<PAGE> 1
FORM 10-Q-QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Quarterly Period Ended: June 30, 2000 or
-------------
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from:_________________ to __________________
Commission File Number: 0-19297
First Community Bancshares, Inc.
(Exact name of registrant as specified in its charter)
Nevada 55-0694814
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Community Place, Bluefield, VA 24605-0989
(Address of principal executive offices) (Zip Code)
(540) 326-9000
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at July 31, 2000
Common Stock, $1 Par Value 8,650,530
----------------------------
<PAGE> 2
First Community Bancshares, Inc.
FORM 10-Q
For the quarter ended June 30, 2000
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NUMBER
-----------
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2000 and
December 31, 1999 3
Consolidated Statements of Income for the Three and
Six Month Periods Ended June 30, 2000 and 1999 4
Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 2000 and 1999 5
Consolidated Statements of Changes in Stockholders'
Equity for the Six Months Ended June 30, 2000 and 1999 6
Notes to Consolidated Financial Statements 7-8
Independent Accountants' Report 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-18
Item 3. Quantitative and Qualitative Disclosures About Market
Risk 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities and Use of Proceeds 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19-29
SIGNATURES 30
</TABLE>
2
<PAGE> 3
ITEM 1. FINANCIAL STATEMENTS
FIRST COMMUNITY BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------
(UNAUDITED) JUNE 30 DECEMBER 31
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA) 2000 1999
------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CASH AND CASH EQUIVALENTS $ 32,679 $ 37,797
SECURITIES AVAILABLE FOR SALE (AMORTIZED COST
OF $212,358 JUNE 30, 2000; $221,226
DECEMBER 31, 1999) 202,754 212,105
INVESTMENT SECURITIES HELD TO MATURITY (MARKET
VALUE OF $78,186 JUNE 30, 2000; $78,917
DECEMBER 31, 1999) 77,208 78,768
TOTAL LOANS, NET OF UNEARNED INCOME 741,581 704,096
LESS: ALLOWANCE FOR LOAN LOSSES 11,828 11,900
---------- ----------
NET LOANS 729,753 692,196
PREMISES AND EQUIPMENT, NET 18,215 18,630
OTHER REAL ESTATE 2,463 1,950
OTHER ASSETS 29,485 23,268
INTANGIBLE ASSETS 22,396 23,448
---------- ----------
TOTAL ASSETS $1,114,953 $1,088,162
LIABILITIES
DEPOSITS, NON-INTEREST BEARING $ 119,221 $ 115,288
DEPOSITS, INTEREST-BEARING 713,405 717,970
---------- ----------
TOTAL DEPOSITS 832,626 833,258
INTEREST, TAXES AND OTHER LIABILITIES 11,698 13,436
FEDERAL FUNDS PURCHASED 10,050 86,700
SECURITIES SOLD UNDER AGREEMENT TO REPURCHASE 41,492 41,062
FHLB BORROWINGS AND OTHER INDEBTEDNESS 112,935 10,218
---------- ----------
TOTAL LIABILITIES 1,008,801 984,674
---------- ----------
STOCKHOLDERS' EQUITY
COMMON STOCK, $1 PAR VALUE; 15,000,000 AND 10,000,000 SHARES
AUTHORIZED IN 2000 AND 1999, RESPECTIVELY; 8,991,586 ISSUED IN
2000 AND 1999; 8,661,715 AND 8,726,836 SHARES OUTSTANDING
IN 2000 AND 1999 8,992 8,992
ADDITIONAL PAID-IN CAPITAL 34,168 34,264
RETAINED EARNINGS 73,468 69,372
Unallocated common stock held by ESOP -- (722)
Treasury stock, at cost (4,714) (2,945)
ACCUMULATED OTHER COMPREHENSIVE LOSS (5,762) (5,473)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 106,152 103,488
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,114,953 $1,088,162
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE> 4
FIRST COMMUNITY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
(UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT SIX MONTHS ENDED THREE MONTHS ENDED
SHARE AND PER SHARE DATA) JUNE 30 JUNE 30
2000 1999 2000 1999
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME:
INTEREST AND FEES ON LOANS $32,674 $28,029 $16,679 $14,157
INTEREST ON SECURITIES AVAILABLE FOR SALE 6,503 6,594 3,243 3,457
INTEREST ON INVESTMENT SECURITIES 2,110 2,206 1,049 1,093
INTEREST ON FEDERAL FUNDS SOLD AND DEPOSITS 157 803 98 189
------- ------- ------- -------
TOTAL INTEREST INCOME 41,444 37,632 21,069 18,896
------- ------- ------- -------
INTEREST EXPENSE:
INTEREST ON DEPOSITS 14,503 15,016 7,342 7,322
INTEREST ON BORROWINGS 3,764 1,314 2,020 604
------- ------- ------- -------
TOTAL INTEREST EXPENSE 18,267 16,330 9,362 7,926
------- ------- ------- -------
NET INTEREST INCOME 23,177 21,302 11,707 10,970
PROVISION FOR LOAN LOSSES 1,880 835 1,218 391
------- ------- ------- -------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 21,297 20,467 10,489 10,579
------- ------- ------- -------
NON-INTEREST INCOME:
FIDUCIARY INCOME 932 1,185 432 669
SERVICE CHARGES ON DEPOSIT ACCOUNTS 1,796 1,799 984 921
OTHER CHARGES, COMMISSIONS AND FEES 1,328 812 681 432
OTHER OPERATING INCOME 1,984 557 1,179 193
------- ------- ------- -------
TOTAL NON-INTEREST INCOME 6,040 4,353 3,276 2,215
------- ------- ------- -------
NON-INTEREST EXPENSE:
SALARIES AND EMPLOYEE BENEFITS 8,050 6,113 4,003 3,046
OCCUPANCY EXPENSE OF BANK PREMISES 1,250 1,033 610 530
FURNITURE AND EQUIPMENT EXPENSE 978 900 500 442
GOODWILL AMORTIZATION 1,052 1,011 526 508
OTHER OPERATING EXPENSE 4,325 4,282 1,840 2,363
------- ------- ------- -------
TOTAL NON-INTEREST EXPENSE 15,655 13,339 7,479 6,889
------- ------- ------- -------
INCOME BEFORE INCOME TAXES 11,682 11,481 6,286 5,905
INCOME TAX EXPENSE 3,675 3,529 1,957 1,787
------- ------- ------- -------
NET INCOME $ 8,007 $ 7,952 $ 4,329 $ 4,118
======= ======= ======= =======
BASIC AND DILUTED EARNINGS PER COMMON SHARE $ .92 $ .91 $ .50 $ .47
======= ======= ======= =======
WEIGHTED AVERAGE SHARES OUTSTANDING 8,690,704 8,781,110 8,665,993 8,776,799
========= ========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE> 5
FIRST COMMUNITY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------
(UNAUDITED)
(AMOUNTS IN THOUSANDS) SIX MONTHS ENDED
JUNE 30
--------------------------
2000 1999
-----------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME $ 8,007 $ 7,952
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
PROVISION FOR LOAN LOSSES 1,880 835
DEPRECIATION OF PREMISES AND EQUIPMENT 698 709
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES 1,073 988
INVESTMENT AMORTIZATION AND ACCRETION, NET 125 283
GAIN ON THE SALE OF ASSETS, NET (1,376) (264)
CHANGE IN OTHER LIABILITIES, NET (1,112) 2,080
CHANGE IN INTEREST RECEIVABLE (159) (1,268)
CHANGE IN OTHER ASSETS, NET (1,766) (2,003)
CHANGE IN OTHER (270) (56)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 7,100 9,256
-------- --------
CASH FLOWS FROM INVESTMENT ACTIVITIES:
INCREASE (DECREASE) IN CASH REALIZED FROM:
MATURITIES AND CALLS OF INVESTMENT SECURITIES 1,579 3,374
MATURITIES AND CALLS OF SECURITIES AVAILABLE FOR SALE 9,843 20,393
PURCHASE OF SECURITIES AVAILABLE FOR SALE (2,767) (63,068)
SALES OF SECURITIES AVAILABLE FOR SALE 1,650 3,511
NET (INCREASE) DECREASE IN LOANS MADE TO CUSTOMERS (38,219) (22,152)
PURCHASE OF BANK OWNED LIFE INSURANCE (4,100) --
PURCHASE OF PREMISES AND EQUIPMENT (393) (1,996)
SALES OF EQUIPMENT 2 33
-------- --------
NET CASH USED IN INVESTMENT ACTIVITIES (32,405) (59,905)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
INCREASE (DECREASE) IN CASH REALIZED FROM:
DEMAND AND SAVINGS DEPOSITS, NET (3,813) (6,514)
TIME DEPOSITS, NET 3,183 (17,396)
SHORT-TERM BORROWINGS, NET 26,508 1,617
PAYMENTS OF LONG-TERM DEBT (11) (7,978)
ACQUISITION OF TREASURY STOCK (1,769) (562)
CASH DIVIDENDS PAID (3,911) (3,609)
-------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 20,187 (34,442)
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (5,118) (85,091)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 37,797 117,096
-------- --------
CASH AND CASH EQUIVALENTS AT END OF QUARTER $ 32,679 $ 32,005
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
5
<PAGE> 6
FIRST COMMUNITY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------------
(UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT ACCUMULATED
SHARE AND PER SHARE DATA) ADDITIONAL UNALLOCATED OTHER
COMMON PAID-IN RETAINED ESOP TREASURY COMPREHENSIVE
STOCK CAPITAL EARNINGS SHARES STOCK INCOME (LOSS) TOTAL
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE BEGINNING OF THE PERIOD,
JANUARY 1, 1999 $8,992 $34,306 $60,250 $(1,664) $(1,403) $ 1,238 $101,719
COMPREHENSIVE INCOME:
NET INCOME -- -- 7,952 -- -- -- 7,952
OTHER COMPREHENSIVE INCOME:
UNREALIZED HOLDING LOSSES ON
SECURITIES AVAILABLE FOR SALE,
NET OF TAX -- -- -- -- -- (4,614) (4,614)
------- ------- --------
COMPREHENSIVE INCOME -- -- 7,952 -- -- (4,614) 3,338
COMMON DIVIDENDS
DECLARED ($.41
PER COMMON SHARE) -- -- (3,609) -- -- -- (3,609)
PURCHASE 25,890 TREASURY SHARES
AT $21.70 PER SHARE -- -- -- -- (562) -- (562)
ALLOCATION OF ESOP SHARES -- (42) -- 942 -- -- 900
------ ------- ------- ------- ------- ------- --------
BALANCE, JUNE 30, 1999 $8,992 $34,264 $64,593 $ (722) $(1,965) $(3,376) $101,786
====== ======= ======= ======= ======= ======= ========
BALANCE BEGINNING OF THE PERIOD,
JANUARY 1, 2000 $8,992 $34,264 $69,372 $ (722) $(2,945) $(5,473) $103,488
COMPREHENSIVE INCOME:
NET INCOME -- -- 8,007 -- -- -- 8,007
OTHER COMPREHENSIVE INCOME:
UNREALIZED HOLDING LOSSES ON
SECURITIES AVAILABLE FOR SALE,
NET OF TAX -- -- -- -- -- (289) (289)
------- ------- --------
COMPREHENSIVE INCOME -- -- 8,007 -- -- (289) 7,718
COMMON DIVIDENDS DECLARED
($.45 PER COMMON SHARE) -- -- (3,911) -- -- -- (3,911)
PURCHASE 89,362 TREASURY SHARES
AT $19.80 PER SHARE -- -- -- -- (1,769) -- (1,769)
ALLOCATION OF ESOP SHARES -- (96) -- 722 -- -- 626
------ ------- ------- ------- ------- ------- --------
BALANCE, JUNE 30, 2000 $8,992 $34,168 $73,468 $ -- $(4,714) $(5,762) $106,152
====== ======= ======= ======= ======= ======= ========
</TABLE>
See Notes to Consolidated Financial Statements.
6
<PAGE> 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. UNAUDITED FINANCIAL STATEMENTS
The unaudited consolidated balance sheet as of June 30, 2000 and the unaudited
consolidated statements of income, cash flows and changes in stockholders'
equity for the three and six month periods ended June 30, 2000 and 1999 have
been prepared by management of First Community Bancshares, Inc. (FCBI, the
"Company"). In the opinion of management, all adjustments (including normal
recurring accruals) necessary to present fairly the financial position of FCBI
and subsidiaries at June 30, 2000 and its results of operations, cash flows, and
changes in stockholders' equity for the three and six month periods ended June
30, 2000 and 1999, have been made. These results are not necessarily indicative
of the results of consolidated operations for the full calendar year.
The consolidated balance sheet as of December 31, 1999 has been extracted from
audited financial statements included in the Company's 1999 Annual Report to
Stockholders. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been omitted. It is suggested that these financial statements be
read in conjunction with the financial statements and notes thereto included in
the 1999 Annual Report of FCBI.
NOTE 2. ACQUISITIONS
On June 27, 2000, the Board of Directors of First Community Bancshares, Inc.
(FCBI) and Citizens Southern Bank, Inc. (Citizens) entered into an agreement in
which FCBI will acquire Citizens through a merger transaction with FCBI's wholly
owned subsidiary First Community Bank, N.A. (FCBNA). The acquisition will be
accounted for as a purchase transaction and is currently contingent upon the
approval of the appropriate regulatory authorities and Citizens shareholders.
The transaction is anticipated to be slightly dilutive to earnings in the first
full year of operations and is anticipated to be completed early in the fourth
quarter of 2000.
On September 28, 1999, FCBNA, 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 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 if made in subsequent years, will result in
additional goodwill and will be amortized over the remaining useful life of the
original goodwill. 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. All loans originated by UFM are
included in total loans outstanding as of June 30, 2000 at the lower of cost or
market value.
NOTE 3. BORROWINGS
Structured term borrowings from the Federal Home Loan Bank (FHLB) of Atlanta of
$100 million are presently being used as a funding vehicle and were used to
repay the overnight funds purchased from the FHLB at December 31, 1999. The
structured term borrowings have varying maturities from two to ten years,
however; these advances are callable in quarterly increments after a predefined
lockout period. The Company has additional term borrowings from the FHLB of $10
million that are included in FHLB borrowings and other indebtedness.
NOTE 4. COMMITMENTS AND CONTINGENCIES
The Company is currently a defendant in various legal actions and asserted
claims most of which involve lending and collection activities in the normal
course of business. While the Company and legal counsel are unable to
7
<PAGE> 8
assess the ultimate outcome of each of these matters with certainty, they are of
the belief that the resolution of these actions should not have a material
adverse affect on the financial position or results of operations of the
Company.
The Company is currently involved in litigation where the plaintiffs are seeking
to overturn the establishment of a charitable foundation established by a
customer of the Company's Trust Division. The court has ruled in favor of the
Company's motion for dismissal on one key allegation in the complaint, affirming
the Trustee's authority to execute certain estate plans directed by the donor.
The plaintiff subsequently filed a motion requesting an immediate appeal of that
ruling to the state supreme court; however, the court denied this motion in a
ruling on April 21, 1999. Discovery and depositions continue in this matter and
court ordered mediation was conducted on May 2, 2000 with no outcome. A trial
date has been set for October 2000. The Company intends to vigorously defend
this action and both the Company and legal counsel are of the opinion that it
will prevail and resolution of this litigation will not have a material adverse
effect on the financial position or results of operations of the Company.
On February 9, 2000, 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 has prepared 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 ultimate 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.
NOTE 5. 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>
Six months ended Three months ended
June 30 June 30
2000 1999 2000 1999
-------------------- --------------------
<S> <C> <C> <C> <C>
(Amounts in Thousands)
OTHER COMPREHENSIVE INCOME:
Holding losses arising during the period $ (483) $(7,690) $ (77) $(5,862)
Tax benefit 194 3,076 31 2,345
------- ------- ------- -------
Holding losses arising during the period, net of tax (289) (4,614) (46) (3,517)
Reclassification adjustment for (gains) losses realized
in net income, net of tax -- -- -- --
Tax expense (benefit) of reclassifications -- -- -- --
------- ------- ------- -------
Other comprehensive loss, net of tax (289) (4,614) (46) (3,517)
Beginning accumulated other comprehensive (loss) income (5,473) 1,238 (5,716) 141
------- ------- ------- -------
Ending accumulated other comprehensive loss $(5,762) $(3,376) $(5,762) $(3,376)
======= ======= ======= =======
</TABLE>
8
<PAGE> 9
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
The Audit Committee of the Board of Directors
First Community Bancshares, Inc.
We have reviewed the accompanying consolidated balance sheet of First Community
Bancshares, Inc. (First Community) as of June 30, 2000, and the related
consolidated statements of income and cash flows for the three and six month
periods then ended, and changes in stockholders' equity for the six month period
then ended. These consolidated financial statements are the responsibility of
the Company's management. The accompanying consolidated statements of income and
cash flows of First Community for the three and six month periods ended June 30,
1999 and changes in stockholders' equity for the six month period ended June 30,
1999, were reviewed by other accountants whose report (dated July 16, 1999)
stated that they were not aware of any material modifications that should be
made to those statements for them to be in conformity with accounting principles
generally accepted in the United States.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data, and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with auditing standards generally accepted in the United States, which will be
performed for the full year with the objective of expressing an opinion
regarding the financial statements taken as a whole. Accordingly, we do not
express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying consolidated balance sheet of First Community as of
June 30, 2000, and the related consolidated statements of income and cash flows
for the three and six month periods then ended, and changes in stockholders'
equity for the six month period then ended June 30, 2000 for them to be in
conformity with accounting principles generally accepted in the United States.
The accompanying consolidated balance sheet of First Community as of December
31, 1999, was audited by other auditors whose report dated January 28, 2000,
expressed an unqualified opinion on that statement.
/s/ Ernst & Young LLP
Charleston, West Virginia
July 17, 2000
9
<PAGE> 10
FIRST COMMUNITY BANCSHARES, INC.
PART 1. ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis is provided to address information about
the Company's financial condition and results of operations, which is not
otherwise apparent from the consolidated financial statements included in this
report. This discussion and analysis should be read in conjunction with the 1999
Annual Report to Shareholders and the other financial information included in
this report.
FORWARD LOOKING STATEMENTS
First Community Bancshares, Inc. (the "Corporation" or "FCBI") may from time to
time make written or oral "forward-looking statements", including statements
contained in the Corporation's filings with the Securities and Exchange
Commission (including this Quarterly Report on Form 10-Q and the Exhibits hereto
and thereto), in its reports to stockholders and in other communications by the
Corporation, which are made in good faith by the Corporation pursuant to the
"safe harbor" provisions of the Private Securities Litigation Reform Act of
1995.
These forward-looking statements include, among others, statements with respect
to the Corporation's beliefs, plans, objectives, goals, guidelines,
expectations, anticipations, estimates and intentions that are subject to
significant risks and uncertainties and are subject to change based on various
factors (many of which are beyond the Corporation's control). The words "may",
"could", "should", "would", "believe", "anticipate", "estimate", "expect",
"intend", "plan" and similar expressions are intended to identify
forward-looking statements. The following factors, among others, could cause the
Corporation's financial performance to differ materially from that expressed in
such forward-looking statements: the strength of the United States economy in
general and the strength of the local economies in which the Corporation
conducts operations; the effects of, and changes in, trade, monetary and fiscal
policies and laws, including interest rate policies of the Board of Governors of
the Federal Reserve System; inflation, interest rate, market and monetary
fluctuations; the timely development of competitive new products and services of
the Corporation and the acceptance of these products and services by new and
existing customers; the willingness of customers to substitute competitors'
products and services for the Corporation's products and services and vice
versa; the impact of changes in financial services' laws and regulations
(including laws concerning taxes, banking, securities and insurance);
technological changes; the effect of acquisitions, including, without
limitation, the failure to achieve the expected revenue growth and/or expense
savings from such acquisitions; the growth and profitability of the
Corporation's noninterest or fee income being less than expected; unanticipated
regulatory or judicial proceedings; changes in consumer spending and saving
habits; and the success of the Corporation at managing the risks involved in the
foregoing.
The Corporation cautions that the foregoing list of important factors is not
exclusive. The Corporation does not undertake to update any forward-looking
statement, whether written or oral, that may be made from time to time by or on
behalf of the Corporation.
RESULTS OF OPERATIONS
Net income for the second quarter of 2000 totaled $4.3 million, 5.1% higher than
net earnings for the corresponding second quarter of 1999. Net income for the
second quarters of the current and prior years resulted in basic and diluted
earnings per share of $0.50 versus $0.47 for the three months ended June 30,
2000 and 1999, respectively. Excluding the impact of United First Mortgage and
increases in the provision for loan losses, earnings would have increased by
approximately $600,000 or 14.6% while basic and diluted earnings per common
share would have increased by $0.07 or 14.7% over the comparable three month
period ended June 30, 1999. The improvement in earnings for 2000 is primarily
attributed to greater operational efficiencies in the company and continued
growth in commercial loan revenues.
Non-interest income for the three and six-month periods ended June 30, 2000
increased $1.1 million and $1.7 million, respectively over the comparable
periods in 1999. The largest portion of this increase resulted from the addition
of the
10
<PAGE> 11
mortgage brokerage division, which added approximately $1.3 million and $2.2
million of gains on the sale of mortgage loans in 2000 versus 1999 for the
comparable three and six-month periods. However, in operations exclusive of UFM,
this increase was partially offset by reductions in fiduciary earnings of
$250,000 and other operating income and other service charges, commissions, and
fees of $270,000 for the six months ended June 30, 2000 in comparison to the
comparable period in the prior year.
Non-interest expense for the three and six month periods ended June 30, 2000
increased $590,000 and $2.3 million, over the comparable periods in 1999. These
increases are primarily attributable to the addition of United First Mortgage
which added approximately $1.3 million and $2.5 million, to the operating
expenses for the three and six month periods ended June 30, 2000 over the
comparable periods in 1999.
Despite increases in the provision for loan losses in the first six months of
2000, losses in the Company's recently acquired mortgage origination division,
and a non-recurring gain recognized in the first quarter of 1999, net income for
the first half of 2000 remained near the comparable period in 1999. Excluding
these items, earnings would have increased by $970,000 or 12.2% for the six
months ended June 30, 2000. Basic earnings per common share between the two
periods increased 1.1%, from $0.91 to $0.92. Also excluding the aforementioned
items, earnings per share would have increased by $0.11 or 12.3% for the six
months ended June 30, 2000. When compared with the corresponding prior period,
the 8 basis point improvement in net interest margin was achieved through higher
yields earned on the available-for-sale investment portfolio as lower yielding
securities matured and were reinvested in higher yielding assets.
NET INTEREST INCOME
Net interest income, the largest contributor to earnings was $23.2 million for
the first six months of 2000 as compared with $21.3 million for the
corresponding period in 1999. Tax equivalent net interest income totaled $24.8
million for the first half of 2000, an increase of $1.8 million from the $23.0
million reported in the first six months of 1999. This increase in net interest
income relates largely to the $108.5 million increase in average loans between
the two periods due to increased marketing efforts and effective utilization of
sales management and strong customer relationship building. Additionally, net
interest income for the second quarter of 2000 exceeded the comparable prior
period by approximately $740,000.
The Company's tax equivalent net interest margin of 4.99% for the first half of
2000 reflects a slight increase over the first six months of 1999 when the tax
equivalent net interest margin was 4.91%. Average loan balances increased $108.5
million while the overall loan yield decreased by 13 basis points. The overall
yield on average earning assets increased 28 basis points, moving from 8.38% for
the six months ended June 30, 1999 to 8.66% for the six months ended June 30,
2000. Alternatively, the cost of interest-bearing liabilities increased by 14
basis points from 4.09% in 1999 to 4.23% in 2000. The primary component to the
increase in tax equivalent net interest margin between the two periods was the
increase in average outstanding loans funded through investment portfolio
rolloff and increased wholesale funding through the FHLB.
Loans, the Company's highest yielding asset category, experienced an increase in
average balances of $108.5 million or 17.7%, comparing the first six months of
2000 to the corresponding period in 1999. The tax equivalent yield on the loan
portfolio was 9.12% for the first six months of 2000 down from 9.25% for the
same period in 1999. The overall loan yield decreased despite increases in the
prime loan rate due to marginal pricing on certain large new loan relationships.
The tax equivalent yield on securities available for sale increased to 6.80%
from 6.32% in the first half of 2000 in comparison to the six months ended June
30, 1999. Average balances in securities available for sale decreased from
$226.0 million during the six months ended June 30, 1999 to $206.0 million
during the comparable period of 2000. This decrease is the result of maturities,
calls, and mortgage backed security principal payments in the portfolio. These
funds have been reinvested in higher yielding loans.
The overall cost of funding increased by 14 basis points, due, primarily to
increases in the cost of short term borrowings, which increased 133 basis points
from 3.74% in for the six months of 1999 to 5.07% for the first six
11
<PAGE> 12
months of 2000. Alternatively, the cost of savings accounts decreased 22 basis
points from 2.35% in the six months of 1999 to 2.13% in 2000. The cost of
interest-bearing demand and time deposits were not materially changed. Average
deposit balances have declined as a result of a degree of price sensitivity with
decreases of 4% and 6% in interest bearing demand and savings deposits,
respectively. Additional funding needed to facilitate loan growth is being
provided by the Federal Home Loan Bank in the form of callable term advances and
is reflected in the increase in average short-term borrowings. The usage of FHLB
credit programs is a significant component of the Company's overall liquidity
and funding strategy.
In comparing the second quarter of 2000 with the second quarter of 1999, net
interest income increased by approximately $740,000 or 6.7%. The increase in
interest earnings was again led by the increase in total outstanding loans.
Alternatively, the rising funding cost tempered the increase in net interest
income during the second quarter of 2000.
12
<PAGE> 13
AVERAGE BALANCE SHEETS AND
NET INTEREST INCOME ANALYSIS
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2000 JUNE 30, 1999
(UNAUDITED) ---------------------------------------- --------------------------------------
(AMOUNTS IN AVERAGE INTEREST YIELD/RATE AVERAGE INTEREST YIELD/RATE
THOUSANDS) BALANCE (1) (2) (2) BALANCE (1) (2) (2)
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Earning Assets:
Loans (3)
Taxable $ 715,206 $32,388 9.11% $ 604,577 $27,670 9.23%
Tax-Exempt 8,320 440 10.63% 10,421 552 10.69%
---------- ------- ----- ---------- ------- -----
Total 723,526 32,828 9.12% 614,998 28,222 9.25%
Reserve for Loan Losses (12,000) (11,277)
---------- --------
Net Total 711,526 603,721
Investments Available for Sale:
Taxable 172,892 5,634 6.55% 189,063 5,676 6.05%
Tax-Exempt 33,150 1,337 8.11% 36,974 1,411 7.70%
---------- ------- ----- ---------- ------- -----
Total 206,042 6,971 6.80% 226,037 7,087 6.32%
Investment Securities Held
to Maturity:
Taxable 4,964 176 7.13% 7,579 258 6.86%
Tax-Exempt 73,346 2,975 8.16% 74,107 2,998 8.16%
---------- ------- ----- ---------- ------- -----
Total 78,310 3,151 8.09% 81,686 3,256 8.04%
Interest-Bearing Deposits 4,549 143 6.32% 17,963 401 4.50%
Federal Funds Sold 0 0 0% 17,730 402 4.57%
---------- ------- ----- ---------- ------- -----
Total Earning Assets 1,000,427 43,093 8.66% 947,137 39,368 8.38%
------- ----- ------- -----
Other Assets 100,779 94,101
---------- ----------
Total $1,101,206 $1,041,238
========== ==========
Interest-Bearing Liabilities:
Interest-Bearing Demand
Deposits $ 131,154 1,436 2.20% $ 137,646 1,482 2.17%
Savings Deposits 138,227 1,465 2.13% 147,939 1,725 2.35%
Time Deposits 451,651 11,605 5.17% 459,461 11,809 5.18%
Short-Term Borrowings 137,038 3,457 5.07% 45,272 839 3.74%
Other Indebtedness 10,211 304 5.99% 15,638 474 6.11%
---------- ------- ----- ---------- ------- -----
Total Interest-Bearing
Liabilities 868,281 18,267 4.23% 805,956 16,329 4.09%
---------- ------- ----- ---------- ------- -----
Demand Deposits 115,293 119,459
Other Liabilities 12,753 11,996
Stockholders' Equity 104,879 103,827
---------- ----------
Total $1,101,206 $1,041,238
========== ==========
Net Interest Earnings $24,826 $23,039
======= =======
Net Interest Spread 4.43% 4.29%
===== ======
Net Interest Margin 4.99% 4.91%
===== ======
</TABLE>
(1) Interest amounts represent taxable equivalent results for the first six
months of 2000 and 1999.
(2) Fully Taxable Equivalent-using the statutory rate of 35%.
(3) Non-accrual loans are included in average balances outstanding with no
related interest income.
13
<PAGE> 14
PROVISION AND ALLOWANCE FOR LOAN LOSSES
To maintain a balance in the allowance for loan losses, which is sufficient to
absorb known and estimable loan losses, charges are made to the provision for
loan losses. The provision was $1.9 million for the first six months of 2000
compared with $835,000 for the corresponding period in 1999 and resulted from
significant loan growth and the resolution of a $2.0 million non-accruing loan
relationship. Average loan balances increased by $109 million from June 30, 1999
to June 30, 2000. In addition, collateral deficiencies on two commercial credits
impacted the provision for loan losses during the second quarter of 2000 and
resulted in a $650,000 charge-off.
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 allowances. The
total loan loss allowance 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 and ii)
formula reserves.
Specific reserves are targeted to cover loan relationships, which are identified
with significant cash flow weakness and for which a collateral deficiency may be
present. Impaired loans are identified, measured, and recorded in accordance
with SFAS No. 114 and SFAS No. 118. The reserves established under the specific
identification method are judged based upon the borrower's estimated cash flow
or projected liquidation value of related collateral.
Formula reserves, based on historical loss experience (Reserves Allocated to
Categories of Loans) are available to cover homogeneous loans, not individually
evaluated. The formula 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 loss percentage is calculated. The calculated percentage is used to
determine the required reserve excluding any relationships specifically
identified and evaluated. While allocations are made to specific loans and
classifications within the various classifications of loans, the reserve is
available for all loan losses.
Activity with First Community's allowance for loan losses for the three and six
month periods ended June 30, 2000 and June 30, 1999 is as follows:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30 June 30
2000 1999 2000 1999
-------------------- --------------------
<S> <C> <C> <C> <C>
(Amounts in Thousands)
Beginning balance $11,851 $11,089 $11,900 $11,404
Provision 1,218 391 1,880 835
Charge-offs (1,491) (586) (2,401) (1,495)
Recoveries 250 217 449 367
------- ------- ------- -------
Ending balance $11,828 $11,111 $11,828 $11,111
======= ======= ======= =======
</TABLE>
The allowance for loan losses totaled approximately $11.8 million at June 30,
2000 and $11.9 million at December 31, 1999 resulting in reserve to loan ratios
of 1.60% and 1.69% for the respective periods.
Net charge-offs for the first six months of 2000 were $1,952,000 as compared
with $1,128,000 million for the corresponding period in 1999. Expressed as a
percentage of average loans, net charge-offs were .27% for the six month period
ended June 30, 2000 and .18% for the corresponding period in 1999. Additionally,
for the three months ended June 30, 2000 and 1999, the net charge-offs as a
percent of average loans were .17% and .06%, respectively. The higher net
charge-off ratios in 2000 reflect the impact of a $650,000 charge-off on the
final resolution of a $2,000,000 loan relationship on a residential development
loan in Beckley, West Virginia.
14
<PAGE> 15
As of June 30, 2000, the reserve as a percentage of non-performing loans was
177.0% as compared to 130.1% at December 31, 1999 and 133.9% at June 30, 1999.
Improvement in this coverage ratio in 2000 is the result of a reduction in
non-accruing loans on the resolution of the previously referenced $2.0 million
development loan.
Management continually evaluates the adequacy of the allowance for loan losses
and makes specific adjustments to it based on the results of risk analysis in
the credit review process, the recommendation of regulatory agencies, and other
factors, such as loan loss experience and prevailing economic conditions.
Management considers the level of reserves adequate based on the current risk
profile in the loan portfolio.
NON-INTEREST INCOME
Non-interest income consists of all revenues, which are not included in interest
and fee income related to earning assets. Total non-interest income increased
$1,687,000, or 38.8% from $4,353,000 for the six months ended June 30, 1999 to
$6,040,000 for the corresponding period in 2000. The large increase was the
result of $2,220,000 in loan origination fees and gains from the sale of loans
from the UFM mortgage affiliate which was acquired in September 1999. Also
impacting the six months ended June 30, 2000 and partially offsetting these
increases was a gain included in other operating revenue for 1999 of $275,000 on
the sale of foreclosed property included in other operating income and
reductions in both fiduciary earnings of $250,000 and other service charges,
commission, and fees of $160,000. The gain resulted from the sale of a
foreclosed commercial facility in Princeton, West Virginia in March 1999.
Non-interest income for the second quarter was also up approximately $1.1
million due to the impact of UFM, which added an additional $1.3 million over
the second quarter of 1999.
NON-INTEREST EXPENSE
Non-interest expense totaled $15.7 million in the first half of 2000 increasing
$2.3 million over the corresponding period in 1999. This increase includes $2.4
million in non-interest expense, primarily in the areas of salaries and benefits
and other operating expenses of UFM. Excluding UFM, decreases were noted in
other non-interest expense categories including other real estate expense which
declined by $262,000 and other operating expense which declined by $106,000 when
comparing the six-month period ended June 30, 2000 to the corresponding period
in 1999. The declines noted were partially offset by an increase in salary and
benefit expense of approximately $231,000 for the six months ended June 30, 2000
in comparison to the first six months of 1999.
Non-interest expense increased $590,000 when comparing the second quarter of
1999 to the corresponding period in 2000. Of this amount, UFM added an
additional $900,000 in salaries and benefits. The increase attributable to UFM
was partially offset by a reduction in other operating expense of approximately
$520,000 attributable to several factors including reductions in other real
estate expense. The reductions in other real estate expense are consistent with
the general decline in non-performing assets. Additionally, general reserves
maintained on classifications of other real estate owned were released and
partially offset the increase attributable to UFM.
15
<PAGE> 16
FINANCIAL POSITION
SECURITIES
Securities totaled $280.0 million at June 30, 2000 and reflect a decrease of
$10.9 million from December 31, 1999. This 3.8% decrease is the result of
maturities and principal payments in the investment portfolio and a $483,000
decline in value of the investment portfolio of securities available for sale.
The market value of fixed rate debt securities reacts inversely to rising
interest rates. As a result of high loan demand, the cash flow from these
investments is currently being reinvested into the higher yielding loan
portfolio.
Securities available for sale were $202.8 million at June 30, 2000 as compared
to $212.1 million at December 31, 1999. Securities available for sale are
recorded at their estimated fair market value. The unrealized gain or loss,
which is the difference between amortized cost and market value, net of related
deferred taxes, is recognized in the Stockholders' Equity section of the balance
sheet as accumulated other comprehensive income. The unrealized loss after taxes
of $5.5 million at December 31, 1999, increased $289,000 to an unrealized loss
of $5.8 million at June 30, 2000 due to market declines in the first half of
2000.
Investment securities, which are purchased with the intent to hold until
maturity, totaled $77.2 million at June 30, 2000 as compared with $78.8 million
at December 31, 1999. The market value of investment securities held to maturity
was 100% and 101% of book value at December 31, 1999 and June 30, 2000,
respectively.
LOANS
The Company's lending strategy stresses quality growth, diversified by product,
geography, and industry. All loans made by the Company are subject to a common
credit underwriting structure. Loans are also subject to a quarterly and annual
review process based on the loan size and type. Total loans increased $37.5
million from $704.1 million at December 31, 1999 to $741.6 million at June 30,
2000. Additionally, the loan to deposit ratio increased from 84.5% at December
31, 1999 to 89.1% at June 30, 2000. The increase in the loan to deposit ratio
has increased the Company's funding dependency on wholesale funding through the
FHLB. Average total loans have increased $108.5 million when comparing the first
half of 1999 and 2000 due primarily to extensive sales and marketing efforts.
The loan portfolio continues to be diversified among loan types and industry
segments. Commercial and commercial real estate loans represent the largest
segment of the portfolio, comprising $292.6 million or 39.47% of total loans at
June 30, 2000 and $301.0 million or 42.74% of total loans at December 31, 1999.
Residential real estate loans increased to $269.0 million or 36.29% of total
loans at June 30, 2000 and from $251.3 million or 35.69% of the total loan
portfolio at December 31, 1999. Loans to individuals increased slightly to
$129.8 million or 17.54% of total loans at June 30, 2000 from $127.1 million or
18.05% of total loans at December 31, 1999. Construction loans grew
significantly to $49.7 million at June 30, 2000 or 6.70% of total loans from
$24.7 million at December 31, 1999 or 3.51% of total loans. Growth in the
construction loan segment includes multifamily residential properties and other
commercial real estate development properties. A portion of these loans will
move into the commercial real estate portfolio as the projects are completed.
16
<PAGE> 17
NON-PERFORMING ASSETS
Non-performing assets are comprised of loans on non-accrual status, loans
contractually past due 90 days or more and still accruing interest and other
real estate owned (OREO). Non-performing assets were $9.1 million at June 30,
2000, or 1.2% of total loans and OREO, compared with $11.1 million or 1.6% at
December 31, 1999 and down $951,000 from the $10.1 million (1.6% of loans and
OREO) at June 30, 1999. The following schedule details non-performing assets by
category at the close of each of the last five quarters:
<TABLE>
<CAPTION>
Quarter Ended
---------------------------------------------------------------------------
(In Thousands) June 30 March 31 December 31 September 30 June 30
2000 2000 1999 1999 1999
------ -------- ----------- ------------ -------
<S> <C> <C> <C> <C> <C>
Non-Accrual Loans $5,359 $ 7,455 $ 7,889 $ 8,246 $ 7,970
Loans Ninety Days Past Due 1,323 1,090 1,259 417 328
Other Real Estate Owned 2,463 2,422 1,950 1,786 1,798
------ ------- ------- ------- -------
$9,145 $10,967 $11,098 $10,449 $10,096
====== ======= ======= ======= =======
Restructured loans
performing in accordance
with modified terms $ 448 $ 449 $ 505 $ 458 $ 460
====== ======= ======= ======= =======
</TABLE>
The decline in total non-accruing loans of approximately $2.1 million between
the first and second quarter of 2000, is primarily the result of the resolution
of a $2.0 million commercial loan on a residential development property in
Beckley, West Virginia, which in turn, reduced non-accrual loans. The reduction
due to two commercial loan relationships was approximately $2.2 million. Ongoing
activity within the classification and categories of non-performing loans
continues to include collections on delinquencies, foreclosures and movements
into or out of the non-performing classification as a result of changing
customer business conditions. The decrease in non-accrual loans due to the
aforementioned resolution was partially offset by a $233,000 increase in loans
ninety days past due from several smaller loans entering this status. Included
in the ninety days past due category are two loans with FmHA and SBA guarantees
comprising $980,000 of the balance in that category of non-performing loans.
STOCKHOLDERS' EQUITY
Total stockholders' equity reached $106.2 million at June 30, 2000 increasing
$2.7 million over the $103.5 million reported at December 31, 1999. The Federal
Reserve's risk based capital guidelines and leverage ratio measure capital
adequacy of banking institutions. Risk-based capital guidelines weight balance
sheet assets and off-balance sheet commitments based on inherent risks
associated with the respective asset types. At June 30, 2000, the Company's risk
adjusted capital-to-asset ratio was 11.68%. The Company's leverage ratio at June
30, 2000 was 8.17% compared with 8.25% at December 31, 1999. Both the risk
adjusted capital-to-asset ratio and the leverage ratio exceed the current
well-capitalized levels prescribed for bank holding companies of 10% and 5%,
respectively.
LIQUIDITY
The Company maintains a significant level of liquidity in the form of cash and
cash equivalent balances ($32.7 million), investment securities available for
sale ($202.8 million) and Federal Home Loan Bank credit availability of
approximately $112.4 million. Cash and cash equivalents as well as advances from
the Federal Home Loan Bank are immediately available for satisfaction of deposit
withdrawals, customer credit needs and operations of the Company. Investment
securities available for sale represent a secondary level of liquidity available
for conversion to liquid funds in the event of extraordinary needs.
17
<PAGE> 18
PART I. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk (IRR) and Asset/Liability Management
The Bank's profitability is dependent to a large extent upon its net interest
income (NII), which is the difference between its interest income on
interest-earning assets, such as loans and securities, and its interest expense
on interest-bearing liabilities, such as deposits and borrowings. The Bank, like
other financial institutions, is subject to interest rate risk to the degree
that its interest-earning assets reprice differently than its interest-bearing
liabilities. The Bank manages its mix of assets and liabilities with the goals
of limiting its exposure to interest rate risk, ensuring adequate liquidity, and
coordinating its sources and uses of funds. Specific strategies for management
of IRR have included shortening the amortized maturity of fixed-rate loans and
increasing the volume of adjustable rate loans to reduce the average maturity of
the Bank's interest-earning assets.
The Bank seeks to control its interest rate risk (IRR) exposure to insulate net
interest income and net earnings from fluctuations in the general level of
interest rates. To measure its exposure to IRR, the bank performs quarterly
simulations of NII using financial models which project NII through a range of
possible interest rate environments including rising, declining, most likely,
and flat rate scenarios. The results of these simulations indicate the existence
and severity of IRR in each of those rate environments based upon the current
balance sheet position and assumptions as to changes in the volume and mix of
interest-earning assets and interest-paying liabilities and management's
estimate of yields attainable in those future rate environments and rates which
will be paid on various deposit instruments and borrowings.
Changes to the Company's risk profile since December 31, 1999 reflect a change
in the balance sheet toward a greater liability sensitive position and an
overall increase in the duration of equity. The shift in the balance sheet is
the result of an increased reliance on short-term convertible advances from the
FHLB used to fund and necessitated by significant loan growth in the form of
longer-term loans experienced since June 30, 1999. The earnings sensitivity
measurements completed on a quarterly basis indicate that the performance
criteria against which sensitivity is measured, are currently within the
Company's defined policy limits. A more complete discussion of the overall
interest rate risk is included in the Company's annual report for December 31,
1999.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
(a) The Company is currently a defendant in various legal actions and
asserted claims most of which involve lending and collection activities
in the normal course of business. While the Company and legal counsel
are unable to assess the ultimate outcome of each of these matters with
certainty, they are of the belief that the resolution of these actions
should not have a material adverse affect on the financial position or
results of operations of the Company.
The Company is currently involved in litigation styled Ann Tierney
Smith, Executrix, et al versus FCFT, First Community Bank, Gentry,
Locke, Rakes & Moore and William Gust. In this matter, the plaintiffs
are seeking to overturn the establishment of a charitable foundation
established by a customer of the Company's Trust Division. The court
has ruled in favor of the Company's motion for dismissal on one key
allegation in the complaint, affirming the Trustee's authority to
execute certain estate plans directed by the donor. The plaintiff
subsequently filed a motion requesting an immediate appeal of that
ruling to the state supreme court; however, the court denied this
motion in a ruling on April 21, 1999. Discovery and depositions
continue in this matter and court ordered mediation was conducted on
May 2, 2000 with no outcome. A trial date has been set for October
2000. The Company intends to vigorously defend this action and both the
Company and legal counsel are of the opinion that it will prevail in
this matter and resolution of this litigation will not have a material
adverse effect on the financial position or results of operations of
the Company.
18
<PAGE> 19
On February 9, 2000, 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 has prepared 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.
Item 2. Changes in Securities
(a) N/A
(b) N/A
(c) N/A
(d) N/A
Item 3. Defaults Upon Senior Securities
(a) N/A
(b) N/A
Item 4. Submission of Matters to a Vote of Security Holders
(a) N/A
(b) N/A
(c) N/A
(d) N/A
Item 5. Other Information
(a) N/A
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 3 - Articles of Incorporation and amendments
Exhibit 15 - Letter regarding unaudited interim financial information
Exhibit 27 - Financial Data Schedule
19
<PAGE> 20
(b) Reports on Form 8-K
A filing on Form 8-K was made on June 13, 2000 reporting a change
in executive management of the Company.
A report on Form 8-K was filed on June 30, 2000 announcing a
proposed acquisition by merger of Citizens Southern Bank, Inc. with
and into First Community Bank N.A., a wholly owned subsidiary of
the Company.
20
<PAGE> 21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
First Community Bancshares, Inc.
DATE: August 14, 2000
/s/ John M. Mendez
-----------------------------------
John M. Mendez
President & Chief Executive Officer
(Duly Authorized Officer)
DATE: August 14, 2000
/s/ Kenneth P. Mulkey
-----------------------------------
Kenneth P. Mulkey
Chief Financial Officer
(Principal Accounting Officer)
21
