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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: September 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 Identification No.)
incorporation or organization)
One Community Place, Bluefield, Virginia 24605
(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 of 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 October 31, 2000
Common Stock, $1 Par Value 8,615,945
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First Community Bancshares, Inc.
FORM 10-Q
For the quarter ended September 30, 2000
INDEX
PART I. FINANCIAL INFORMATION REFERENCE
---------
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 2000 and
December 31, 1999 3
Consolidated Statements of Income for the Three and Nine
Month Periods Ended September 30, 2000 and 1999 4
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 2000 and 1999 5
Consolidated Statements of Changes in Stockholders'
Equity for the Nine Months Ended September 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 10-17
Item 3. Quantitative and Qualitative Disclosures about 18
Market Risk
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities and Use of Proceeds 18
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of 19
Security Holders
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
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PART I. Item 1. Financial Statements
FIRST COMMUNITY BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in Thousands, Except Share Data) (Unaudited)
September 30 December 31
2000 1999
----------- -----------
Assets
Cash and due from banks $ 30,510 $ 37,797
Securities available for sale (amortized cost of $211,085
September 30, 2000; $221,226, December 31, 1999) 204,208 212,105
Investment securities held to maturity (fair value of $77,774,
September 30, 2000; $78,917, December 31, 1999) 76,312 78,768
Loans, net of unearned income 762,983 704,096
Less reserve for loan losses 11,872 11,900
----------- -----------
Net loans 751,111 692,196
Premises and equipment 18,033 18,630
Other real estate owned 2,780 1,950
Interest receivable 7,848 8,090
Other assets 19,926 15,178
Intangible assets 21,899 23,448
----------- -----------
Total Assets $ 1,132,627 $ 1,088,162
=========== ===========
Liabilities
Deposits:
Deposits, non-interest bearing $ 115,308 $ 115,288
Deposits, interest-bearing 722,991 717,970
----------- -----------
Total Deposits 838,299 833,258
Interest, taxes and other liabilities 13,308 13,436
Federal funds purchased 16,000 86,700
Securities sold under agreements to repurchase 43,338 41,062
FHLB borrowings and other indebtedness 112,110 10,218
----------- -----------
Total Liabilities 1,023,055 984,674
----------- -----------
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; 8,635,014 and 8,726,836 shares outstanding
in 2000 and 1999 8,992 8,992
Additional paid-in capital 34,168 34,264
Retained earnings 75,768 69,372
Unallocated common stock held by ESOP, at cost -- (722)
Treasury stock, at cost (5,229) (2,945)
Accumulated other comprehensive loss (4,127) (5,473)
----------- -----------
Total Stockholders' Equity 109,572 103,488
----------- -----------
Total Liabilities and Stockholders' Equity $ 1,132,627 $ 1,088,162
=========== ===========
See Notes to Consolidated Financial Statements.
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FIRST COMMUNITY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
Nine Months Three Months
Ended Ended
September 30 September 30
2000 1999 2000 1999
- ------------------------------------------------------------------------------------------------------------------------
Interest Income:
Interest and fees on loans $ 50,043 $ 42,675 $ 17,369 $ 14,646
Interest on securities available for sale 9,732 9,925 3,229 3,331
Interest on investment securities 3,134 3,293 1,024 1,087
Interest on federal funds sold and deposits 167 827 10 24
---------- ---------- ---------- ----------
Total Interest Income 63,076 56,720 21,632 19,088
---------- ---------- ---------- ----------
Interest Expense:
Interest on deposits 22,200 22,092 7,697 7,076
Interest on borrowings 6,099 2,009 2,335 695
---------- ---------- ---------- ----------
Total Interest Expense 28,299 24,101 10,032 7,771
---------- ---------- ---------- ----------
Net Interest Income 34,777 32,619 11,600 11,317
Provision for Loan Losses 2,722 1,340 842 505
---------- ---------- ---------- ----------
Net Interest Income After Provision for Loan Losses 32,055 31,279 10,758 10,812
---------- ---------- ---------- ----------
Non-Interest Income:
Fiduciary income 1,314 1,664 382 479
Service charges on deposit accounts 2,748 2,727 952 928
Other service charges, commissions and fees 2,008 1,236 680 424
Other operating income 3,024 654 1,040 97
---------- ---------- ---------- ----------
Total Non-Interest Income 9,094 6,281 3,054 1,928
---------- ---------- ---------- ----------
Non-Interest Expense:
Salaries and employee benefits 11,951 9,161 3,901 3,048
Occupancy expense of bank premises 1,885 1,552 635 519
Furniture and equipment expense 1,376 1,346 398 446
Goodwill amortization 1,586 1,525 534 514
Other operating expense 6,548 6,500 2,223 2,218
---------- ---------- ---------- ----------
Total Non-Interest Expense 23,346 20,084 7,691 6,745
---------- ---------- ---------- ----------
Income before income taxes 17,803 17,476 6,121 5,995
Income tax expense 5,511 5,470 1,836 1,941
---------- ---------- ---------- ----------
Net Income 12,292 12,006 4,285 4,054
========== ========== ========== ==========
Basic and diluted earnings per common share $ 1.42 $ 1.37 $ 0.50 $ 0.46
========== ========== ========== ==========
Weighted average shares outstanding 8,676,081 8,776,029 8,647,153 8,766,031
========== ========== ========== ==========
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FIRST COMMUNITY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in Thousands)
Nine Months Ended
September 30
--------------------------------
2000 1999
- ----------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities:
Net income $ 12,292 $ 12,006
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 2,722 1,340
Depreciation of premises and equipment 1,047 1,059
Amortization of goodwill and other intangibles 1,618 1,495
Investment amortization and accretion, net 181 395
Gain on the sale of assets, net (2,102) (251)
Mortgage loans originated for sale (72,968) 0
Proceeds from sale of mortgage loans 72,024 0
Change in other liabilities, net 498 601
Change in interest receivable, net 242 (391)
Change in other assets, net (1,546) (1,143)
Other, net (392) (22)
-------- ---------
Net cash provided by operating activities 13,616 15,089
-------- ---------
Cash Flows From Investing Activities:
Increase (decrease) in cash realized from:
Maturities and calls of investment securities 2,478 3,864
Maturities and calls of securities available for sale 12,481 27,115
Sale of securities available for sale 1,650 4,568
Purchase of securities available for sale (4,193) (65,861)
Net increase in loans made to customers, net (58,933) (49,278)
Purchase of bank-owned life insurance (4,100) 0
Purchase of premises and equipment (652) (2,086)
Sale of equipment 35 80
Net cash used in acquisitions 0 (1,413)
-------- ---------
Net cash used in investing activities (51,234) (83,011)
-------- ---------
Cash Flows From Financing Activities:
Increase (decrease) in cash realized from:
Demand and savings deposits, net (11,728) (11,041)
Time deposits, net 16,772 (21,432)
Short-term borrowings, net 33,483 29,992
Payment of long-term debt (15) (7,981)
Acquisition of treasury stock (2,284) (1,017)
Cash paid in lieu of fractional shares 0 (18)
Cash dividends paid (5,897) (5,542)
-------- ---------
Net cash provided by (used in) financing activities 30,331 (17,039)
-------- ---------
Net decrease in cash and cash equivalents (7,287) (84,961)
Cash and cash equivalents at beginning of year 37,797 117,096
-------- ---------
Cash and cash equivalents at end of quarter $ 30,510 $ 32,135
======== =========
See Notes to Consolidated Financial Statements.
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FIRST COMMUNITY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(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
- -----------------------------------------------------------------------------------------------------------------------------------
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 -- -- 12,006 -- -- -- 12,006
Other comprehensive income:
Unrealized holding losses on
securities available for sale,
net of tax -- -- -- -- -- (5,334) (5,334)
-------- ------- ---------
Comprehensive income -- -- 12,006 -- -- (5,334) 6,672
Common dividends
declared ($.63
per common share) -- -- (5,542) -- -- -- (5,542)
Purchase 47,436 treasury shares
at $21.44 per share -- -- -- -- (1,017) -- (1,017)
Allocation of ESOP shares -- (42) -- 942 -- -- 900
------- -------- -------- ------- ------- ------- ---------
Balance, September 30, 1999 $ 8,992 $ 34,264 $ 66,714 $ (722) $(2,420) $ (4,096) $ 102,732
======= ======== ======== ======= ======= ========= =========
Balance beginning of
the period,
January 1, 2000 $ 8,992 34,264 $ 69,372 $ (722) $(2,945) $ (5,473) $103,488
Comprehensive income:
Net Income -- -- 12,292 -- -- -- 12,292
Other comprehensive income:
Unrealized holding losses on
securities available for sale,
net of tax -- -- -- -- -- 1,346 1,346
-------- ------- ---------
Comprehensive income -- -- 12,292 -- -- 1,346 13,638
Common dividends
declared ($.68
per common share) -- -- (5,896) -- -- -- (5,896)
Purchase 116,063 treasury shares
at $19.68 per share -- -- -- -- (2,284) -- (2,284)
Allocation of ESOP shares -- (96) -- 722 -- -- 626
------- -------- -------- ------- ------- ------- ---------
Balance, September 30, 2000 $ 8,992 $ 34,168 $ 75,768 $ -- $(5,229) $ (4,127) $ 109,572
======= ========= ======== ======= ======= ========= =========
See Notes to Consolidated Financial Statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. UNAUDITED FINANCIAL STATEMENTS
The unaudited consolidated balance sheet as of September 30, 2000 and the
unaudited consolidated statements of income, cash flows and changes in
stockholders' equity for the three and nine month periods ended September 30,
2000 and 1999 have been prepared by the 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 September 30, 2000 and its
results of operations, cash flows, and changes in stockholders' equity for the
three and nine month periods ended September 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. These financial statements should be read in
conjunction with the financial statements and notes thereto included in the 1999
Annual Report of FCBI.
NOTE 2. ACQUISITIONS
First Community Bancshares, Inc. (FCBI) acquired Citizens Southern Bank, Inc.
(Citizens) in a merger transaction with FCBI's wholly owned subsidiary First
Community Bank, N.A. (FCBNA). The acquisition has been accounted for as a
purchase transaction and is anticipated to be slightly dilutive to earnings in
the first full year of operations.
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
which are included in total loans outstanding as of September 30, 2000 are
stated at the lower of cost or market value and are classified as held for sale.
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 pay
down 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 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 was involved in litigation where the plaintiffs were seeking to
overturn the establishment of a charitable foundation established by a customer
of the Company's Trust Division. This case was tried and a directed verdict in
favor of the Company was issued on October 10, 2000, by the Circuit Court of
Mercer County, West Virginia. The Company and its legal counsel believe there
will be no further action on this matter. The court dismissed this action on the
directed verdict affirming the Bank's defense of its fiduciary obligation to the
trust, the foundation and its trust client.
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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:
Nine months ended Three months ended
September 30 September 30
2000 1999 2000 1999
-------------------- ----------------------
(Amounts in Thousands)
OTHER COMPREHENSIVE INCOME:
Holding gains (losses) arising during the period $ 2,244 $(8,890) $ 2,725 $(1,200)
Tax (expense) benefit (898) 3,556 (1,090) 480
------- ------- ------- -------
Holding gains (losses) arising during the period, net of tax 1,346 (5,334) 1,635 (720)
------- ------- ------- -------
Other comprehensive income (loss), net of tax 1,346 (5,334) 1,635 (720)
Beginning accumulated other comprehensive (loss) income (5,473) 1,238 (5,762) (3,376)
------- ------- ------- -------
Ending accumulated other comprehensive loss $(4,127) $(4,096) $(4,127) $(4,096)
======= ======= ======= =======
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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 September 30, 2000, and the related
consolidated statements of income and cash flows for the three and nine month
periods then ended, and changes in stockholders' equity for the nine 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 nine
month periods ended September 30, 1999 and changes in stockholders' equity for
the nine month period ended September 30, 1999, were reviewed by other
accountants whose report (dated October 19, 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
September 30, 2000, and the related consolidated statements of income and cash
flows for the three and nine month periods then ended, and changes in
stockholders' equity for the nine month period then ended September 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
October 13, 2000
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FIRST COMMUNITY BANCSHARES, INC.
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", "FCBI", or "First
Community") 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 third quarter of 2000 totaled $4.3 million, 5.70% higher than
net earnings of $4.1 million reported for the corresponding third quarter of
1999. Net income for the third quarters of the current and prior year resulted
in basic and diluted earnings per share of $0.50 versus $0.46 for the three
months ended September 30, 2000 and 1999, respectively. Excluding the impact of
United First Mortgage, Inc., ("UFM"), increases in the provision for loan
losses, and a non-recurring gain recognized in the first quarter of 1999,
earnings for the nine month period ended September 30, 2000, would have
increased by approximately $1,246,000 or 10.5% over the corresponding period in
1999, while basic and diluted earnings per common share would have increased by
$0.16 or 11.9%. The improvement in earnings for 2000 is primarily attributed to
continued growth in the loan portfolio along with repricing of existing
adjustable rate loans. However, these gains were tempered by higher funding
cost, an increased loan loss provision as a result of the overall growth in the
loan portfolio, and the impact of the addition of UFM on the current year's
operations.
Non-interest income for the three and nine-month periods ended September 30,
2000 increased $1.1 million and $2.8 million, respectively, over the comparable
periods in 1999. The largest portion of this increase resulted from the addition
of the mortgage brokerage operation, which added approximately $1.2 million and
$3.4 million of gains on the sale of mortgage loans in 2000 versus 1999 for the
comparable three and nine-month periods. However, when comparing the nine months
ended September 30, 2000, to the comparable period in the prior year, exclusive
of UFM, non-interest income decreased $599,000 the majority of which was a
$350,000 decline in fiduciary earnings and a reduction of $260,000 in other
service
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charges, commissions, and fees. Fiduciary earnings correspond to the asset
management fees recorded and have declined from the prior year as a direct
result of a reduction in new estate and trust management activity in the current
year. The decline in other service charges, commissions and fees was from
several components, including any remaining revenues recorded in 1999 stemming
from the credit card portfolio which was substantially curtailed in 1998 and
ultimately disposed. $111,000 in credit card discount fees were recorded in the
first part of 1999 and, accordingly, no substantial income was booked in 2000.
Also, there was an approximate $100,000 decline in origination fees on mortgage
loans sold and other loan service fees primarily due to the reduction of the
origination and sale of mortgage loans at the bank level as well as a $46,000
decrease in insurance premium income. Currently, the majority of all secondary
market mortgage loans are handled through UFM, the Company's mortgage brokerage
division.
Non-interest expense for the three and nine month periods ended September 30,
2000 increased $946,000 and $3.3 million, over the comparable periods in 1999.
These increases are primarily attributable to the addition of United First
Mortgage that added approximately $1.2 million and $3.6 million, to the
operating expenses for the three and nine month periods ended September 30, 2000
over the comparable periods in 1999. Excluding the impact of United First
Mortgage, non-interest expenses for the company decreased $248,000 and $382,000
for the three and nine month periods ended September 30, 2000, respectively.
The effective income tax rate was slightly lower in the third quarter of 2000,
(30% vs. 32%) as a result of tax planning strategies implemented in the current
year.
Despite increases in the provision for loan losses in the first nine 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 nine months of 2000 increased $286,000 or 2.38% over the comparable
period in 1999. Basic and diluted earnings per common share between the two
periods increased 3.65%, from $1.37 to $1.42. When comparing the nine months
ended September 30, 2000 with the corresponding prior period, the higher cost of
funds and other borrowings partially offset the impact of increased loan volume
and higher yields on the available for sale security portfolio resulting in a 5
basis point decline in net interest margin to 4.94%.
NET INTEREST INCOME
Net interest income, the largest contributor to earnings was $34.8 million for
the first nine months of 2000 as compared with $32.6 million for the
corresponding period in 1999. Additionally, net interest income for the third
quarter of 2000 exceeded the comparable prior period by approximately $283,000.
Tax equivalent net interest income totaled $37.3 million for the first nine
months of 2000, an increase of $2.1 million from the $35.2 million reported in
the first nine months of 1999. This increase in net interest income relates
largely to the $107.7 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.
The Company's tax equivalent net interest margin of 4.94% for the first nine
months of 2000 reflects a decrease of 5 basis points in comparison to the first
nine months of 1999 when the tax equivalent net interest margin was 4.99%.
Average loan balances increased $107.7 million while the overall loan yield
remained relatively consistent with the prior year. The overall yield on average
earning assets increased 30 basis points, moving from 8.40% for the nine months
ended September 30, 1999 to 8.70% for the nine months ended September 30, 2000.
Alternatively, the cost of interest-bearing liabilities increased by 31 basis
points from 4.02% in 1999 to 4.33% in 2000 due to competitive pricing pressure
on deposits and short-term borrowings.
Loans, the Company's highest yielding asset category, experienced an increase in
average balances of $107.7 million or 17.2%, when comparing the first nine
months of 2000 to the corresponding period in 1999. The tax equivalent yield on
the loan portfolio was 9.17% for the first nine months of 2000 down slightly
from 9.20% 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 increase in average outstanding loans was funded through
investment portfolio rolloff and increased wholesale funding through the FHLB.
The tax equivalent yield on securities available for sale increased to 6.79% in
the first nine months of 2000 in comparison to 6.35% for the nine months ended
September 30, 1999. Average balances in securities available for sale decreased
from $224.5 million during the nine months ended September 30, 1999 to $205.3
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 are currently being reinvested in higher yielding loans.
The overall cost of funding increased by 31 basis points, due, primarily to
increases in the cost of short term borrowings, which increased 70 basis points
from 3.75% for the nine months of 1999 to 4.45% for the first nine months of
2000. The cost
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of interest-bearing demand and time deposits increased 6 and 15 basis points,
respectively. Alternately, the cost of savings accounts decreased 14 basis
points from 2.28% in the nine months of 1999 to 2.14% in 2000. Average deposit
balances have declined as a result of a degree of price sensitivity with
decreases of 5.58% and 6.85% 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 other indebtedness. The usage of FHLB
credit programs is a significant component of the Company's overall liquidity
and funding strategy.
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AVERAGE BALANCE SHEETS AND
NET INTEREST INCOME ANALYSIS
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
(UNAUDITED) -------------------------------------------------- -------------------------------------------
(AMOUNTS IN AVERAGE INTEREST YIELD/RATE AVERAGE INTEREST YIELD/RATE
THOUSANDS, EXCEPT %'S) BALANCE (1) (2) (2) BALANCE (1) (2) (2)
- ------------------------------------------------------------------------------------------------------------------------------------
Earning Assets:
Loans (3)
Taxable $ 724,207 $ 49,618 9.15% $ 614,404 $ 42,145 9.17%
Tax-Exempt 8,162 655 10.72% 10,252 816 10.64%
----------- ----------- ----- ----------- -------- -----
Total 732,369 50,273 9.17% 624,656 42,961 9.20%
----------- -------
Reserve for Loan Losses (11,993) (11,230)
----------- -----------
Net Total 720,376 613,426
Investment Securities
Available for Sale:
Taxable 171,870 8,430 6.55% 188,263 8,567 6.08%
Tax-Exempt 33,375 2,004 8.02% 36,223 2,090 7.71%
----------- ----------- ----- ----------- -------- -----
Total 205,245 10,434 6.79% 224,486 10,657 6.35%
----------- -------
Investment Securities
Held to Maturity:
Taxable 4,724 246 6.96% 7,251 374 6.90%
Tax-Exempt 73,046 4,443 8.12% 74,016 4,491 8.11%
----------- ----------- ----- ----------- -------- -----
Total 77,770 4,689 8.05% 81,267 4,865 8.00%
----------- -------
Interest-Bearing Deposits 3,196 153 6.39% 12,516 423 4.52%
Federal Funds Sold 0 0 0.00% 11,764 403 4.58%
----------- ----------- ----- ----------- -------- -----
Total Earning Assets 1,006,587 65,549 8.70% 943,459 59,309 8.40%
----------- ----- -------- -----
Other Assets 100,988 94,192
----------- -----------
Total $ 1,107,575 $ 1,037,651
=========== ===========
Interest-Bearing Liabilities:
Interest-bearing Demand
Deposits $ 130,276 2,155 2.21% $ 137,972 2,223 2.15%
Savings Deposits 136,762 2,191 2.14% 146,812 2,500 2.28%
Time Deposits 452,775 17,859 5.27% 453,977 17,375 5.12%
Short-Term Borrowings 61,539 2,050 4.45% 49,097 1,377 3.75%
Other Indebtedness 91,084 4,044 5.93% 13,809 628 6.08%
----------- ----------- ----- ----------- -------- -----
Total Interest-Bearing 872,436 28,299 4.33% 801,667 24,103 4.02%
----------- ----------- ----- ----------- -------- -----
Liabilities
Demand Deposits 115,768 120,030
Other Liabilities 13,281 12,294
Stockholders' Equity 106,090 103,660
----------- -----------
Total $ 1,107,575 $ 1,037,651
=========== ===========
Net Interest Earnings $ 37,250 $ 35,206
=========== ========
Net Interest Spread 4.37% 4.38%
===== =====
Net Interest Margin 4.94% 4.99%
===== =====
(1) Interest amounts represent taxable equivalent results for the first nine
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.
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PROVISION AND ALLOWANCE FOR LOAN LOSSES
To maintain a balance in the allowance for loan losses sufficient to absorb
known and estimable loan losses, charges are made to the provision for loan
losses. The $2.7 million provision made in the first nine months of 2000
compared to the $1.3 million for the corresponding period in 1999 reflect
additional provisions to cover significant average loan growth of $107.7 million
from the third quarter of 1999 and the resolution of a $2.0 million non-accruing
loan relationship which resulted in a $650,000 charge-off due to collateral
deficiencies recorded in the second quarter of the current year.
The Company consistently applies a monthly review process to 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 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, an estimated loss
percentage is developed based upon rolling average historical loss percentages.
The calculated percentage is used to determine the estimated reserve excluding
any relationships specifically identified and evaluated. While allocations are
made to specific loans and classifications within the various categories of
loans, the reserve is available for all loan losses.
First Community's allowance for loan loss activity for the three and nine month
periods ended September 30, 2000 and September 30, 1999 is as follows:
Three months ended Nine months ended
September 30 September 30
2000 1999 2000 1999
---------------------- ----------------------
(Amounts in Thousands)
Beginning balance $ 11,828 $ 11,111 $ 11,900 $ 11,404
Provision 842 505 2,722 1,340
Charge-offs (1,033) (653) (3,434) (2,148)
Recoveries 235 128 684 495
-------- -------- -------- --------
Ending balance $ 11,872 $ 11,091 $ 11,872 $ 11,091
======== ======== ======== ========
The allowance for loan losses totaled approximately $11.9 million for both the
September 30, 2000 and December 31, 1999 reporting periods resulting in reserve
to loan ratios of 1.56% and 1.69% for the respective periods.
Net charge-offs for the first nine months of 2000 were $2.75 million compared
with $1.65 million for the corresponding period in 1999. Expressed as a
percentage of average loans, net charge-offs were .38% for the nine month period
ended September 30, 2000 and .26% for the corresponding period in 1999.
Additionally, for the three months ended September 30, 2000 and 1999, the net
charge-offs as a percent of average loans were .11% and .08%, respectively. The
higher net charge-off ratios in 2000 relate largely to the impact of a $650,000
charge-off resulting from collateral deficiencies in a commercial loan
transaction and the final resolution of that loan relationship on a residential
development loan in Beckley, West Virginia.
As of September 30, 2000, the reserve as a percentage of non-performing loans
was 166.7% as compared to 130.1% at December 31, 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 residential development
loan and continued maintenance of adequate reserves to support the portfolio.
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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
$2.8 million, or 44.8% from $6.3 million for the nine months ended September 30,
1999 to $9.1 million for the corresponding period in 2000. The increase was
largely the result of $3,412,000 in loan origination fees and gains from the
sale of loans from the UFM mortgage affiliate acquired in September 1999. Also
impacting the nine months ended September 30, 1999, was a gain included in other
operating income for 1999 of $275,000 on the sale of foreclosed property
resulting from the sale of a commercial facility in Princeton, West Virginia in
March 1999. In operations exclusive of UFM, comparing the nine months ended
September 30, 2000, to the comparable period in the prior year, non-interest
income decreased $599,000 of which the majority was a $350,000 decline in
fiduciary earnings and a reduction of $260,000 in other service charges,
commissions and fees. Other service charges, commission, and fees contracted as
a result of declining fee revenues in the areas of credit life and A & H
policies and the elimination of fee revenues from the credit card portfolio
which was substantially sold in the later part of 1998 and subsequently
curtailed. Non-interest income for the third quarter 2000 was also up
approximately $1.1 million when compared to the third quarter 1999 due to the
impact of UFM.
NON-INTEREST EXPENSE
Non-interest expense totaled $23.4 million in the first nine months of 2000
increasing $3.3 million over the corresponding period in 1999. This increase
includes $3.6 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 $251,000 and other operating expense which
declined by $313,000 when comparing the nine-month period ended September 30,
2000 to the corresponding period in 1999. The declines noted were partially
offset by an increase in salary and benefit expense of approximately $260,000
for the nine months ended September 30, 2000 in comparison to the first nine
months of 1999.
Non-interest expense increased $946,000 when comparing the third quarter of 1999
to the corresponding period in 2000. This amount included UFM expenses in 2000
of $824,000 in salaries and benefits, $85,000 in occupancy expenses, $62,000 in
furniture and equipment expenses, and $201,000 in other operating expenses.
Excluding the effects of UFM, non-interest expense decreased $248,000 for the
third quarter of 2000 when compared to the third quarter of 1999 This decrease
was attributable to several factors including reductions in other real estate
expense and the implementation of tighter expense control measures.
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FINANCIAL POSITION
SECURITIES
Securities totaled $280.5 million at September 30, 2000 and reflect a decrease
of $10.4 million from December 31, 1999. This 3.6% decrease is the net result of
maturities, calls, and mortgage backed security principal payments in the
investment portfolio along with an increase in market value of securities
available for sale of $2.2 million. The market value of fixed rate debt
securities reacts inversely to rising interest rates; however, recent trends in
the securities portfolio have had a positive effect on the underlying market
value since December 31, 2000. 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 $204.2 million at September 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 either accumulated other comprehensive income or loss. The unrealized
loss after taxes of $5.5 million at December 31, 1999, decreased $1.4 million to
an unrealized loss of $4.1 million at September 30, 2000 due to market increases
in the first nine months of 2000.
Investment securities, which are purchased with the intent to hold until
maturity, totaled $76.3 million at September 30, 2000 as compared with $78.8
million at December 31, 1999. The market value of investment securities held to
maturity was 100% and 101.9% of book value at December 31, 1999 and September
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 $58.9
million from $704.1 million at December 31, 1999 to $763.0 million at September
30, 2000. Additionally, the loan to deposit ratio increased from 84.5% at
December 31, 1999 to 91% at September 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 $107.7 million when
comparing the first nine months 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 $291.7 million or 38.24% of total loans at
September 30, 2000 and $301.0 million or 42.75% of total loans at December 31,
1999. Residential real estate loans increased to $274.7 million or 36.00% of
total loans at September 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
$132.1 million or 17.31% of total loans at September 30, 2000 from $127.1
million or 18.05% of total loans at December 31, 1999. Construction loans grew
significantly to $64.2 million at September 30, 2000 or 8.41% 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.
Loan Portfolio Overview
(Amounts in Thousands)
September 30, 2000 December 31, 1999
Amount Percent Amount Percent
--------------------- ----------------------
Commercial and Agricultural $ 84,890 11.13% $ 92,739 13.17%
Commercial Real Estate 206,837 27.11 208,228 29.57
Residential Real Estate 274,705 36.00 251,332 35.69
Construction 64,154 8.41 24,684 3.51
Consumer 132,105 17.31 127,051 18.05
Other 292 .04 62 .01
-------- ----- -------- -----
Total $762,983 100.00% $704,096 100.00%
======== ====== ======== ======
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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 $9.9 million at September
30, 2000, or 1.3% of total loans and OREO, compared with $11.1 million or 1.6%
at December 31, 1999 and down $548,000 from the $10.5 million (1.6% of loans and
OREO) at September 30, 1999. The following schedule details non-performing
assets by category at the close of each of the last five quarters:
(In Thousands) September 30 June 30 March 31 December 31 September 30
2000 2000 2000 1999 1999
---------------------------------------------------------------------
Non-Accrual $5,939 $ 5,359 $ 7,455 $ 7,889 $ 8,246
Ninety Days Past Due 1,182 1,323 1,090 1,259 417
Other Real Estate Owned 2,780 2,463 2,422 1,950 1,786
------ ------- ------- ------- -------
$9,901 $ 9,145 $10,967 $11,098 $10,449
====== ======= ======= ======= =======
Restructured loans
performing in accordance
with modified terms $ 448 $ 448 $ 449 $ 505 $ 458
====== ======= ======= ======= =======
Non-accrual loans increased $580,000 during the third quarter of 2000. The
increase is primarily due to a commercial loan relationship in which the
borrowers are attempting to sell the underlying collateral and apply the
receipts to the outstanding loan balances. Ninety day past due loans decreased
slightly for the third quarter by $141,000 while other real estate owned
increased by $317,000. The increase in other real estate owned is due to the
foreclosure of several loans with individual balances of less than $100,000.
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. 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 Company has undertaken an extensive marketing campaign through a national
auction liquidation agency to reduce both other real estate owned and
underutilized bank-owned facilities. The property auctions are scheduled for the
fourth quarter of 2000 and efforts are now underway to liquidate 17 pieces of
property. The parcels of other real estate owned are generally carried at the
lesser of their estimated fair market value or cost.
STOCKHOLDERS' EQUITY
Total stockholders' equity reached $109.6 million at September 30, 2000
increasing $6.1 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 September 30, 2000, the Company's
risk adjusted capital-to-asset ratio was 11.62%. The Company's leverage ratio at
September 30, 2000 was 8.30% 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 ($30.5 million), investment securities available for
sale ($204.2 million) and Federal Home Loan Bank credit availability of
approximately $99.7 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.
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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 September 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 was involved in litigation where the plaintiffs were
seeking to overturn the establishment of a charitable foundation
established by a customer of the Company's Trust Division. This case
was tried and a directed verdict in favor of the Company was issued on
October 10, 2000, by the Circuit Court of Mercer County, West Virginia.
The Company and its legal counsel believe there will be no further
action on this matter. The court dismissed this action on the directed
verdict affirming the Bank's defense of its fiduciary obligation to the
trust, the foundation and its trust client.
Item 2. Changes in Securities and Use of Proceeds
(a) N/A
(b) N/A
(c) N/A
(d) N/A
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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) A registration statement on Form S-4 was filed on September 25, 2000
in regards to a proposed merger between Citizens Southern Bank, Inc. of Beckley,
West Virginia and First Community Bank, N. A., a wholly owned subsidiary of
First Community Bancshares, Inc. Notice of this merger proposal was previously
filed with the S.E.C. on Form 8-K dated June 30, 2000.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 3 - Articles of Incorporation and amendments previously filed
Exhibit 15 - Letter regarding unaudited interim financial information
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
A report on Form 8-K was filed on October 20, 2000 announcing the
Company's quarterly earnings and depicting certain financial
information as of September 30, 2000 and December 31, 1999 and
comparative income statements for the three and nine month periods
ending September 30, 2000 and 1999, respectively.
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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: November 14, 2000
/s/ John M. Mendez
- ------------------------------
John M. Mendez
President & Chief Executive Officer
(Duly Authorized Officer)
DATE: November 14, 2000
/s/ Kenneth P. Mulkey
- ------------------------------
Kenneth P. Mulkey
Chief Financial Officer
(Principal Accounting Officer)
20