MARKET VALUE
Maturity:
Within one year........................ $ 4,839 $ 380 $ -- $ 5,219
After one year through five years...... 29,445 5,061 -- 34,506
After five years through ten years..... 48,150 5,285 26,500 79,935
After ten years........................ 61,202 22,629 8,614 92,445
-------- ------- ------- --------
Total market value.................. $143,636 $33,355 $35,114 $212,105
======== ======= ======= ========
</TABLE>
LOGO
First Community Bancshares Logo
- - --------------------------------------------------------------------------------
<PAGE> 33
NOTE 4. INVESTMENT SECURITIES
The following table presents amortized cost and approximate market values
of investment securities at December 31:
<TABLE>
<CAPTION>
1999
---------------------------------------------
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- -------
(Amounts in Thousands)
<S> <C> <C> <C> <C>
U.S. Treasury securities............. $ 100 $ -- $ -- $ 100
U.S. Government agencies and
corporations....................... 3,663 3 (59) 3,607
States and political subdivisions.... 73,640 810 (613) 73,837
Other securities..................... 1,365 10 (2) 1,373
------- ---- ----- -------
Total........................... $78,768 $823 $(674) $78,917
======= ==== ===== =======
</TABLE>
<TABLE>
<CAPTION>
1998
---------------------------------------------
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>
Various investment securities with an amortized cost of approximately
$27,050,000 and $27,875,000, respectively, were pledged at December 31, 1999 and
1998 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; the proceeds from these calls were $1,021,000. There were no gains from
calls of investment securities held to maturity during 1999. The following table
presents maturities of investments by type on both an amortized cost and market
value basis at December 31, 1999:
<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.................. $100 $ 594 $ 1,012 $ -- $ 1,706 6.50%
After one year through five
years......................... -- 2,268 3,474 1,065 6,807 7.49%
After five years through ten
years......................... -- 801 30,117 300 31,218 8.33%
After ten years.................. -- -- 39,037 -- 39,037 8.82%
---- ------ ------- ------ -------
Total amortized cost.......... $100 $3,663 $73,640 $1,365 $78,768
==== ====== ======= ====== =======
Tax equivalent purchase yield...... 6.01% 6.17% 8.59% 7.74% 8.46%
Average maturity (in years)........ .5 3.48 10.05 4.02 9.63
</TABLE>
- - --------------------------------------------------------------------------------
33
<PAGE> 34
<TABLE>
<CAPTION>
U.S.
GOVERNMENT STATES &
U.S. AGENCIES & POLITICAL OTHER
TREASURY CORPORATIONS SUBDIVISIONS SECURITIES TOTAL
-------- ------------ ------------ ---------- -------
(Amounts in Thousands)
<S> <C> <C> <C> <C> <C>
MARKET VALUE
Maturity:
Within one year.................. $100 $ 585 $ 1,013 $ -- $ 1,698
After one year through five
years......................... -- 2,225 3,530 1,073 6,828
After five years through ten
years......................... -- 797 30,433 300 31,530
After ten years.................. -- -- 38,861 -- 38,861
---- ------ ------- ------ -------
Total market value............ $100 $3,607 $73,837 $1,373 $78,917
==== ====== ======= ====== =======
</TABLE>
NOTE 5. LOANS
Loans consist of the following at December 31:
<TABLE>
<CAPTION>
1999 1998
-------- --------
(Amounts in Thousands)
<S> <C> <C>
Real estate -- commercial............................ $208,227 $170,669
Real estate -- construction.......................... 24,684 8,988
Real estate -- residential........................... 251,157 228,218
Commercial, financial and agricultural............... 92,739 77,233
Loans to individuals for household and other consumer
expenditures....................................... 127,227 125,491
All other loans...................................... 62 894
-------- --------
$704,096 $611,493
======== ========
</TABLE>
The banking subsidiary of the Company is a party to financial instruments
with off-balance sheet risk in the normal course of business to meet the
financing needs of its customers. These financial instruments include
commitments to extend credit, standby letters of credit and financial
guarantees. These instruments involve, to varying degrees, elements of credit
and interest rate risk beyond the amount recognized on the balance sheet. The
contractual amounts of those instruments reflect the extent of involvement the
Company has in particular classes of financial instruments.
The Company's exposure to credit loss in the event of non-performance by
the other party to the financial instrument for commitments to extend credit and
standby letters of credit and financial guarantees written is represented by the
contractual amount of those instruments. The Company uses the same credit
policies in making commitments and conditional obligations as it does for
on-balance sheet instruments.
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, 1999.
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- - --------------------------------------------------------------------------------
<PAGE> 35
Financial instruments whose contract amounts represent credit risk at
December 31, 1999 are commitments to extend credit (including availability of
lines of credit) -- $132.1 million, and standby letters of credit and financial
guarantees written -- $3.2 million. At December 31, 1999, neither the Company
nor its subsidiary 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, 1999 are summarized as follows:
<TABLE>
<CAPTION>
1999
--------------------------
NOTIONAL
AMOUNT RATE
-------- ------------
(Amounts in Thousands)
<S> <C> <C>
Real estate -- commercial (fixed)................. $ 29,845 7.50 - 10.50%
Real estate -- commercial (variable).............. 28,346 6.50 - 10.75%
Real estate -- construction (fixed)............... 16,646 7.75 - 11.25%
Real estate -- construction (variable)............ 21,345 8.25 - 11.00%
Real estate -- residential (fixed)................ 1,840 6.50 - 18.00%
Real estate -- residential (variable)............. 7,388 6.43 - 13.00%
Commercial, financial, agricultural (fixed)....... 9,312 5.60 - 13.00%
Commercial, financial, agricultural (variable).... 15,576 6.50 - 13.50%
Loans to individuals for household and other
consumer expenditures (fixed)................... 3,888 5.00 - 18.00%
Loans to individuals for household and other
consumer expenditures (variable)................ 1,125 7.43 - 18.00%
--------
TOTAL........................................ $135,311
========
</TABLE>
Presently, the Company has no significant concentrations of credit risk
other than geographic concentrations. Most loans in the current portfolio were
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 presence in three states
including North Carolina, Virginia and West Virginia provides additional
diversification against geographic concentrations of credit risk.
In the normal course of business, the banking subsidiary of the Company has
made loans to directors and executive officers of the Company and its
subsidiary. 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 $8.6 million and
$7.3 million at December 31, 1999 and 1998, respectively. New loans and payments
attributable to the change from 1998 to 1999 total $3.1 million and $1.8
million, respectively. The beginning balance of $7.3 million has been restated
from $9.8 million in the prior year due to the consolidation of the banking
subsidiaries with and into First Community Bank, N.A. and a reduction in the
number of directors.
- - --------------------------------------------------------------------------------
35
<PAGE> 36
NOTE 6. RESERVE FOR LOAN LOSSES
Activity in the reserve for loan losses was as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
(Amounts in Thousands)
<S> <C> <C> <C>
Balance, January 1........................ $11,404 $11,406 $ 8,987
Recoveries credited to reserve............ 610 736 673
Provision for the year charged to
operations.............................. 2,893 6,250 4,963
Reserve acquired in acquisitions.......... -- -- 1,981
------- ------- -------
14,907 18,392 16,604
Loans charged-off......................... 3,007 6,988 5,198
------- ------- -------
Balance, December 31...................... $11,900 $11,404 $11,406
======= ======= =======
</TABLE>
The Company consistently applies a monthly review process to continually
evaluate loans for changes in credit risk. This process serves as the primary
means by which the Company evaluates the adequacy of loan loss reserves. The
total loan loss reserve is divided into two categories which apply to i)
specifically identified loan relationships which are on non-accrual status,
ninety days past due or more and loans with elements of credit weakness
(allocated reserves) and ii) formula and unallocated reserves.
Allocated reserves are specifically targeted to cover loan relationships
which are identified with significant credit weakness and for which a collateral
deficiency may be present. Impaired loans are identified in accordance with
Statement of Financial Accounting Standard ("SFAS") No. 5 and measured and
recorded in accordance with SFAS No. 114 and SFAS No. 118. The allocated
reserves established under the specific identification method are judged based
upon the borrower's current operating status and projected liquidation value of
pledged collateral.
Formula and unallocated reserves are available to cover the homogeneous
pool of loans, which are not specifically identified as potential problems. The
formula and unallocated reserve is developed and evaluated against loans in
general by specific category (commercial, mortgage, and consumer). To determine
the amount of reserve needed for each loan category, a rolling three-year
average net loan charge-off percentage is calculated. The calculated percentage
is used to determine the required reserve excluding any relationships
specifically identified under the allocated reserve method. The Company's policy
also requires that the formula reserve percentage be maintained at not less than
1% for each category of loans, irrespective of the historic net charge-off
ratio.
The composition of First Community's allowance for loan losses was as
follows at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
DECEMBER 31 DECEMBER 31
1999 1998
----------- -----------
(Amounts in Thousands)
<S> <C> <C>
Specific Reserves............................... $ 2,195 $ 1,642
Formula and Unallocated Reserves................ 9,705 9,762
------- -------
Total Reserves............................. $11,900 $11,404
======= =======
</TABLE>
The specific reserve for loan losses increased by $553,000 when comparing
December 31, 1999 to December 31, 1998. The increase is primarily a function of
the amount and expected realization of specific loans included in the pool of
identified loans. The increase in total reserves corresponds with increases in
the total loan portfolio of $92.6 million. However, a greater portion of the
reserve was allocated to the pool of specifically identified loans. Total
reserves to total outstanding loans decreased from 1.87% in 1998 to 1.69% at
December 31, 1999.
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<PAGE> 37
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>
1999 1998
------ ------
<S> <C> <C>
Recorded investment in loans considered to be impaired.... $5,851 $5,266
Loans considered to be impaired that were on a non-accrual
basis................................................... 5,851 5,266
Allowance for loan losses related to loans considered to
be impaired............................................. 1,297 1,019
Average recorded investment in impaired loans............. 5,247 5,023
Total interest income recognized on impaired loans... 124 148
</TABLE>
NOTE 7. PREMISES AND EQUIPMENT
Premises and equipment are comprised of the following as of December 31:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
(Amounts in Thousands)
<S> <C> <C>
Land..................................................... $ 5,553 $ 4,552
Bank premises............................................ 21,302 20,124
Equipment................................................ 13,690 13,906
------- -------
40,545 38,582
Less: accumulated depreciation and amortization.......... 21,915 20,596
------- -------
Total............................................... $18,630 $17,986
======= =======
</TABLE>
NOTE 8. OTHER INDEBTEDNESS
The Company's banking subsidiary is a member of the Federal Home Loan Bank
("FHLB") of Atlanta, which provides credit in the form of overnight and
long-term advances collateralized by various mortgage assets. Long-term debt
from a commercial bank totaling $7.9 million at December 31, 1998 and used to
acquire Blue Ridge Bank, was repaid prior to its final maturity on April 30,
1999.
Long-term debt, included in other indebtedness, consists primarily of
structured term advances from the FHLB. Long-term advances from the FHLB and
principal payments on correspondent bank debt as of December 31, 1999 and 1998
mature as follows:
<TABLE>
<CAPTION>
1999 1998
---------------------- ----------------------
WEIGHTED WEIGHTED
AMOUNT AVERAGE RATE AMOUNT AVERAGE RATE
------- ------------ ------- ------------
(Amounts in Thousands)
<S> <C> <C> <C> <C>
1999........................... $ -- -- $ 1,200 6.61%
2000........................... -- -- 1,200 6.61%
2001........................... -- -- 1,200 6.61%
2002........................... -- -- 1,200 6.61%
2003........................... 8,000 5.95% 9,200 6.04%
2004........................... -- -- 1,200 6.61%
2005........................... -- -- 700 6.61%
2008........................... 2,000 6.27% 2,000 6.27%
------- ---- ------- ----
$10,000 6.01% $17,900 6.28%
======= ==== ======= ====
</TABLE>
Advances from the FHLB are secured by stock in the FHLB of Atlanta,
qualifying first mortgage loans, mortgage-backed securities and certain other
investment securities. The FHLB advances are subject to restrictions or
penalties in the event of prepayment. Other various debt obligations of the
Company totaled $218,000 at December 31, 1999 and $276,000 at December 31, 1998.
- - --------------------------------------------------------------------------------
37
<PAGE> 38
NOTE 9. DEPOSITS
At December 31, 1999, the scheduled maturities of certificates of deposit
are as follows:
<TABLE>
<CAPTION>
(Amounts in Thousands)
<S> <C>
2000............................................ $340,936
2001............................................ 65,587
2002............................................ 20,853
2003............................................ 12,678
2004 and thereafter............................. 6,736
--------
$446,790
========
</TABLE>
Time deposits include Certificates of Deposit issued in denominations of
$100,000 or more which amounted to $110.8 million and $113.4 million at December
31, 1999 and 1998, respectively. Interest expense on these certificates was $5.4
million, $6.5 million, and $5.5 million for 1999, 1998, and 1997, respectively.
NOTE 10. PER SHARE AMOUNTS
Basic earnings per share are based upon the weighted average number of
shares of common stock outstanding during the year. The Company's common stock
was split five shares for four on March 31, 1997, March 31, 1998 and again on
March 31, 1999. All share and per share data have been retroactively adjusted to
reflect these stock splits.
NOTE 11. EMPLOYEE BENEFITS
EMPLOYEE STOCK OWNERSHIP PLAN
The Company maintains an Employee Stock Ownership and Savings Plan
("KSOP"). Coverage under the plan is provided to all employees meeting minimum
eligibility requirements. Annual contributions to the stock portion of 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 recognized by
the Company related to the Employee Stock Ownership Plan was $918,000, $947,000
and $767,000 in 1999, 1998 and 1997, respectively.
EMPLOYEE SAVINGS PLAN
The Company provides a 401(k) Savings feature within the KSOP that is
available to substantially all employees meeting minimum eligibility
requirements. The cost of Company contributions under the Savings Plan component
of the KSOP was $149,000, $99,000, and $116,000 in 1999, 1998 and 1997,
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 1999, 1998 and 1997.
EMPLOYEE WELFARE PLAN
The Company provides various medical, dental, vision, 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 formed 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 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 $1,533,000 for individual and aggregate claims, respectively.
The Company adopted SFAS No. 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
LOGO
First Community Bancshares Logo
- - --------------------------------------------------------------------------------
<PAGE> 39
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 is being
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
The banking subsidiary of the Company has deferred compensation agreements
with certain current and former officers providing for benefit payments over
various periods commencing at retirement or death. The balance sheet liability
at December 31, 1999 was approximately $794,000. The expenses associated with
this plan for 1999, 1998 and 1997 were $76,000, $(11,000) and $58,000,
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 1998 cost reflected a reduction in total benefit cost resulting in
a net credit of $11,000.
EXECUTIVE RETENTION PLAN
In 1999, the Company established an Executive Retention Plan for key
members of senior management. This Plan provides for a benefit at normal
retirement (age 65) targeted at 15% of final compensation projected at an
assumed 3% salary progression rate. Benefits under the Plan become payable at
age 62. Actual benefits payable under the Retention Plan are dependant on an
indexed retirement benefit formula which accrues benefits equal to the aggregate
after-tax income of associated life insurance contracts less the Company's tax-
effected cost of funds for that plan year. Benefits under the Plan are dependent
on the performance of the insurance contracts and are not guaranteed by the
Company.
As of December 31, 1999, the Company had not acquired the associated life
insurance contracts. Accordingly, no benefits under the Plan have accrued. The
Company funded the contracts during the first quarter of 2000.
In connection with the Executive Retention Plan, the Company has also
entered into Life Insurance Endorsement Method Split Dollar Agreements (the
"Agreements") with the executives covered under the Retention Plan. Under the
Agreements, the Company shares 80% of death benefits (after recovery of cash
surrender value) with the designated beneficiaries of the executives under life
insurance contracts referenced in the Retention Plan. The Company as owner of
the policies retains a 20% interest in life proceeds and a 100% interest in the
cash surrender value of the policies.
The Retention Plan also contains provisions for change of control, as
defined, which allow the executives to retain benefits under the Plan in the
event of a termination of service other than for cause during the twelve months
prior to a change in control or anytime thereafter, unless the executive
voluntarily terminates his employment within 90 days following the change in
control.
Because the Retention Plan was designed to retain the future services of
key executives, no benefits are payable under the Plan in the event of voluntary
termination prior to retirement age of 62.
STOCK OPTIONS
In 1999, the Company instituted a Stock Option Plan to encourage and
facilitate investment in the common stock of the Company by key executives and
to assist in the long-term retention of service by those executives. The Plan
covers key executives as determined by the Company's Board of Directors from
time to time. Options under the Plan were granted in the form of non-statutory
stock options with the aggregate number of shares of common stock available for
grant under the Plan set at 275,000 shares. Total options granted under the Plan
during 1999 represent the rights to acquire 272,578 shares with deemed grant
dates of January 1 for each year 1999 through 2003 resulting in the deemed grant
of 54,516 shares in each year of the five-year deemed grant period. All stock
options granted pursuant to the Plan vest ratably on the first through the
seventh anniversary dates of the deemed grant date. The option price of each
stock option is equal to the fair market value of the Company's common stock on
the date of each deemed grant during the five-year grant period. Vested stock
options granted pursuant to the Plan are exercisable for a period of five years
after the date of the grantee's retirement (provided retirement occurs at or
after age 62), and at disability, or death. If employment is terminated other
than by retirement, disability, or death, vested options must be exercised
- - --------------------------------------------------------------------------------
39
<PAGE> 40
within 90 days after the effective date of termination. Any option not exercised
within such period will be deemed cancelled.
The Company accounts for options under Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations. Under APB 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
Pro forma disclosure information regarding net income and earnings per
share is required by SFAS No. 123, and is determined as if the Company had
accounted for its employee stock options under one of the fair value methods
called for in that Statement. The fair value of options was estimated at the
date of grant using the Black-Scholes option pricing model using the following
assumptions: i) risk-free interest rate of 6.25%; ii) a dividend yield of 4.5%;
iii) volatility factors for the expected market price of the Company's common
stock of 32.8%; and iv) a weighted-average expected life of the options of 14.83
years.
Pro forma net income and earnings per share for 1999 would have been as
follows:
<TABLE>
<CAPTION>
1999
----------------------
(Amounts in Thousands,
Except Per Share Data)
<S> <C>
Net income................................................ $16,818
Basic earnings per share.................................. $ 1.92
Fully diluted earnings per share.......................... $ 1.91
</TABLE>
A summary of the Company's stock option activity, and related information
for the year ended December 31, 1999 is as follows:
<TABLE>
<CAPTION>
1999
--------------------------
WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE
------- ----------------
<S> <C> <C>
Outstanding, beginning of year........................ -- $ --
Granted............................................... 54,516 24.20
Exercised............................................. -- --
Forfeited............................................. -- --
-------
Outstanding, end of year.............................. 54,516 $24.20
=======
Weighted-average fair value of options granted during
the year............................................ $ 4.47
</TABLE>
The exercise price for options outstanding as of December 31, 1999 was
$24.20; however, no options are currently exercisable. The weighted-average
remaining contractual life of all options is 14.83 years.
DEFINED BENEFIT PENSION PLAN
In October 1996, the Company's 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. There was no pension
cost for the 1999 or 1998 years. Net periodic pension expense in 1997 was as
follows:
<TABLE>
<CAPTION>
1997
----------------------
(Amounts in Thousands)
<S> <C>
Service cost -- benefits earned during the year........... $ --
Interest expense on projected benefit obligation.......... 496
Expected return on plan assets............................ (879)
Net amortization and deferral............................. (56)
-----
Net periodic pension (income) expense..................... $(439)
=====
</TABLE>
LOGO
First Community Bancshares Logo
- - --------------------------------------------------------------------------------
<PAGE> 41
NOTE 12. COMPENSATING BALANCES
Pursuant to agreements with the Federal Reserve Bank, the Company has
agreed to maintain cash balances of approximately $1.0 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 subsidiary 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;
accordingly, the Company has entered a vigorous defense of this suit for the
continuation of the foundation's purpose. On October 15, 1998, the plaintiffs in
the matter filed a cross motion for partial summary judgment. In a hearing on
this motion, the Court requested that the Company, as defendant, file a motion
for summary judgement and further ordered that discovery in this case be halted
pending receipt of the motion for summary judgement. The motion for partial
summary judgement was filed with the Court on January 14, 1999, and in a
subsequent ruling, the Court granted the Company's motion finding no wrongdoing
by the Company in its discretionary use of principal funds in this matter. This
ruling in the Company's favor resolved plaintiffs' major cause of action against
the Company.
As of the date of this report, discovery in this matter continues with a
number of depositions of material witnesses completed and with other depositions
scheduled for the near future. While the ultimate outcome of the matter cannot
be predicted, both management and the Company's legal counsel are of the opinion
that the remainder of the suit is without merit and will be successfully
defended with no material adverse impact on the Company's financial condition.
Subsequent to December 31, 1999, the Company was named as defendant in a
civil action brought by a not-for-profit foundation (plaintiff) as beneficiary
under a Trust Under Will administered by the Company's Trust and Financial
Services Division. The complaint formalized previous asserted but unfiled claims
that the Bank as Trustee failed to appropriately acknowledge and follow the
investment philosophy set forth by the plaintiff which allegedly resulted in a
$425,000 loss of value of a bequest. The complaint further alleges that the
Trustee failed to act prudently with respect to the investment of the Trust
funds and alleges that account management fees charged to the Trust account were
excessive and did not constitute legitimate services tangibly benefiting the
Trust account. The Company vigorously denies these allegations and is preparing
an appropriate response to this complaint. The suit seeks recovery of the
alleged losses, removal of the Trustee and unspecified punitive damages. At this
time, it is not possible to predict the outcome of this action; however, the
Company and its legal counsel believe that the Company possesses meritorious
defenses and intend to vigorously defend this suit.
Other legal actions have arisen primarily from commercial lending
transactions and collection activities. 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.
- - --------------------------------------------------------------------------------
41
<PAGE> 42
NOTE 14. DIVIDENDS
The primary source of funds for dividends paid by the Company is dividends
received from its subsidiary bank. Dividends paid by the subsidiary bank are
subject to restrictions by banking regulations. The most restrictive provision
of the regulations requires approval by the Office of the Comptroller of the
Currency 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,
1999, subsidiary earnings available for distribution as dividends to the Company
without prior approval were $8.4 million.
NOTE 15. REGULATORY CAPITAL REQUIREMENTS AND RESTRICTIONS
First Community Bancshares, Inc. and First Community Bank, N.A.
(collectively referred to as "the Bank") 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 Bank, the bank must meet specific capital guidelines
that involve quantitative measures of the entity's assets, liabilities, and
certain off-balance sheet items as calculated under regulatory accounting
practices. The entity's 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 Bank to maintain minimum
amounts and ratios (set forth in the table on page 43) 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). As of
December 31, 1999, the Company and banking subsidiary met all capital adequacy
requirements to which they are subject.
As of December 31, 1999 and 1998, the most recent notifications from the
Federal Reserve Board categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Bank 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.
Capital ratios for December 31, 1998 have been restated in order to reflect
the merger of the subsidiary entities of the Company with and into First
Community Bank, N.A. The ratios presented for 1998 are reflective of the
restated combined results as if the combination had occurred prior to 1999.
LOGO
First Community Bancshares Logo
- - --------------------------------------------------------------------------------
<PAGE> 43
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-------------------------------------------------------
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT
ADEQUACY CORRECTIVE
ACTUAL PURPOSES ACTION PROVISIONS
--------------- --------------- -----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ----- ------- ----- -------- ------
<S> <C> <C> <C> <C> <C> <C>
TOTAL CAPITAL TO RISK-WEIGHTED ASSETS:
First Community Bancshares, Inc............. $94,484 13.22% $57,182 8.00% $ N/A N/A
First Community Bank, N.A. ................. 79,226 11.12% 56,999 8.00% 71,248 10.00%
-------------------------------------------------------
TIER 1 CAPITAL TO RISK-WEIGHTED ASSETS:
First Community Bancshares, Inc............. $85,513 11.96% $28,591 4.00% $ N/A N/A
First Community Bank, N.A. ................. 70,283 9.86% 28,499 4.00% 42,749 6.00%
-------------------------------------------------------
TIER 1 CAPITAL TO AVERAGE ASSETS (LEVERAGE):
First Community Bancshares, Inc............. $85,513 8.25% $41,442 4.00% $ N/A N/A
First Community Bank, N.A. ................. 70,283 6.80% 41,364 4.00% 51,704 5.00%
-------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-------------------------------------------------------
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT
ADEQUACY CORRECTIVE
ACTUAL PURPOSES ACTION 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, N.A. ................. 66,966 10.45% 51,252 8.00% 64,065 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, N.A. ................. 58,916 9.20% 25,626 4.00% 38,439 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, N.A. ................. 58,916 5.51% 32,057 3.00% 53,428 5.00%
-------------------------------------------------------
</TABLE>
NOTE 16. INCOME TAXES
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
--------------------------
1999 1998 1997
------ ------ ------
(Amounts in Thousands)
<S> <C> <C> <C>
INCOME TAXES ARE AS FOLLOWS:
Income exclusive of securities gains............. $7,772 $6,154 $6,874
Net securities gains............................. -- 10 2
------ ------ ------
$7,772 $6,164 $6,876
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
--------------------------
1999 1998 1997
------ ------ ------
(Amounts in Thousands)
<S> <C> <C> <C>
INCOME TAX PROVISIONS CONSISTS OF:
Current tax expense.............................. $8,324 $6,605 $6,520
Deferred tax (benefit) expense................... (552) (441) 356
------ ------ ------
$7,772 $6,164 $6,876
====== ====== ======
</TABLE>
- - --------------------------------------------------------------------------------
43
<PAGE> 44
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 assets as of
December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
------- -------
(Amounts in Thousands)
<S> <C> <C>
DEFERRED TAX ASSETS:
Reserve for loan losses............................... $4,659 $4,463
Unrealized asset losses............................... 243 248
Deferred compensation................................. 1,050 956
Deferred insurance premiums........................... 326 344
Unrealized loss on securities available for sale...... 3,628 --
------ ------
Total deferred tax assets.......................... $9,906 $6,011
------ ------
DEFERRED TAX LIABILITIES:
Purchase accounting adjustments....................... 1,384 2,306
Depreciation.......................................... 311 331
Gain on pension termination........................... 282 497
Unrealized gain on securities available for sale...... -- 825
Other................................................. 553 592
------ ------
Total deferred tax liabilities..................... 2,530 4,551
------ ------
Net deferred tax assets............................ $7,376 $1,460
====== ======
</TABLE>
The reconciliation between the federal statutory tax rate and the effective
income tax rate is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
--------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Tax at statutory rate................................. 35.0% 35.0% 35.0%
(Reductions) increases resulting from:
Tax-exempt interest on investment securities and
loans............................................ (7.9%) (9.6%) (6.7%)
State income taxes, net of federal benefit.......... .9% 1.3% 1.1%
Amortization of purchase accounting adjustments..... 1.8% 2.3% 1.6%
Other, net.......................................... 1.8% 3.0% .3%
---- ---- ----
Effective tax rate.................................... 31.6% 32.0% 31.3%
==== ==== ====
</TABLE>
NOTE 17. OTHER COMPREHENSIVE INCOME
The Company currently has one component of other comprehensive income,
which includes unrealized gains and losses on securities available for sale and
is detailed as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- ------ ------
(Amounts in Thousands)
<S> <C> <C> <C>
OTHER COMPREHENSIVE INCOME:
Holding (losses) gains arising during the period.... $(11,184) $ (17) $1,381
Tax benefit (expense)............................... 4,473 6 (559)
-------- ------ ------
Holding (losses) gains arising during the period,
net of tax........................................ (6,711) (11) 822
Reclassification adjustment for gains realized in
net income, net of tax............................ -- (4) (6)
Tax expense of reclassifications.................... -- 2 2
-------- ------ ------
Other comprehensive (loss) income................... (6,711) (13) 818
Beginning accumulated other comprehensive income.... 1,238 1,251 433
-------- ------ ------
Ending accumulated other comprehensive (loss)
income............................................ $ (5,473) $1,238 $1,251
======== ====== ======
</TABLE>
LOGO
First Community Bancshares Logo
- - --------------------------------------------------------------------------------
<PAGE> 45
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
---------------------------
1999 1998 1997
------- ------ ------
(Amounts in Thousands)
<S> <C> <C> <C>
Credit card fees paid............................ $ * $1,315 $1,671
Supplies cost.................................... * 959 *
</TABLE>
* Cost did not exceed one percent for the reported period.
NOTE 19. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments"
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. Statement No. 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
actually be realized or paid upon settlement or maturity on these various
instruments could be significantly different.
<TABLE>
<CAPTION>
1999 1998
------------------------ ------------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
(Amounts in Thousands)
<S> <C> <C> <C> <C>
ASSETS:
Cash and due from banks......................... $ 37,791 $ 37,791 $ 91,484 $ 91,484
Securities available for sale................... 212,105 212,105 193,194 193,194
Investment securities........................... 78,768 78,917 84,016 88,256
Federal funds sold.............................. 6 6 25,630 25,630
Loans (net of reserve for loan losses).......... 692,196 701,020 600,089 601,205
Interest receivable............................. 8,090 8,090 7,030 7,030
LIABILITIES:
Demand deposits................................. 115,288 115,288 123,992 123,992
Interest-bearing demand deposits................ 133,073 133,073 137,169 137,169
Savings deposits................................ 138,107 138,107 148,461 148,461
Time deposits................................... 446,790 443,611 466,374 467,054
Federal funds purchased......................... 86,700 86,700 0 0
Securities sold under agreements to
repurchase................................... 41,062 41,062 47,680 47,680
Interest, taxes and other obligations........... 13,436 13,436 10,417 10,417
Other indebtedness.............................. 10,218 9,276 18,176 18,179
</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.
- - --------------------------------------------------------------------------------
45
<PAGE> 46
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 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 Statement No. 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.
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.
LOGO
First Community Bancshares Logo
- - --------------------------------------------------------------------------------
<PAGE> 47
NOTE 20. PARENT COMPANY FINANCIAL INFORMATION
Condensed financial information related to First Community Bancshares, Inc.
as of December 31, 1999 and 1998, and for the years ended December 31, 1999,
1998 and 1997 are as follows:
CONDENSED BALANCE SHEETS
- - --------------------------------------------------------------------------------
(Amounts in Thousands)
<TABLE>
<CAPTION>
DECEMBER 31
----------------------
1999 1998
-------- --------
<S> <C> <C>
ASSETS
Cash........................................................ $ 13,421 $ 814
Investment in subsidiary.................................... 87,962 108,889
Other assets................................................ 2,267 1,506
-------- --------
TOTAL ASSETS......................................... $103,650 $111,209
======== ========
LIABILITIES
Other liabilities........................................... $ 162 $ 9,490
STOCKHOLDERS' EQUITY
Common stock.............................................. 8,992 8,992
Additional paid-in capital.................................. 34,264 34,306
Retained earnings........................................... 63,899 61,488
Treasury stock.............................................. (2,945) (1,403)
Unallocated ESOP shares..................................... (722) (1,664)
-------- --------
TOTAL STOCKHOLDERS' EQUITY........................... 103,488 101,719
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........... $103,650 $111,209
======== ========
</TABLE>
CONDENSED STATEMENTS OF INCOME
- - --------------------------------------------------------------------------------
(Amounts in Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
DECEMBER 31
---------------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Cash dividends received from subsidiary banks.............. $ 6,500 $ 7,500 $25,050
Revenue.................................................... 275 112 148
Operating expense.......................................... (468) (1,143) (779)
------- ------- -------
6,307 6,469 24,419
Income tax benefit......................................... 62 331 210
Equity in undistributed earnings of subsidiary
(Dividends in excess of earnings of subsidiary).......... 10,483 6,301 (9,535)
------- ------- -------
Net Income................................................. $16,852 $13,101 $15,094
------- ------- -------
Basic Earnings Per Share................................... $ 1.92 $ 1.49 $ 1.71
======= ======= =======
Diluted Earnings Per Share................................. $ 1.91 $ 1.49 $ 1.71
======= ======= =======
</TABLE>
- - --------------------------------------------------------------------------------
47
<PAGE> 48
CONDENSED STATEMENTS OF CASH FLOWS
- - --------------------------------------------------------------------------------
(Amounts in Thousands)
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31
------------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................... $ 16,852 $ 13,101 $ 15,094
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed earnings of subsidiary
(Dividends in excess of earnings of subsidiary)... (10,483) (6,301) 9,535
Increase (decrease) in other assets................. 118 271 (136)
Increase (decrease) in other liabilities............ 51 (194) 98
-------- -------- --------
Net cash provided by operating activities.............. 6,538 6,877 24,591
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of securities available for sale...... -- -- 12
Payments for investments in and (advances to)
subsidiary............................................. 24,719 -- (27,695)
-------- -------- --------
Net cash provided by (used in) investing activities.... 24,719 -- (27,683)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt................. -- 3,000 11,730
Repayment of long-term debt.............................. (9,378) (2,851) (2,400)
Acquisition of treasury stock............................ (1,542) (132) --
Dividends paid........................................... (7,730) (7,415) (7,345)
Other, net............................................... -- -- (6)
-------- -------- --------
Net cash (used in) provided by financing activities.... (18,650) (7,398) 1,979
-------- -------- --------
Net increase (decrease) in cash and cash equivalents..... 12,607 (521) (1,113)
Cash and cash equivalents at beginning of year........... 814 1,335 2,448
-------- -------- --------
Cash and cash equivalents at end of year................. $ 13,421 $ 814 $ 1,335
======== ======== ========
</TABLE>
LOGO
First Community Bancshares Logo
- - --------------------------------------------------------------------------------
<PAGE> 49
NOTE 21. SUPPLEMENTAL FINANCIAL DATA
FIRST COMMUNITY BANCSHARES, INC.
QUARTERLY EARNINGS SUMMARY (UNAUDITED)
Quarterly earnings for the years ended December 31, 1999 and 1998 are as
follows:
<TABLE>
<CAPTION>
1999
--------------------------------------
MARCH 31 JUNE 30 SEPT 30 DEC 31
-------- ------- ------- -------
(Amounts in Thousands, Except Per
Share Data)
<S> <C> <C> <C> <C>
Interest Income....................................... $18,736 $18,896 $19,088 $19,772
Interest Expense...................................... 8,404 7,926 7,771 8,149
------- ------- ------- -------
Net interest income................................... 10332 10,970 11,317 11,623
Provision for loan losses............................. 444 391 505 1,553
Net interest income after provision for possible loan
losses.............................................. 9,888 10,579 10,812 10,070
Other income.......................................... 2,138 2,215 1,928 4,451
Other expenses........................................ 6,450 6,889 6,745 7,373
------- ------- ------- -------
Income before income taxes............................ 5,576 5,905 5,995 7,148
Income taxes.......................................... 1,742 1,787 1,941 2,302
------- ------- ------- -------
Net income............................................ $ 3,834 $ 4,118 $ 4,054 $ 4,846
======= ======= ======= =======
Per share:
Basic earnings...................................... $ 0.44 $ 0.47 $ 0.46 $ 0.55
Dividends........................................... $ 0.20 $ 0.21 $ 0.22 $ 0.25
Weighted average basic shares outstanding............. 8,786 8,777 8,766 8,737
</TABLE>
<TABLE>
<CAPTION>
1998
--------------------------------------
MARCH 31 JUNE 30 SEPT 30 DEC 31
------- ------- ------- -------
<S> <C> <C> <C> <C>
Interest Income....................................... $20,655 $20,620 $20,330 $19,608
Interest Expense...................................... 9,551 9,678 9,633 9,266
------- ------- ------- -------
Net interest income................................... 11,104 10,942 10,697 10,342
Provision for loan losses............................. 1,287 3,789 749 425
Net interest income after provision for loan losses... 9,817 7,153 9,948 9,917
Other income.......................................... 3,259 2,452 3,100 2,371
Other expenses........................................ 7,338 7,388 7,258 6,768
------- ------- ------- -------
Income before income taxes............................ 5,738 2,217 5,790 5,520
Income taxes.......................................... 1,784 681 1,795 1,904
------- ------- ------- -------
Net income............................................ $ 3,954 $ 1,536 $ 3,995 $ 3,616
======= ======= ======= =======
Per share:
Basic and diluted earnings.......................... $ .46 $ .18 $ .46 $ .39
Dividends........................................... $ .20 $ .20 $ .20 $ .24
Weighted average basic shares outstanding............. 8,829 8,811 8,790 8,774
</TABLE>
NOTE 22. OTHER ITEMS
In July 1999, the Company executed a commitment to purchase an equity
interest in the Virginia Bankers Insurance Center, LLC ("VBIC"). The investment
and participation in VBIC will allow the Company to offer a full line of
property, casualty, life and health insurance products through its branch
network. The initial investment in VBIC resulted in a 3.17% ownership interest
in the newly established bank consortium. This investment was recorded and is
being accounted for using the cost method of accounting. The VBIC is in the
development stage and has no operations as of December 31, 1999.
- - --------------------------------------------------------------------------------
49
<PAGE> 50
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 subsidiary as of December 31, 1999 and 1998, and
the related consolidated statements of income, changes in stockholders' equity
and cash flows for each of the three years in the period ended December 31,
1999. 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 subsidiary as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999 in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche
- - ------------------------
Pittsburgh, Pennsylvania
January 28, 2000
LOGO
First Community Bancshares Logo
- - --------------------------------------------------------------------------------
<PAGE> 51
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
- - --------------------------------------------------------------------------------
51
<PAGE> 52
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, N. A.
B. W. HARVEY
President, Highlands Real Estate Management, Inc.; Member Executive Committee
and Audit 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.; Senior Vice President -- Finance & Chief Administrative
Officer, First Community Bank, N. A.
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.
Past 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; Member Executive Committee
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
LOGO
First Community Bancshares Logo
- - --------------------------------------------------------------------------------
<PAGE> 53
BOARD OF DIRECTORS, FIRST COMMUNITY BANK, N. A.
- - --------------------------------------------------------------------------------
K. A. AMMAR, JR.
President and Chief Executive Officer,
Ammar's Inc. and Magic Mart
DR. JAMES P. BAILEY
Veterinarian, Veterinary Associates, Inc.
Chairman, First Community Bank, N.A.
W. C. BLANKENSHIP, JR.
Agent, State Farm Insurance
D. L. BOWLING, JR.
President, True Energy, Inc.
JUANITA G. BRYAN
Homemaker
SAM CLARK
Agent, State Farm Insurance
C. WILLIAM DAVIS
Attorney at Law, Richardson & Davis
ALLEN T. HAMNER, PH.D.
Professor of Chemistry,
West Virginia Wesleyan College
JAMES L. HARRISON, SR.
President and Chief Executive Officer,
First Community Bancshares, Inc.;
President, First Community Bank, N. A.
B. W. HARVEY
President, Highlands Real Estate Management, Inc.
I. NORRIS KANTOR
Partner, Katz, Kantor & Perkins, Attorneys-at-Law
JOHN M. MENDEZ
Vice President, Chief Financial Officer and Secretary, First Community
Bancshares, Inc.; Senior Vice President -- Finance and Chief Administrative
Officer, First Community Bank, N. A.
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
ROBERT E. PERKINSON, JR.
Past Vice President -- Operations, MAPCO Coal, Inc. -- Virginia Region
CLYDE B. RATLIFF
President, Gasco Drilling, Inc.
RICHARD G. RUNDLE
Attorney at Law, Rundle and Rundle, LC
WILLIAM P. STAFFORD
President, Princeton Machinery Service, Inc.
WILLIAM P. STAFFORD, II
Attorney at Law, Brewster, Morhous and Cameron, PLLC
W. W. TINDER, JR.
Chairman and Chief Executive Officer,
Tinder Enterprises, Inc.
DALE F. WOODY
President, Woody Lumber Company
- - --------------------------------------------------------------------------------
53
<PAGE> 54
FIRST COMMUNITY BANK, N. A.
- - --------------------------------------------------------------------------------
(A NATIONAL ASSOCIATION -- MEMBER FDIC)
1001 Mercer Street
Princeton, West Virginia 24740-5939
(304) 487-9000 or (304) 327-5175
Pine Plaza Branch (304) 425-7523
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
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
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
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
LOGO
First Community Bancshares Logo
- - --------------------------------------------------------------------------------
<PAGE> 55
UNITED FIRST MORTGAGE, INC.
- - --------------------------------------------------------------------------------
(A WHOLLY-OWNED SUBSIDIARY OF FIRST COMMUNITY BANK, N. A.)
1503 Santa Rosa Road, Suite 109
P. O. Box K-177
Richmond, VA
23288
(804) 282-5631
FINANCIAL INFORMATION
- - --------------------------------------------------------------------------------
CORPORATE HEADQUARTERS
First Community Bank, N.A.
One Community Place
P.O. Box 989
Bluefield, Virginia
24605-0989
(540) 326-9000
STOCK REGISTRAR AND TRANSFER AGENT
First Community Bank, N.A.
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 989
Bluefield, Virginia
24605-0989
(540) 326-9000
INTERNET ACCESS
Website: www.fcbinc.com
E-Mail: [email protected]
- - --------------------------------------------------------------------------------
55
<PAGE> 1
Exhibit 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
333-63865 and 333-31338 of First Community Bancshares, Inc. on Form S-8 of our
report dated January 28, 2000, incorporated by reference in this Annual Report
on Form 10-K of First Community Bancshares, Inc. for the year ended December
31, 1999.
/s/ Deloitte & Touche LLP
Pittsburgh, Pennsylvania
March 30, 2000
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 36,400
<INT-BEARING-DEPOSITS> 1,391
<FED-FUNDS-SOLD> 6
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 212,105
<INVESTMENTS-CARRYING> 78,768
<INVESTMENTS-MARKET> 78,917
<LOANS> 704,096
<ALLOWANCE> 11,900
<TOTAL-ASSETS> 1,088,162
<DEPOSITS> 833,258
<SHORT-TERM> 127,762
<LIABILITIES-OTHER> 13,436
<LONG-TERM> 10,218
0
0
<COMMON> 8,992
<OTHER-SE> 94,496
<TOTAL-LIABILITIES-AND-EQUITY> 1,088,162
<INTEREST-LOAN> 58,036
<INTEREST-INVEST> 17,571
<INTEREST-OTHER> 885
<INTEREST-TOTAL> 76,492
<INTEREST-DEPOSIT> 29,137
<INTEREST-EXPENSE> 32,250
<INTEREST-INCOME-NET> 44,242
<LOAN-LOSSES> 2,893
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 27,457
<INCOME-PRETAX> 24,624
<INCOME-PRE-EXTRAORDINARY> 24,624
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,852
<EPS-BASIC> 1.92
<EPS-DILUTED> 1.91
<YIELD-ACTUAL> 5.03
<LOANS-NON> 7,889
<LOANS-PAST> 1,259
<LOANS-TROUBLED> 505
<LOANS-PROBLEM> 9,148
<ALLOWANCE-OPEN> 11,404
<CHARGE-OFFS> 3,007
<RECOVERIES> 610
<ALLOWANCE-CLOSE> 11,900
<ALLOWANCE-DOMESTIC> 11,900
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 9,705
</TABLE>
