1
Exhibit 13
First Community
Bancshares, Inc.
2000 Annual Report
FCBC
YOUR FIRST FINANCIAL RESOURCE
2
FINANCIAL HIGHLIGHTS
(Amounts in Thousands, Except Percent and Per Share Data)
YOUR
FIRST
FINANCIAL
RESOURCE.
EARNINGS AND DIVIDENDS
2000 1999 1998
- --------------------------------------------------------------------------------------------
Income from recurring operations* ............... $17,166 $15,748 $11,904
Net income ...................................... 17,063 16,852 13,101
Basic and diluted earnings per share ............ 1.95 1.92 1.49
Cash earnings per share** ....................... 2.16 2.12 1.69
Cash dividends per share ........................ 0.95 0.88 0.84
Return on average equity ........................ 15.70% 16.23% 13.02%
Return on average assets ........................ 1.51% 1.62% 1.24%
* Income from recurring operations represents earnings adjusted for
nonrecurring items of income and expense.
** Cash earnings per share represents earnings per share adjusted for noncash
charges such as amortization of goodwill and other intangibles.
BALANCE SHEET DATA AT YEAR-END
2000 1999 1998
- --------------------------------------------------------------------------------------------
Total assets ................................... $1,218,017 $1,088,162 $1,053,988
Earning assets ................................. 1,117,910 996,366 971,856
Deposits ....................................... 899,903 833,258 875,996
Securities sold under agreement to repurchase .. 46,179 41,062 47,680
Stockholders' equity ........................... 120,682 103,488 101,719
TABLE OF CONTENTS
Message to Stockholders ................................................................. 1
Management's Discussion and Analysis .................................................... 4
Consolidated Financial Statements ....................................................... 25
Consolidated Balance Sheets ........................................................... 26
Consolidated Statements of Income ..................................................... 27
Consolidated Statements of Cash Flow .................................................. 28
Consolidated Statements of Stockholders' Equity ....................................... 29
Notes to Consolidated Financial Statements ............................................ 30
Report of Independent Auditors .......................................................... 48
Report of Management's Responsibilities ................................................. 49
Board of Directors ...................................................................... 50
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Just Checking OverdraftHonor Hourly Rate CD Silverline
TO OUR STOCKHOLDERS AND FRIENDS,
It has been an eventful year for the banking industry filled with changes and
speculation of the possible impact of major legislation in the form of the
Gramm-Leach-Bliley Act, which was expected to reshape the financial services
industry. While the long-term impact of this financial modernization act is not
fully known, it has opened the door for sweeping changes in the delivery of many
financial services for banks, as well as the insurance and securities
industries. As First Community Bancshares navigates through this arena of new
opportunity, we will continue our focus on our core business and our position as
a community banking organization and intensify our efforts to produce
exceptional returns to our stockholders and quality service to our valued
clients and customers.
Financial results for 2000 again set new records for performance for our
Company. Net income for the year reached $17.06 million, up from $16.85 million
in 1999. More significantly, operational earnings, excluding nonrecurring income
in 1999, increased by $1.4 million in 2000. These core earnings were achieved
through improvement in net interest income and non-interest revenues and through
the addition of new services and branch locations. Earnings per share totaled
$1.95 and $1.92 in 2000 and 1999, respectively. On a recurring basis earnings
per share were $1.97 and $1.80 in 2000 and 1999, reflecting strong improvement
in core earnings for the 2000 fiscal year.
The 2000 fiscal year benefited from two months of contribution from the new
Beckley, West Virginia operations of the former Citizens Southern Bank and the
addition of the Company's new core product set for transaction accounts
including Just Checking(TM) and our new OverdraftHonor(TM) service. We expect
these products and services will provide a strong, full-year contribution in
2001. Expectations for the new Beckley operations are also high with this new
market on track for better than expected results in 2001.
The Company experienced growth in 2000 with total resources reaching $1.2
billion at year-end. Growth came in the form of $71.8 million in new retail
deposits, $38.3 million in wholesale funding and $118.7 million in new loan
balances. Growth opportunities for 2001 include further penetration in the new
Beckley, West Virginia market, improved market share in existing West Virginia
markets as we compete against super regional banks, and opportunities for
expansion of our Company and operating philosophy into Eastern Virginia and
Central North Carolina.
Asset quality remains an important objective for the Company. Progress was made
during 2000 with a $2.5 million reduction in nonperforming loans and a decrease
in nonperforming loans to total loans from 1.3% in 1999 to .82% in 2000. The
Company continues to do a very good job of managing delinquencies with a
year-end delinquency percentage of 1.71%, versus 2.12% at year-end 1999.
We have achieved much in 2000 with a restructuring of the management team and
the addition of key personnel to enhance service delivery, attract new customers
and improve support services to our branch network.
BASIC EARNINGS PER SHARE
$ in dollars
1996 1997 1998 1999 2000
- ---- ---- ---- ---- ----
1.58 1.71 1.49 1.92 1.95
RECURRING EARNINGS PER SHARE
$ in dollars
1996 1997 1998 1999 2000
- ---- ---- ---- ---- ----
1.67 1.66 1.35 1.80 1.97
[PHOTO]
John M. Mendez
President &
Chief Executive Officer
First Community Bancshares, Inc.
1
4
Preferred Money Market Easy Checking XPress PC Banking
TOTAL ASSETS
$ in dollars
1996 1997 1998 1999 2000
- ---- ---- ---- ---- ----
838 1,042 1,054 1,088 1,218
Retail banking is a top priority and has been the subject of many projects to
date with the update of transaction account products, the addition of new
services and a comprehensive review of the branch network to ensure convenient
and up-to-date facilities. In the second quarter of 2001, we expect to break
ground on a new branch facility to replace our existing Pine Plaza branch in
Princeton, West Virginia, which will no longer accommodate the retail traffic
for that service location. We also plan the addition of an Athens, West Virginia
branch to serve current and future customers in that area. This is an area that
has previously been serviced primarily by our Princeton offices. Management
resources have been redirected to speed the opening of retail offices in Eastern
Virginia and Central North Carolina, hopefully by late 2001. The volume of
commercial business currently being conducted in those areas indicates a strong
opportunity for the addition of retail banking and our operations infrastructure
is capable of supporting these additions.
In September 2000, the Company initiated a wholesale mortgage operation through
its mortgage banking subsidiary, United First Mortgage, Inc. (UFM). This
division holds great opportunity through its network of mortgage originators.
Mortgage origination volume in the first two months of operation has far
exceeded expectations. We are hopeful that this is an indication of great things
to come for this new endeavor.
On March 1, 2001, First Community Bancshares, Inc. was admitted to trading on
the Nasdaq(R) SmallCap market. The trading symbol remains FCBC and our former
market makers will continue their activities in that capacity. This listing was
initiated to provide a higher level of visibility for the stock and greater
access to investor information. During 2000, FCBC stock traded at a discount to
most market indices and many individual financial stocks. The new stock listing
will hopefully increase investor awareness and help improve the valuation of the
stock to a level justified by its strong earnings and dividend history.
Along with the new Nasdaq(R) listing, we have recruited three new market makers
and initiated ongoing analysis coverage for the Company. The addition of these
brokers to the list of market makers supplemented by independent research
reports will hopefully strengthen the market for our stock through increased
exposure and a broader universe of potential investors.
In 2000, financial stocks along with many sectors of the equity markets and
broad equity indices suffered significant devaluations as the climate for
investing shifted to one of uncertainty and concern that recent growth trends
could not be sustained, amid anxieties of earnings weaknesses and a general
slowdown in the U. S. economy. Financial sector stocks, after being temporarily
overlooked for technology and e-commerce stocks, also suffered from the
lingering effects of a general increase in the level of interest rates and the
expectation of lower earnings and disappointing merger synergies from super
regional banks. The net result for First Community Bancshares was a 23% decline
in the market value of our common stock between January and November 2000
despite continued record earnings and dividends. For First Community Bancshares
and many other financial stocks, this resulted in record low price/earnings
multiples and record high dividend yields on some of the strongest companies
represented in the market. In the Fourth Quarter of 2000, the market began to
recognize the value associated with these stocks and their consistent stream of
earnings and cash flow. As a result, we have seen a reversal in the price trend
for financial stocks in general. At year-end 2000, FCBC recovered most of the
approximate 36% decline experienced in late 1999 and the first three quarters of
2000. However, our stock still traded at an attractive multiple of 9.1 times
earnings based on its year-end price of $17.75 and 2000 earnings of $1.95 per
share.
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XPress Phone Banking Cash Management Accounts Mac Card
DIVIDENDS PER SHARE
$ in dollars
1996 1997 1998 1999 2000
- ---- ---- ---- ---- ----
.73 .83 .84 .88 .95
First Community Bancshares increased its annual dividend rate for the 10th
consecutive year in 2000 as well as in fifteen of the last sixteen years. This
resulted in an 8% increase over the 1999 dividend and an annual dividend payment
of $.95 per share. The annual dividend rate represents a 5.4% cash yield based
on the year-end closing price of $17.75. We are proud of this long-term record
of dividends and returns to our stockholders.
We are very pleased to report that certain litigation against First Community
Bank was resolved in October 2000 when the Mercer County Circuit Court ruled in
favor of the bank in a three-year contest by heirs of a benefactor who
established a charitable foundation in the bank's Trust & Financial Services
Division. The heirs objected to the continuation of the charitable foundation
established by the Trust customer prior to her death. The bank fought to protect
the interest of its client and her charitable legacy and is pleased to now have
this matter resolved in a favorable outcome.
As you can see, the year 2000 has been filled with new endeavors and has been
one of our most productive years ever. Many internal processes have been changed
to allow for greater flexibility, better distribution of authority to act and
serve, and to gain efficiencies available within the organization. Our
Asset/Liability management group was reorganized and targeted on interest rate
risk issues. We developed a new market group with responsibility for appropriate
product structure and pricing. Internal processes have been streamlined and
decision making has been placed at appropriate points throughout the
organization. We have invested or planned for over $3 million in technology and
branch facility expenditures over the next two years designed to enhance
customer access, convenience and the service experience. We are preparing for a
mid-year 2001 transition from our XPress PC Banking product to an Internet-based
delivery system with added functionality and improved service. Preparation is
being made for the launch of property and casualty insurance services in the
Second Quarter of 2001 including business and personal lines through our
affiliate consortium--Bankers Insurance--which has already acquired four
full-service agencies with twelve locations in Virginia and North Carolina. We
are hopeful that we can announce other new services by the end of the Third
Quarter of 2001 including on-line brokerage services for discount and
full-service brokerage customers.
Certainly, it will be another exciting year for us as we prepare ourselves to
compete for the array of financial services which our customers need and demand.
As larger financial service providers position themselves as Financial Holding
Companies and acquire businesses across the various financial industry lines, we
too will be prepared to offer complete financial services through alliances and
strategic partnerships, but we will do so with a community-based approach that
emphasizes personal service through people you know. We are very confident in
our ability to compete; indeed, we believe that the consolidation of smaller
financial institutions into regional and super regional organizations will only
serve to strengthen the demand for our personal delivery style. We appreciate
your support throughout the year, and I look forward to meeting many of you at
our Annual Meeting of Stockholders.
Sincerely,
/s/ John M. Mendez
John M. Mendez
President & Chief Executive Officer
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Repurchase Agreements Certificates of Deposit
MANAGEMENT'S DISCUSSION AND ANALYSIS
Introduction .......................................................................5
Recent Acquisition .................................................................6
Summary Financial Results ..........................................................6
Five-Year Selected Financial Data ..................................................8
Common Stock and Dividends .........................................................9
Net Interest Margin ................................................................9
Net Interest Income ................................................................9
Provision for Loan Losses .........................................................10
Noninterest Income ................................................................11
Noninterest Expense ...............................................................12
Income Tax Expense ................................................................13
Investment Securities Held to Maturity ............................................14
Securities Available for Sale .....................................................14
Loan Portfolio ....................................................................14
Reserve for Loan Losses ...........................................................15
Nonperforming Assets ..............................................................17
Deposits ..........................................................................17
Short-Term Borrowings .............................................................17
Other Indebtedness ................................................................18
Stockholders' Equity ..............................................................18
Trust and Investment Management Services ..........................................18
Liquidity .........................................................................18
Interest Rate Sensitivity, Interest Rate Risk and Asset/Liability Management ......19
Insurance Services ................................................................22
Recent Legislation ................................................................22
[PHOTO] [PHOTO] [PHOTO]
John M. Mendez Robert L. Buzzo E. Stephen Lilly
President and CEO President and CEO COO
First Community First Community Bank, N.A.; First Community
Bancshares, Inc. Vice President and Bancshares, Inc. and
Secretary First Community Bank, N.A.
First Community
Bancshares, Inc.
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Individual Retirement Accounts Visa Check Card
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
INTRODUCTION
This discussion should be read in conjunction with the consolidated financial
statements, notes and tables included throughout this report and the First
Community Bancshares, Inc. (the "Company" or "First Community") Annual Report on
Form 10-K. All statements other than statements of historical fact included in
this Annual Report, including statements in the Message to Stockholders and in
Management's Discussion and Analysis of Financial Condition and Results of
Operations are, or may be deemed to be, forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Exchange Act of 1934. Such information involves risks and uncertainties that
could cause actual results differing from those projected in the forward-looking
information.
Many factors could cause the Company's actual results to differ materially from
the results contemplated by the forward-looking statements. Some factors which
could negatively affect the results include: (1) general economic conditions,
either nationally or within the Company's markets, could be less favorable than
expected, (2) changes in market interest rates could affect interest margins and
profitability, (3) competitive pressures could be greater than anticipated, (4)
legal or accounting changes could affect the Company's results, (5) acquisition
cost savings may not be realized or the anticipated income may not be achieved,
and (6) adverse changes could occur in the securities and investments markets.
Forward-looking statements made herein reflect management's expectations as of
the date such statements are made. Such information is provided to assist
stockholders and potential investors in understanding current and anticipated
financial operations of the Company and is included pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995.
First Community is a multi-state holding company headquartered in Bluefield,
Virginia. With total assets of $1.218 billion at December 31, 2000, First
Community through its community banking subsidiary, First Community Bank, N. A.
("FCBNA"), provides financial, mortgage brokerage and origination and trust
services to individuals and commercial customers through 33 banking locations in
West Virginia, Virginia and North Carolina as well as ten mortgage brokerage
facilities operated by United First Mortgage, Inc. ("UFM"). UFM is a wholly
owned subsidiary of FCBNA.
"First Community Bank is key to our success. Their convenience and ease of
service is what really differentiates them from other banks."
================================================================================
Profile--Acken Signs
Acken Signs, the region's largest outdoor signage company, began when owner Bud
Acken purchased a local sign manufacturing company. The company has been in
business since 1971 and currently employs approximately 70 people.
The bank has played a vital role in the success of Acken Signs. "First Community
Bank is key to our success," says Bud Acken. "Their convenience and ease of
service is what really differentiates them from other banks. I feel comfortable
knowing I can walk into the bank, no matter what time of day and get the service
I need." Bud Acken has been a customer of the bank for over 30 years.
[PHOTO Bud & Tammy Acken Acken Signs o Bluefield, VA]
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Trust and Financial Services Mortgage Loans Auto Loans
RECENT ACQUISITION
On October 31, 2000, the Company acquired Citizens Southern Bank, Inc.,
("Citizens") of Beckley, West Virginia in a merger which was accounted for as a
"purchase" transaction. The acquisition of Citizens added an additional $67.8
million in total resources to the Company. Of the total resources acquired, the
merger added an additional $48.4 million in loans and $51.6 million in total
deposits. As a result of the combination of Citizens and FCBNA, the Company
realized $2.8 million in intangible assets recorded as goodwill associated with
the transaction. "Purchase" accounting does not require restatement of prior
years' results and, accordingly, the results of operation of Citizens are
reflected from the date of acquisition forward. Pro forma results of earnings,
as if Citizens had been acquired at the beginning of the year, would not be
materially different from amounts reported for the year ended December 31, 2000.
NET INCOME
$ in millions
1996 1997 1998 1999 2000
- ---- ---- ---- ---- ----
13.9 15.1 13.1 16.9 17.1
SUMMARY FINANCIAL RESULTS
Net income for 2000 was $17.1 million, an increase of $211,000 over $16.9
million in 1999 and an increase of $4.0 million over 1998 net income of $13.1
million. Excluding the impact of non-recurring items, including a $1.8 million
pre-tax non-recurring gain recognized in 1999 relative to a check clearing loss
recorded in 1996, net earnings on an operational basis are up by 9% or
approximately $1.4 million over 1999. Basic earnings per share also increased to
a record level of $1.95 per share, up from $1.92 and $1.49 in 1999 and 1998,
respectively. Cash earnings per share for 2000 were $2.16, up from $2.12 in 1999
and $1.69 in 1998. Cash earnings per share represent earnings per share (EPS)
adjusted for non-cash charges such as amortization of goodwill and other
intangibles.
The increase in net income between 1999 and 2000 was driven by a $2.3 million or
5.3% increase in net interest income and a $1.8 million increase in non-interest
income. The improvement in net interest income was the result of continued
strong loan demand as demonstrated by a $118.7 million increase in outstanding
loans. Interest expense and funding was managed through use of a combination of
retail deposits and Federal Home Loan Bank borrowings. Interest and fees on
loans increased from $58.0 million in 1999 to $68.4 million in 2000, a $10.4
million, or 17.93% increase. Additionally, the cost of funds experienced a $7.1
million dollar increase over 1999.
As a result of continuous and aggressive management of operating costs, the
Company was able to realize a $440,000 decrease in operating expense between
2000 and 1999, excluding the impact of Citizens and UFM. As expected, the first
full year of including UFM and the partial year inclusion of Citizens resulted
in a $3.5 million increase in total operating cost.
"Because of First Community Bank, we have been able to pay off our loans in a
timely manner. Our loan officer has been very helpful in our relationship. He
really cares about our needs and what we want to accomplish."
================================================================================
Profile--DMI Corporation
DMI Corporation, a real estate development and management company, was
established in 1983 by Sterling Nichols and Larry McCardle. DMI develops student
housing and townhomes, as well a single family dwellings.
First Community Bank has provided DMI with financing for the student housing
sector of their business. According to Sterling Nichols, "Because of the bank,
we have been able to pay off our loans in a timely manner. Our loan officer has
been very helpful in our relationship. He really cares about our needs and what
we want to accomplish."
[PHOTO Sterling Nichols and Larry McCardle DMI Corporation o Williamsburg, VA]
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Home Improvement Loans Commercial Loans
RETURN ON AVERAGE EQUITY
% Percent
1996 1997 1998 1999 2000
- ---- ---- ---- ---- ----
16.26 16.05 13.02 16.23 15.70
The $3.8 million increase in net income between 1998 and 1999 is largely
attributable to a $3.4 million decrease in the provision for loan losses
associated with a commercial loan foreclosure occurring in 1998. The 1999
results benefitted from the aforementioned $1.8 million recovery on a check
clearing loss and a $1.3 million reduction in operating expense when comparing
1998 and 1999.
The Company's key profitability ratios of Return on Average Assets (ROA) and
Return on Average Equity (ROE) continue to reflect the strong earnings
performance of the Company and substantially exceed the average of the Company's
national peers. ROA, which measures the Company's stewardship of assets, was at
1.51%, compared to 1.62% in 1999 and 1.24% in 1998. ROE for the Company remained
strong at 15.70% in 2000, compared with 16.23% in 1999 and 13.02% in 1998. These
results relate, in large part, to the Company's emphasis on pricing to achieve
desired asset yields and acceptable funding costs as well as a focus on
operational efficiency. The decline in ROE in 2000 is reflective of the general
increase in equity capital throughout the most recent year as the Company's
total equity increased by $17.2 million, or 16.66% through retained earnings and
improvements in comprehensive income related to the "Available for Sale"
securities portfolio. The reduction in ROA between 1999 and 2000 reflects growth
in assets and the impact of marginal pricing or additions to the credit
portfolio. The lower ROA in 1998 is primarily attributable to the larger
provision for loan losses in that year.
"First Community helped us with many loans as we needed to expand our business.
They really assisted us in the past, and we appreciate that. No matter what the
time or how busy they are, they always go out of their way to help us and that's
important."
================================================================================
Profile--The Herman Dairy Farm
Herman Dairy Farm, located in Taylorsville, NC, milks over 450 cows. The Hermans
are members of Dairy Farmers of America. Family member Ken Herman sits on The
National Dairy Board and is a member of the American Farm Council.
Ask any member of The Herman Family if they would be where they are today
without First Community Bank, and the answer would be, "no." "First Community
helped us with many loans as we needed to expand our business. They really
assisted us in the past, and we appreciate that. No matter what the time or how
busy they are, they always go out of their way to help us and that's important."
[PHOTO The Herman Family Herman Dairy Farm o Taylorsville, NC]
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OverdraftHonor Hourly Rate CD Preferred Money Market
FIVE-YEAR SELECTED FINANCIAL DATA
(Amounts in Thousands, Except Percent and Per Share Data)
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Balance Sheet Summary (at end of period):
Loans, net of unearned income .................. $ 822,826 $ 704,096 $ 611,493 $ 671,817 $ 547,703
Reserve for loan losses ........................ 12,303 11,900 11,404 11,406 8,987
Securities ..................................... 283,298 290,873 277,210 270,969 236,441
Total assets ................................... 1,218,017 1,088,162 1,053,988 1,042,304 837,597
Deposits ....................................... 899,903 833,258 875,996 853,507 643,497
Other indebtedness ............................. 138,015 10,218 18,176 24,330 15,000
Stockholders' equity ........................... 120,682 103,488 101,719 97,842 89,258
Summary of Earnings:
Total interest income .......................... $ 85,958 $ 76,492 $ 81,213 $ 75,834 $ 64,941
Total interest expense ......................... 39,379 32,250 38,128 32,890 26,933
Provision for loan losses ...................... 3,986 2,893 6,250 4,963 2,273
Noninterest income ............................. 12,492 10,732 11,182 8,661 9,070
Noninterest expense ............................ 30,968 27,457 28,752 24,672 24,358
Income tax expense ............................. 7,054 7,722 6,164 6,876 6,530
Net income ..................................... 17,063 16,852 13,101 15,094 13,917
Per Share Data:
Basic and diluted earnings per common share .... $ 1.95 $ 1.92 $ 1.49 $ 1.71 $ 1.58
Cash earnings per share* ....................... 2.16 2.12 1.69 1.85 1.63
Cash dividends ................................. 0.95 0.88 0.84 0.83 0.73
Book value at year-end ......................... 13.35 11.86 11.60 11.08 10.11
Selected ratios:
Return on average assets ....................... 1.51% 1.62% 1.24% 1.59% 1.73%
Return on average equity ....................... 15.70% 16.23% 13.02% 16.05% 16.26%
Dividend payout ................................ 48.72% 45.83% 56.38% 48.54% 46.20%
Average equity to average assets ............... 9.64% 9.96% 9.50% 9.90% 10.64%
Risk based capital to risk adjusted assets...... 12.93% 13.22% 13.25% 11.96% 17.02%
Leverage ratio ................................. 8.37% 8.25% 7.37% 6.96% 10.33%
* Cash earnings per share represent earnings per share adjusted for
noncash charges such as amortization of goodwill and other intangibles.
8
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Roth IRAs Club 50 Trust and Financial Services
COMMON STOCK AND DIVIDENDS
The Company's common stock has historically traded in the over-the-counter
market; however, on March 1, 2001, the Company began trading on the Nasdaq
SmallCap Market under the symbol FCBC.
Book value per common share was $13.35 at December 31, 2000, compared with
$11.86 at December 31, 1999 and $11.60 at the close of 1998. The year-end market
price for First Community common stock of $17.75 represents 133% of the
Company's book value as of the close of the most recent fiscal year and results
in total market capitalization of $160.5 million. Utilizing the year-end market
price and 2000 basic earnings per share, First Community common stock closed the
year trading at 9.1 times basic and diluted earnings per share.
Dividends for 2000 totaled $.95 per share, up $.07 or 7.95% from the $.88 paid
in 1999. The 2000 dividends resulted in a cash yield on year-end market value of
5.35%. Total dividends paid for the current and prior year totaled $8.3 and $7.7
million, respectively.
Cash
Bid Book Value Dividends
High Low Per Share Per Share
---- --- ---------- ---------
2000
First Quarter ................ $21.00 $17.25 $12.02 $0.22
Second Quarter ............... 18.88 15.00 12.25 0.23
Third Quarter ................ 16.13 15.00 12.69 0.23
Fourth Quarter ............... 17.00 14.00 13.35 0.27
-----
$0.95
1999
First Quarter ................ $23.20 $20.70 $11.75 $0.20
Second Quarter ............... 22.90 18.50 11.60 0.21
Third Quarter ................ 23.50 18.88 11.74 0.22
Fourth Quarter ............... 21.38 18.00 11.86 0.25
-----
$0.88
NET INTEREST MARGIN
Net interest margin measures net interest income as a percentage of average
earning assets. In 2000, the net interest margin was 4.86% versus 5.03% in 1999,
but above the 4.81% level attained in 1998. The current year's decrease was due
in large part to deposit rate and other borrowing rate increases of 43 basis
points, partially offset by an earning asset yield increase of 27 basis points.
In general, market interest rates and competitive pressures for loans and
deposits produced a lower margin. Average loans increased $111 million during
2000, resulting in an additional $10.3 million in loan interest income and a
$9.3 million increase in total interest income. Interest on deposits for the
same period increased $1.6 million and interest expense on borrowings increased
by $5.5 million.
In 2000, significant increases in the loan portfolio were funded with wholesale
advances from the FHLB. The FHLB provides an alternative funding source that
occasionally offers less expensive funding than traditional retail sources.
Other short-term borrowings, including retail repurchase agreements with bank
customers and FHLB advances, increased $90.8 million with a corresponding 141
basis points increase in the cost of these sources.
NET INTEREST INCOME
The primary source of the Company's earnings is net interest income, the
difference between income on earning assets and the cost of funds supporting
those assets. Significant categories of earning assets are
NET INTEREST MARGIN
% Percent
1996 1997 1998 1999 2000
- ---- ---- ---- ---- ----
5.39 5.25 4.81 5.03 4.86
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Educational IRAs Bonus Checking FCB Travel Group
loans and securities while deposits and short-term borrowings represent the
major portion of interest-bearing liabilities.
On a tax equivalent basis, net interest income increased $2,193,000 or 4.6% in
2000 compared to an increase of $1,250,000, or 2.7%, in 1999 and $726,000, or
1.6%, in 1998. Net interest income in 2000 was boosted by an increase in average
earning assets of $79 million, or 8.24%, compared with a 1999 decrease of 1.8%
and a 1998 increase of 10.9%. The current year increase in average earning
assets was the result of a $111 million increase in loans with an offsetting $20
million decrease in investment securities. Other short-term investments
decreased $12 million. The 1999 decrease of $17.5 million in average earning
assets was primarily the result of reductions in interest-bearing balances and
federal funds sold. This occurred in reaction to deposit level decreases and the
general repricing of the interest-bearing deposit portfolio to achieve desired
net interest margins.
Average interest-bearing liabilities increased $82 million in 2000, which
included increases in short-term borrowings of $91 million, primarily used to
fund loan growth, and decreases of $3 and $6 million in long-term debt and
interest-bearing deposits, respectively.
The increase in tax equivalent net interest income in 1998 was constrained by
the sale of approximately $14.0 million in credit card revolving loan accounts
during the latter part of the year which resulted in a reduction in interest and
fees on loans of approximately $747,000 during 1998. The proceeds of the sale
were reinvested in interest-bearing balances, which yielded substantially lower
earnings and, accordingly, reduced interest earnings in 1998. The portfolio sale
was part of an overall exit strategy from the credit card line of business.
TAX EQUIVALENT NET INTEREST INCOME
$ in thousands
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
40,395 45,700 46,426 47,676 49,870
PROVISION FOR LOAN LOSSES
The provision for loan losses represents charges against operations to establish
reserves for loan losses inherent in the Company's loan portfolio. The level of
expense, as well as the required level of reserves, is dependent upon a number
of factors including historical loss ratios by loan type, assessment of specific
credit weaknesses within the portfolio, concentrations of credit type,
assessment of the prevailing economic climate, and other factors which may
affect the overall condition of the loan portfolio.
"When asked a question, First Community Bank always gives you a straight answer.
In my line of business, I need answers and I need them fast. I can always count
on First Community Bank to do just that."
================================================================================
Profile--REIC
Jim Hern, president of REIC, Research Environmental Industry Consultants,
began his company in 1984. At a time when trying to find funding without equity
was hard, First Community Bank put their trust in Hern's company. REIC had
specialized equipment and needed financing to grow the business.
When asked why Hern chose First Community Bank over many banks in the area, he
said, "They are more responsive. When asked a question, they always give you a
straight answer. In my line of business, I need answers and I need them fast.
I can always count on First Community Bank to do just that."
[PHOTO Dr. Jim Hern REIC o Beckley, WV]
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Safe Deposit Boxes Personal Loans Ideal Account
The provision for loan losses was $4.0 million in 2000, $2.9 million in 1999 and
$6.3 million in 1998. The current year provision of $4.0 million reflects a
provision increase of $1.1 million in response to adjustments to the net
realizable value of two commercial accounts that are in various stages of
resolution, as well as a substantial increase in outstanding loan balances at
December 31, 2000, in comparison to the prior year.
An increase in the provision for loan losses in 1998 of $1.3 million, as
compared to 1997, was largely the result of a second quarter provision taken in
response to a commercial loan foreclosure. Elevated provisions in 1998 also
included higher levels of consumer loan charge-offs in the Company's credit card
division and indirect auto financing program. Each of these programs was
substantially curtailed in 1998.
NONINTEREST INCOME
Non-interest income consists of fiduciary income, service charges on deposit
accounts and income derived from the origination and sale of mortgages. The
largest contributor to the current year increase in non-interest income results
from revenue derived from origination and sale of mortgages through the mortgage
origination offices of UFM. UFM was acquired in the latter part of 1999, and in
the first full year of operations as a subsidiary of First Community Bank,
generated a $3.5 million increase in gross revenues from the mortgage banking
operations. Total noninterest income reached $12.5 million in 2000, a $1.8
million increase or 16.8% over the $10.7 million in 1999 and a $1.3 million or
11.6% increase over the 1998 total of $11.2 million. Excluding the previously
mentioned nonrecurring gain of $1.8 million recognized in the fourth quarter of
1999, the operational increase in noninterest revenues in 2000 was $3.6 million,
or 40.4%.
Noninterest income for 1999 was lower in comparison to 1998 due to the inclusion
of a pension termination gain of $1,062,000 (net of federal excise tax of
$764,000) in 1998 as a result of the Company's termination of its Defined
Benefit Pension Plan, which was completed in the first quarter of 1998. Also
included in other operating income for 1998 are gains totaling $1.2 million on
the sale of substantially all revolving loan accounts and all merchant account
relationships in the Company's credit card division. The Company's decision to
exit this business was based on its relatively small share of this market,
vigorous competition for credit card accounts and rising consumer delinquencies.
"I feel confident that the relationship with First Community Bank is going to
open up new doors for us."
================================================================================
Profile--United First Mortgage, Inc.
The President and CEO of United First Mortgage, Inc. (UFM), Stan Vickhouse, has
been in the mortgage business for 34 years. Stan was approached by First
Community Bank less than two years ago to purchase the company because they
wanted to expand into the mortgage business. Now, UFM is a wholly owned
subsidiary of First Community Bank.
"Over the years, many different banks have approached me, but what really
attracted me to First Community Bank was the youth of their leadership. It's
very exciting to be a part of it. Their diversity of locations was also very
appealing. I feel confident that this relationship is going to open up new doors
for us," said Stan Vickhouse.
[PHOTO United First Mortgage, Inc. Richmond, VA]
11
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Construction Loans Jumbo CDs Flex CDs Just Checking
Noninterest revenues from fiduciary services declined slightly during 2000 in
comparison to the prior year due to a general decline in estate activity which
is cyclical in nature. Fiduciary income totaled $1.8 million in 2000 versus $2.1
million in 1999 and $1.7 million in 1998. Trust revenues are comprised of fees
for asset management, employee benefit administration and estate settlement.
Expenses associated with the operation of the Trust and Financial Services
Division are included in noninterest expense.
Service charges on deposit accounts are one of the primary sources of
noninterest income. Service charge income totaled $4.0 million in 2000, an
increase of $367,000 or 10.0% from 1999. The current year increase is largely
attributed to a program entitled "OverdraftHonor(TM)" which was developed for
well managed demand deposit accounts and allows the customer greater flexibility
in handling overdrafts to their accounts. As a result of this program,
approximately $366,000 in additional demand deposit account charges were
recorded in 2000. The current year increase compares with a 2.8% decrease or
$106,000 between 1998 and 1999.
Other service charges, commissions and fees increased by $266,000, or 24.3%, in
2000 versus 1999. This increase was primarily the result of the collection of
rental revenues from properties acquired by the Company's banking subsidiary in
the fourth quarter of 1999 as part of a settlement in recovery of a
check-clearing loss incurred in 1996.
Additionally, with the significant increase in the size and volume of business
conducted by UFM, the revenues associated with the mortgage banking division are
presented separately and have increased significantly due to the full-year
impact of UFM which contributed $4.7 million in revenues in 2000 versus $1.2
million in 1999.
NONINTEREST EXPENSE
Noninterest expense consists of salaries and benefits, occupancy, equipment and
all other operating expense incurred by the Company. Noninterest expense totaled
$31.0 million in 2000, compared with $27.5 million and $28.8 million in 1999 and
1998, respectively. The increase in noninterest expense in 2000 of $3.5 million
relates largely to the impact of a full year's operation of UFM and two months
of
"When I'm expanding and need money to complete a transaction, First Community
Bank gives me the quickest turnaround. Other banks in the area just don't know
me as well and don't understand my needs like First Community Bank."
================================================================================
Profile--Ramey Automotive Group
Jim Ramey, president and founder of Ramey Automotive Group, began his venture
into the automobile industry with only one car on his mother's front lawn which
he sold for $1,500. He is now the largest used car dealer in West Virginia and
the 8th largest used car dealer in the United States.
First Community Bank has played a vital role in the expansion of Ramey's
business."When I'm expanding and need money to complete a transaction, First
Community Bank gives me the quickest turnaround. They also have local decision
making abilities and an honest word. Other banks in the area just don't know me
as well and don't understand my needs like First Community Bank."
[PHOTO Jim Ramey Ramey Automotive Group o Princeton, WV]
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Overdraft Honor Hourly Rate CD Silverline
NET OVERHEAD RATIO
% Percent
1996 1997 1998 1999 2000
- ---- ---- ---- ---- ----
2.22 1.84 2.06 1.96 1.64
operation of Citizens. UFM and Citizens contributed an additional $3.8 million
and $144,000, respectively, to noninterest expense over the prior year.
Reductions of approximately $440,000 were achieved in the existing banking
operations through the utilization of newer equipment and continued closer
scrutiny of operating budgets and expenditures. Also, cost reductions were
achieved from the sale of other real estate owned and closed banking facilities.
During 1999, savings were also generated through the application of a more
centralized purchasing environment and the introduction of technology for the
electronic storage and retrieval of reports, which significantly reduced paper
costs and the aggregate cost of supplies, which declined by $425,000 in 1999.
Salaries and employee benefits increased $2.9 million or 22.2% when comparing
2000 with 1999 and $890,000 in 1999 with comparison to 1998. These increases
relate almost exclusively to the addition of UFM for part of 1999 and all of
2000 and the impact of two months of Citizens' operations in 2000.
Occupancy expense increased $350,000 or 16.4% between 2000 and 1999 and $185,000
or 9.5% between 1999 and 1998. The increases in both years were largely
attributable to UFM which added $270,000 and $84,000 in 2000 and 1999,
respectively. Additionally, the current year was impacted by two months of
operations of Citizens and existing facility cost increases.
Furniture and equipment cost remained relatively flat in the current year after
a $222,000 decrease in the prior year. Both years are reflective of the reduced
maintenance cost on newer equipment that has been added over the last several
years and newer check processing technology. The Company remains committed to
increasing its technological competency and deploying methods that reduce
operating cost, maximize efficiency and increase the level of customer
satisfaction.
The Company's net overhead ratio (noninterest expense less noninterest income
excluding security gains and nonrecurring gains divided by average earning
assets) is a measure of its ability to manage and control costs. As this ratio
decreases, more of the net interest income earned is realized as net income. The
net overhead ratios for 2000, 1999 and 1998 were 1.64%, 1.96% and 2.06%,
respectively.
The Company's efficiency ratio also measures management's ability to control
costs and maximize net revenues. The efficiency ratio is computed by dividing
noninterest expense by the sum of net interest income plus noninterest income
(excluding all nonrecurring items). The efficiency ratios for 2000, 1999 and
1998 were 45.8%, 44.2%. and 47.4%, respectively. The increase in the current
year is reflective of the higher operating costs incurred by UFM including the
development of a new wholesale mortgage operation in the latter part of 2000.
INCOME TAX EXPENSE
Income tax expense totaled $7.1 million in 2000, compared with $7.8 million in
1999 and $6.2 million in 1998. The effective tax rate for 2000 was 29.3% as
compared with 31.6% for 1999 and 32.0% in 1998. The reduced effective rate
between 1999 and 2000 is reflective of the higher level of tax-exempt earnings
generated from municipal bonds included within the Company's investment
portfolio. This change is also reflective of the development of tax strategies
that have facilitated further reductions in taxable earnings.
The major difference between the statutory tax rate and the effective tax rate
(income tax expense divided by pre-tax book income) results principally from
income not taxable for Federal income tax purposes. The primary categories of
non-taxable income are state and municipal securities and industrial revenue
bonds and tax-free loans.
13
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Preferred Money Market Easy Checking XPress PC Banking
INVESTMENT SECURITIES HELD TO MATURITY
Investment securities held to maturity are comprised largely of U.S. Agency
obligations and state and municipal securities. U.S. Agency obligations include
securities issued by various government corporations and agencies, including
Federal Home Loan Bank (FHLB), Federal National Mortgage Association (FNMA),
Government National Mortgage Association (GNMA), Student Loan Marketing
Association (SLMA), Federal Farm Credit Bank (FFCB), and Federal Home Loan
Mortgage Corporation (FHLMC).
Obligations of States and Political Subdivisions, which represent the largest
portion of the held to maturity portfolio and totaled $72.3 million at December
31, 2000, are comprised of high-grade municipal securities generally carrying
AAA bond ratings, most of which also carry credit enhancement insurance by major
insurers of investment obligations. The average maturity of the investment
portfolio decreased from 9.63 years in 1999 to 8.92 years in 2000 with the
tax-equivalent yield increasing from 8.46% at year-end 1999 to 8.54% at the
close of 2000.
The held to maturity investment portfolio totaling $75.7 million decreased $3.1
million between 1999 and 2000. This decrease is the result of maturities,
prepayments and calls occurring within the portfolio. The net cash flow
generated by the portfolio during 2000 was invested in new loans supporting
higher loan demand in the current year.
SECURITIES AVAILABLE FOR SALE
Securities available for sale are used as part of management's asset/liability
strategy. These securities may be sold in response to changes in interest rates,
changes in prepayment risk, for liquidity needs and other factors. These
securities are recorded at market value.
At December 31, 2000, the Company had $207.6 million in securities available for
sale, compared with $212.1 million at year-end 1999. The reduction in the
portfolio reflects the redeployment of funds received from payments on these
debt securities as a result of maturities, calls and prepayments.
The book value of securities available for sale exceeded market value at
year-end 2000 by $2.6 million. The decline in the market value of the securities
available for sale is a direct result of the inverse relationship between
prevailing market rates and the pricing of the securities. When market rates
increase for similar instruments that are currently in the portfolio, the
corresponding price of the security falls and the opposite occurs as rates fall.
The tax-equivalent purchase yield on securities available for sale, which was
relatively unchanged in the current year, was 6.54% in 2000 and 6.53% in 1999.
The average maturity of the portfolio was 11.5 years and 12.4 years at December
31, 2000 and 1999, respectively. The slight decline in average maturity is the
result of maturities, calls and mortgage-backed security principal payments and
prepayments. Most longer-term securities in the portfolio have call provisions
which could result in redemption prior to their final maturity.
LOAN PORTFOLIO 2000
Real Estate - Residential 37.1%
Real Estate - Commercial 27.0%
Loans to Individuals 16.4%
Commercial, Financial and Agricultural 10.6%
Real Estate - Construction 8.9%
LOAN PORTFOLIO
The loan portfolio is geographically diversified among loan types and industry
segments. Commercial and commercial real estate loans represent 37.6% of the
total portfolio. During 2000, commercial real estate loans increased to $222.6
million and now comprise 27.0% of total loans. Commercial loans decreased by
$5.9 million and now represent 10.6% of total loans. The combined commercial and
commercial real estate sectors increased by $8.4 million or 2.8% in 2000. Real
estate construction loans, which comprise 8.9% of the portfolio, grew $48.4
million, a 196% increase. This category includes both residential and commercial
construction with the increase largely attributable to a number of large
commercial office buildings and apartment projects. Additionally, consumer loans
increased by $7.1 million, or 5.6%, from
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XPress Phone Banking Cash Management Accounts
$127.2 million at December 31, 1999 to $134.3 million at the close of 2000.
Consumer loans represent 16.4% and 18.1% of the portfolio at the close of 2000
and 1999, respectively. Residential real estate loans experienced the largest
dollar change. This portfolio increased $54.1 million, or 21.5% during 2000.
Residential real estate loans represent 37.1% of the total portfolio at the end
of 2000.
Loans, net of unearned income, were $822.8 million at year-end 2000. The
increase of $118.7 million represents 16.9% growth from the $704.1 million level
at December 31, 1999. The fourth quarter acquisition of Citizens Southern
accounted for $48.1 million of this growth. The addition of these loans did not
materially affect the distribution of loan types within the portfolio. Emphasis
on relationship management and loan development resulted in the significant
increase in the total loan portfolio despite continued strong competition for
all types of loans from other banks and financing sources. The Company's
underwriting standards emphasize close scrutiny of loans through an evaluation
of historic and projected cash flow, credit history and collateral. Larger loans
are also subjected to annual loan review to assess ongoing credit quality.
The loan to deposit ratio increased to 91% at December 31, 2000, from 85% at
December 31, 1999. The increase in the loan to deposit ratio is a result of the
$118.7 million increase in the loan portfolio coupled with a smaller increase in
deposits of $66.6 million. The level of retail funding through deposits has been
impacted by greater competition from both bank and non-banking institutions and
has also led to a higher level of loans relative to deposits.
RESERVE FOR LOAN LOSSES
The reserve for loan losses represents reserves available to absorb estimated
loan losses and other credit-related charges. Loan losses arise primarily from
the loan portfolio, but may also be derived from other sources, including
commitments to extend credit, guarantees, and standby letters of credit. The
reserve for loan losses is increased by both charges to earnings in the form of
provisions for loan losses and recoveries of prior loan charge-offs, and
decreased by loans charged off. The provision for loan losses is calculated to
bring the reserve to a level which, in management's judgment, is considered
adequate to absorb losses inherent in the loan portfolio.
"First Community Bank has opened many doors for us and has been crucial to
helping us grow. I feel comfortable knowing that anyone in the bank can help me.
First Community always provides excellent service."
================================================================================
Profile--Woody Lumber
Woody Lumber, a family owned and operated business, began in 1935. Since
continuing tradition was so important, all of the Woodys pitched in and worked
hard to develop the family business. The company exports various types of lumber
throughout the world.
The relationship between First Community Bank and Woody Lumber began with the
founding father, Don Woody. Since that time, they have continued that
partnership. "First Community Bank has opened many doors for us and has been
crucial to helping us grow," said Dale Woody. "I feel comfortable knowing that
anyone in the bank can help me. First Community always provides excellent
service."
[PHOTO Dale Woody Woody Lumber o Buckhannon, WV]
15
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Mac Card Repurchase Agreements Certificates of Deposit
Management performs monthly assessments to determine the appropriate level of
the reserve. Differences between actual loan loss experience and estimates are
reflected through adjustments that are made either increasing or decreasing the
loss provision based upon current expectations. Commercial, consumer and
mortgage loan portfolios are separated for purposes of determining the allowance
for loan losses. Elements of the allowance include: specific identification of
individual credits, allocations to the homogeneous pools of loans represented
and allocations based upon management's judgment. These elements are impacted by
qualitative and quantitative factors about both the macro and micro economic
conditions as reflected in the portfolio of loans and the economy as a whole.
Factors considered in this evaluation include, but are not necessarily limited
to, estimated losses from loan and other credit arrangements, general economic
conditions, changes in credit concentrations or pledged collateral, historical
loan loss experience, and trends in portfolio volume, maturity, composition,
delinquencies, and nonaccruals. While management has attributed reserves to
various portfolio segments, the allowance is available for the entire portfolio.
Differences between actual loan loss experience and estimates are reviewed on a
periodic basis and adjustments are made to those estimates.
The reserve for loan losses represents 186% of nonperforming loans at year-end
2000 versus 130% and 140% at December 1999 and 1998, respectively. When other
real estate is combined with nonperforming loans, reserves equal 137% of
nonperforming assets at the end of 2000 versus 107% and 98% at December 31, 1999
and 1998, respectively.
Net charge-offs were $4.6 million in 2000, compared with $2.4 million in 1999
and $6.3 million in 1998. The $2.2 million increase in net charge-offs in 2000
is principally attributable to a commercial loan charge-off relating to
foreclosure of a residential land development loan in Beckley, West Virginia and
the write-down of another commercial loan to more accurately reflect the current
market value of the real estate securing the loan. Net charge-offs for 1999
reflect normally occurring loan loss activity, while 1998 charges included a
commercial loan charge-off of $2.9 million relating to a failed furniture
assembly plant in Princeton, West Virginia.
"For over 40 years, First Community Bank has provided us with excellent products
and services not only for our business, but for our personal needs as well. They
are a very strong and sound institution and their track record proves it."
================================================================================
Profile--The Cortes
The Cortes are former owners of Corte Construction Company. They focused most of
their business efforts throughout West Virginia and the surrounding region. They
have built many buildings throughout the area including interstate rest areas,
and commercial and office buildings.
The relationship between First Community Bank and the Cortes is built on solid
ground. The Cortes constructed the facility that now houses the bank's Corporate
Center. "For over 40 years, First Community Bank has provided us with excellent
products and services not only for our business, but for our personal needs as
well. They are a very strong and sound institution and their track record proves
it," said Betty Corte.
[PHOTO Stelio and Betty Corte Retirees o Bluefield, VA]
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Individual Retirement Accounts Visa Check Card
NONPERFORMING ASSETS
Nonperforming assets include loans on which interest accruals have ceased, loans
contractually past due 90 days or more and still accruing interest, and other
real estate owned (OREO) pursuant to foreclosure proceedings. Total
nonperforming assets were $9.0 million at December 31, 2000. The levels of
nonperforming assets for the last five years are presented in the table below.
DECEMBER 31
(Amounts in Thousands) 2000 1999 1998 1997 1996
Nonaccrual loans.............................................. $5,397 $ 7,889 $ 7,763 $ 9,988 $5,4??
Loans 90 days or more past due................................ 1,208 1,259 377 4,391 7??
Other real estate owned....................................... 2,406 1,950 3,547 1,472 2,2??
------ ------- ------- ------- ------
$9,011 $11,098 $11,687 $15,851 $8,4??
Nonperforming loans as a percentage of total loans............ 0.8% 1.3% 1.3% 2.1%
Nonperforming assets as a percentage of total loans
and other real estate owned................................ 1.1% 1.6% 1.9% 2.4%
Reserve for loan losses as a percentage of
nonperforming loans........................................ 186.3% 130.1% 140.1% 79.3% 14??
Reserve for loan losses as a percentage of
nonperforming assets....................................... 136.5% 107.2% 97.6% 72.0% 10??
Nonperforming assets decreased $2.1 million between 1999 and 2000 primarily as a
result of a $2.5 million or 31.6% decline in nonaccrual loans; however, this
decline was partially offset by an increase of $456,000 in other real estate
owned. The decrease in nonaccrual loans resulted from the resolution,
liquidation, or write-down of certain commercial loan relationships, while loans
past due over 90 days were reduced slightly through collection activity.
Activity in the other real estate owned category reflects the addition and
deletion of various commercial and residential real estate acquired through
foreclosure throughout the year.
DEPOSITS
Total deposits at December 31, 2000, increased $66.6 million or 8.0% when
compared to December 31, 1999, $48.4 million of which were obtained though the
acquisition of Citizens Southern Bank, Inc. on October 31, 2000. Not considering
the acquisition, deposits increased for the year by $18.2 million. The Company
also utilized lower cost, short-term advances from the Federal Home Loan Bank to
supplement the funding needs of the Company throughout 1999 and 2000. In 2000,
the average rate paid on all interest-bearing liabilities was 4.43%, up from
4.00% in 1999.
Average deposits decreased to $845.8 million for 2000 versus $854.0 million in
1999, a decrease of less than 1%. Average savings deposits decreased by $10.1
million while time deposits increased by $10.7 million. Average interest-bearing
demand and noninterest-bearing demand deposits decreased by $6.4 million and
$2.4 million, respectively.
SHORT-TERM BORROWINGS
The Company's short-term borrowings consist primarily of overnight Federal Funds
purchased from the FHLB and securities sold under agreements to repurchase. This
source of funding decreased $81.6 million between 1999 and 2000. The decrease in
short-term borrowings (primarily Federal Funds purchased) in
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Trust and Financial Services Mortgage Loans Auto Loans
2000 was accompanied by an offsetting increase in other indebtedness used to pay
off the short-term borrowings in exchange for term advances from the FHLB. In
1999 and 2000, the price sensitivity of retail deposits was closely monitored
and managed in order to achieve the lowest overall cost of funding. Short-term
borrowings were used to fill the gap in funding and short-term liquidity needs.
OTHER INDEBTEDNESS
FHLB borrowings and other indebtedness increased by $127.8 million in 2000. The
increase is primarily attributable to the substantial loan growth experienced
throughout the year. Additional term borrowings were also used to pay off the
$86.7 million in overnight funding from the FHLB. This indebtedness of
approximately $125 million, with original maturities varying from two to ten
years, is callable at quarterly intervals after a predefined lockout period of
three to six months. These call options could significantly shorten the lives of
these debt instruments.
STOCKHOLDERS' EQUITY
Risk-based capital ratios are a measure of the Company's capital adequacy. At
December 31, 2000, the Company's Tier I capital ratio was 11.68% compared with
11.96% in 1999. Regulators use risk-based capital ratios and the leverage ratio
to measure the capital adequacy of banking institutions. Risk-based capital
guidelines, risk weighted balance sheet assets, and off-balance sheet
commitments are used in determining capital adequacy. The Company's total
risk-based capital-to-asset ratio was 12.93% at the close of 2000 compared with
13.22% in 1999. The leverage ratio is the measurement of total tangible equity
to total assets. The Company's leverage ratio at December 31, 2000 was 8.37%
compared to 8.25% at December 31, 1999. The ratings are well above the minimum
levels prescribed by the Federal Reserve as depicted in Note 13 to the Financial
Statements.
TRUST AND INVESTMENT MANAGEMENT SERVICES
As part of its community banking services, the Company offers asset management
and estate administration services through its Trust and Financial Services
Division (Trust Division). The Trust Division reported market value of assets
under management of $495 million and $506 million at December 31, 2000 and 1999,
respectively. The Trust Division manages inter vivos trusts and trusts under
will, develops and administers employee benefit plans and individual retirement
plans, and manages and settles estates. Fiduciary fees for these services are
charged on a schedule related to the size, nature and complexity of the account.
The Trust Division employs 17 professionals and support staff with a wide
variety of estate and financial planning, investing and plan administration
skills. Trust Division operating expenses totaled $1.4 million in 2000 and $1.3
million in 1999. These costs are comprised primarily of salaries and related
benefits, investment services, asset custody fees and the cost of information
processing systems. The Trust Division is headquartered in the Company's banking
facility in Bluefield, West Virginia, and provides client services through the
Bank's existing branch network.
LIQUIDITY
Liquidity represents the Company's ability to respond to demands for funds and
is primarily derived from maturing investment securities, overnight investments,
periodic repayment of loan principal, and the Company's ability to generate new
deposits. The Company also has the ability to attract short-term sources of
funds and draw on credit lines that have been established at financial
institutions to meet cash needs.
Total liquidity of $376.0 million at December 31, 2000 is comprised of the
following: cash on hand and deposits with other financial institutions of $50.2
million; securities available for sale of $207.6 million;
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Home Improvement Loans Commercial Loans
investment securities held to maturity due within one year of $10.3 million; and
Federal Home Loan Bank credit availability of $107.9 million.
INTEREST RATE SENSITIVITY, INTEREST RATE RISK
AND ASSET/LIABILITY MANAGEMENT
The Bank's profitability is dependent to a large extent upon its net interest
income (NII), which is the difference between its interest income on
interest-earning assets, such as loans and securities, and its interest expense
on interest-bearing liabilities, such as deposits and borrowings. The Bank, like
other financial institutions, is subject to interest rate risk to the degree
that its interest-earning assets reprice differently than its interest-bearing
liabilities. The Bank manages its mix of assets and liabilities with the goals
of limiting its exposure to interest rate risk, ensuring adequate liquidity, and
coordinating its sources and uses of funds while maintaining an acceptable level
of NII given the current interest rate environment.
The Company's primary component of operating revenue, NII, is subject to
variation (Interest Rate Risk or IRR) as a result of changes in interest rate
environments in conjunction with unbalanced repricing opportunities in earning
assets and interest-bearing liabilities. IRR has four primary components
including repricing risk, basis risk, yield curve risk and option risk.
Repricing risk occurs when earning assets and paying liabilities reprice at
differing times as interest rates change. Basis risk occurs when the underlying
rates on the assets and liabilities the institution holds change at different
levels or in varying degrees. Yield curve risk is the risk of adverse
consequences as a result of unequal changes in the spread between two or more
rates for different maturities for the same instrument. Lastly, option risk is
due to "embedded options," often called put or call options, given or sold to
holders of financial instruments.
In order to mitigate the effect of changes in the general level of interest
rates, the Company manages repricing opportunities and thus, its interest rate
sensitivity. The Bank seeks to control its IRR exposure to insulate net interest
income and net earnings from fluctuations in the general level of interest
rates. To measure its exposure to IRR, quarterly simulations of NII are
performed using financial models which project NII through a range of possible
interest rate environments including rising, declining, most likely and flat
rate scenarios. The results of these simulations indicate the existence and
severity of IRR in each of those rate environments based upon the current
balance sheet position, assumptions as to changes in the volume
"They have enhanced our real estate assets and have been instrumental in our
success. First Community Bank understands our needs and custom tailors financing
instruments to meet our growth pattern."
================================================================================
Profile--The Daniel Group, Inc.
In 1945, John W. Daniel started a small construction company in Danville, VA.
Today, The Daniel Group, Inc. has evolved from that beginning and now exists as
a diversified group of companies which provides quality real estate,
construction and related services throughout the Southeast. Building on its
tradition of excellence, this group of companies is committed to the
satisfaction and success of its customers, employees and shareholders.
The relationship between First Community Bank and The Daniel Group is a thriving
partnership. "They have enhanced our real estate assets and have been
instrumental in our success. First Community Bank understands our needs and
custom tailors financing instruments to meet our growth pattern," said Howard
Burnette.
[PHOTO Howard J. Burnette, President & COO and Edwin H. Coleman, Chairman & CEO]
The Daniel Group, Inc. o Danville, VA
19
22
Home Equity Lines of Credit Savings Accounts Roth IRAs
and mix of interest-earning assets and interest-paying liabilities, and
management's estimate of yields attained in those future rate environments and
rates which will be paid on various deposit instruments and borrowings.
Additionally, key measures including Economic Value of Equity (EVE) and
Duration, which help to highlight longer-term exposures that fall outside of the
income simulation period, are monitored in conjunction with the income
simulation results. Specific strategies for management of IRR have included
shortening the maturity of fixed-rate loans, increasing the volume of adjustable
rate loans to reduce the average repricing term of the Bank's interest-earning
assets and monitoring the term structure of liabilities to maintain a balanced
mix of maturity and repricing structures to mitigate the potential exposure. The
simulation model used by the Company captures all earning assets,
interest-bearing liabilities and all off- balance sheet financial instruments
and combines the various factors affecting rate sensitivity into an earnings
outlook. Based upon the latest simulation, the Company believes that it is
slightly biased toward an asset sensitive position. Absent adequate management,
asset sensitive positions can negatively impact net interest income in a falling
rate environment while liability sensitive positions positively impact net
interest income in a falling rate environment.
The Company has established policy limits for tolerance of interest rate risk
that allow for no more than a ten percent reduction in projected (next twelve
months') net interest income based on quarterly income simulations. The most
recent simulation indicates that current exposure to interest rate risk does not
exceed the Company's defined policy limits.
The following table summarizes the estimated impact on NII and the Market Value
of Equity (MVE) as of December 31, 2000 and 1999 of immediate and sustained rate
shocks in the interest rate environment of plus and minus 100 and 200 basis
points from the flat rate simulation. The results of the rate shocks depicted
below differ from the results in quarterly simulations, in that, all changes are
assumed to take effect immediately; whereas, in the quarterly income
simulations, changes in interest rates take place more gradually over a 24-month
horizon. This table, which illustrates the prospective effects of hypothetical
interest rate changes, is based upon numerous assumptions including relative and
estimated levels of key
2000
Increase Increase
(Decrease) (Decrease)
Increase (Decrease) in Interest Rates Net Interest % Market Value %
(Basis Points) Income Change of Equity Change
------------ ------ ------------ ------
200 ........................................ $ 98 0.20 $(12,496) (9.80)
100 ........................................ 698 1.50 (6,275) (4.90)
(100) ...................................... (2,301) (4.80) 1,113 0.90
(200) ...................................... (4,354) (9.10) 2,675 2.10
1999
Increase Increase
(Decrease) (Decrease)
Increase (Decrease) in Interest Rates Net Interest % Market Value %
(Basis Points) Income Change of Equity Change
------------ ------ ------------ ------
200 ........................................ $(4,920) (10.26) $ (36,915) (35.0)
100 ........................................ (2,305) (4.81) (17,858) (16.9)
(100) ...................................... 2,033 4.20 18,867 17.9
(200) ...................................... 2,775 5.80 35,803 34.0
20
23
Club 50 Trust and Financial Services Educational IRAs
interest rates over a twelve-month time period. Management feels that this type
of modeling technique, although useful, does not take into account all
strategies which management might undertake in response to a sudden and
sustained rate shock as depicted. Also, as market conditions vary from those
assumed in the sensitivity analysis, actual results will also differ due to:
prepayment/refinancing levels likely deviating from those assumed, the varying
impact of interest rate caps or floors on adjustable rate assets, the potential
effect of changing debt service levels on customers with adjustable rate loans,
depositor early withdrawals, product preference changes, and other internal and
external variables.
When comparing the impact of the rate shock analysis between 2000 and 1999, the
2000 changes in net interest income and market value of equity are reflective of
a change in the balance sheet composition as the repricing structure of assets
was shortened and the repricing structure of liabilities was extended. This
resulted in a gradual shift to an asset sensitive position. Additionally, the
duration of assets declined while the duration of liabilities increased. The
repricing structure of assets decreased due to both the addition of assets with
shorter repricing structures as well as the maturity and repayment of existing
loans and investments with longer repricing terms. The repricing structure and
duration of liabilities increased primarily as a result of $125.0 million in
additional term borrowings from the FHLB, with final maturities of between two
and ten years, and the repayment of $86.7 million in outstanding overnight
advances from the FHLB.
The fluctuation in the market value of equity between 1999 and 2000 is less
severe as a result of a reduction in the overall duration of equity. The
reduction in the duration of equity is the result of a combination of factors
including the reduction in the duration of total assets and an increase in the
duration of liabilities. The correlation between rate changes and market value
of equity is reflective of the inverse relationship between market interest
rates and the market value of the underlying instruments. The market value of
equity increases while rates fall and conversely as rates rise. The significant
decrease in MVE in 1999 was prompted by the reinvestment of $83 million of
interest-bearing balances held by affiliates at the end of 1998 that were
subsequently reinvested in loans and investment securities with longer duration
and repricing terms. Consequently, the balance sheet reflected a slight
liability sensitive position and a longer duration, and a greater variation on
net interest income and the market value of equity.
"First Community Bank has faith in our company and our community. They are very
responsive not only to our needs, but to the needs of the individuals who work
here."
================================================================================
Profile--The Dean Company
The Dean Company, a long-time community partner of Mercer County, has been in
Princeton for over 35 years. The company makes wood veneers that are used in the
manufacturing of furniture, doors, panels, musical instruments, and fine
architecture. Over 65% of their products are exported to many countries around
the world and to major furniture markets within the United States.
The Dean Company has been a customer of First Community Bank for over 20 years.
"They have faith in our company and our community. They are very responsive not
only to our needs, but to the needs of the individuals who work here. They are
just down to earth-good bankers."
[PHOTO Herb McClaugherty President & CEO, The Dean Company o Princeton, WV]
21
24
Bonus Checking FCB Travel Group Just Checking
The process of assessing the underlying risk inherent in the balance sheet and
the institution is coordinated by the Asset/Liability Management Committee. This
committee focuses on the measurement, monitoring and control of balance sheet
and off-balance sheet positions. Risk assessments include the monitoring of
interest rate risk, liquidity and funding needs of the institution, operational
issues relative to product marketing and pricing and new product development, as
well as defining and assessing various investment strategies of the Company.
INSURANCE SERVICES
To further enhance its array of financial services, the Company purchased an
equity interest (currently 3.29%) in Bankers Insurance, L.L.C. Bankers Insurance
was formed through a consortium of over sixty banks with a presence in Virginia,
West Virginia, North Carolina, Tennessee and Maryland. The pool of capital
developed was utilized to purchase four insurance agencies to date. These
acquisitions will enable the participating banks to collectively initiate
property, casualty, life, and health insurance agency services. It is expected
that insurance products will be available in the bank's branches through Bankers
Insurance in 2001. The Company believes that through its extensive network of
bank branches and its thousands of customer relationships, it will be in a
position to market significant volumes of insurance, particularly property and
casualty insurance for homes and automobiles. The Company's entry into the
insurance business is designed to provide new sources of fee revenue and further
solidify the financial relationship between the Company and its present
customers. The four agencies now owned by Bankers Insurance include Blue Ridge
Insurance Group, located in Wytheville and Pulaski, Virginia, and Sparta, North
Carolina; Insurance Partners of Virginia, located in Staunton, Front Royal,
Harrisonburg, Stuarts Draft, Waynesboro, and Charlottesville, Virginia; Welton,
Duke & Hawks, Inc., located in Portsmouth and Lexington, Virginia; and
Washington, Chichester & Clarke, located in Fredericksburg, Virginia.
RECENT LEGISLATION
GRAMM-LEACH-BLILEY FINANCIAL SERVICES MODERNIZATION ACT
The Gramm-Leach-Bliley Financial Services Modernization Act of 1999 (the "Act")
is the most significant financial services legislation in 60 years, and is the
culmination of decades of effort to restructure the financial services industry
in the United States. The most significant change wrought by the act is to allow
affiliations among banks, securities firms and insurance companies. The "Act" is
complex and far-reaching
"The benefit of doing business with First Community Bank is you know you're not
getting lost in the corporate world. They really take the time to work with you
and give you the best service they can."
================================================================================
Profile--Silver Development Company
Silver Development Company, established in 1947, has grown into one of
Virginia's most successful real estate development companies. Unlike many other
developers in the area, Silver Development Company has remained committed to the
Fredericksburg community.
The relationship between First Community Bank and Silver Development Company
began when the bank participated in one of their developments. "The benefit of
doing business with First Community Bank is you know you're not getting lost in
the corporate world. They really take the time to work with you and give you the
best service they can."
[PHOTO Edward O. Minniear, Jr., President and Tony Sala,
Executive Vice President Silver Development Company o Fredericksburg, VA]
22
25
OverdraftHonor Hourly Rate CD Silverline Mac Card
and deals with a multitude of additional banking, insurance and financial
services issues, and is intended to modernize the nation's financial services
industry. The following discussion is a brief overview of some of the points of
interest that have an impact on the Company and is not intended to represent the
entirety of the "Act."
Among other things, the "Act" is designed to allow greater savings to consumers
by increasing competition and reforming the Federal Home Loan Bank System by
providing a source of funds for community banks to make loans to small
businesses and farmers.
The "Act" repeals two sections of the Glass-Steagall Act, which restrict banks
and their affiliates from being affiliated with companies engaged in the
business of underwriting and dealing in securities. The "Act" authorizes
financial holding companies (FHC) and FHC affiliates to engage in activities
that are "financial in nature or incidental to financial in nature," or
activities that are "complementary to financial activities." In addition, the
"Act" blesses as "financial in nature" the acquisition of interest in and
control of any company, "whether financial or not," through securities
underwriting, merchant banking, or insurance company investments. In the case of
securities affiliates, the investment must be part of a bona fide underwriting
or merchant or investment banking activity, including investment activities
engaged in for the purpose of appreciation and ultimate resale or disposition of
the investment. In the case of insurance companies, the portfolio investment
must be made in the ordinary course of business of the insurance company in
accordance with relevant state law governing such investments. The "Act"
authorizes the Federal Reserve Board to determine, for bank holding company
affiliates, what activities are financial in nature or incidental to financial
in nature or complementary to a financial activity.
The legislation also amends the Community Reinvestment Act (CRA) to provide that
an election of a bank holding company to become a FHC will not be effective if
any of the holding company's subsidiary insured depository institutions has
received a less than "satisfactory" rating in its most recent Community
Reinvestment Act examination. In addition, the "Act" amends the Bank Holding
Company Act to require the appropriate Federal banking agency to prohibit an FHC
or insured depository institution from commencing any new activities or
acquiring companies engaged in expanded activities "financial in nature" (other
than merchant banking or insurance portfolio investment activities), if any
insured depository institution affiliate has failed to receive in its last
examination at least a "satisfactory" CRA rating. Certain activities of new
FHC's have been grandfathered to allow companies that previously engaged in
non-financial activities to do so.
Title II of the "Act" amends the federal securities laws to provide for
functional regulation of bank securities activities. Title III of the "Act"
deals with insurance issues and is divided into four subparts: State Regulation
of Insurance, Redomestication of Mutual Insurers, National Association of
Registered Agents and Brokers, and Rental Car Agency Insurance Activities.
The privacy provisions encompassed under Title IV of the "Act" govern the
activities of "financial institutions," which include banks, savings
associations, credit unions, broker-dealers, investment companies, investment
advisers and insurance companies.
FAIR DISCLOSURE RULES UNDER REGULATION FD
On October 23, 2000, a new set of rules went into effect that has wide-ranging
impact on how public companies share information with investors. Known as
"Regulation FD" (for "Fair Disclosure"), the rule ends a practice known as
"selective disclosure" that many companies used in the past to provide
information to Wall Street and investment professionals before making it
available to the general public.
23
26
Money Market Easy Checking XPress PC Banking
Regulation FD represents the SEC's first attempt at direct regulation of
informal communications between public companies and investment professionals.
In an attempt to comply with Regulation FD, companies are reconsidering the
information and the dissemination methods they use to provide such information
to analysts and the investment public. No longer can a company have a
conversation with an analyst and provide any information that is not available
to the general public. The new regulations cover a wide range of information
including topics addressing earnings to business development issues concerning
new products and delivery methods. Additionally, the new rules create the need
for tighter control over material non public information by placing greater
liability on all Company representatives who have access to this information,
including directors, officers, employees and others with access to material
nonpublic information. Additionally, areas addressed by Regulation FD include
but are not limited to issues addressing the timing of information
dissemination, Securities Act and liability issues and the timing of
information. The requirements of this new regulation are very detailed and
complex and are not presented as a part of this discussion in their entirety.
The long-term effect of fair disclosure is likely to be beneficial to individual
investors, regardless of what happens in the short term as companies and
analysts determine how to best comply with the new rules. However, at the crux
of the disclosure rules is the underlying theme that the investment public
should be on an even and fair playing field when any material and non public
information is disclosed.
Future Expansions
PHOTO PHOTO
Athens Branch Ingleside Road Branch
Athens, WV Princeton, WV
"In the second quarter of 2001, we expect to break ground on a new branch
facility to replace our existing Pine Plaza branch in Princeton, West Virginia,
which will no longer accommodate the retail traffic for that service location.
We also plan the addition of an Athens, West Virginia branch to serve current
and future customers in that area. This is an area that has previously been
serviced primarily by our Princeton offices."
-John M. Mendez
President and CEO
First Community Bancshares, Inc.
24
27
Consolidated Financial Statements
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets ........................................ 26
Consolidated Statements of Income .................................. 27
Consolidated Statements of Cash Flow ............................... 28
Consolidated Statements of Stockholders' Equity .................... 29
Notes to Consolidated Financial Statements ......................... 30
Report of Independent Auditors ..................................... 48
Report of Management's Responsibilities ............................ 49
25
28
Consolidated Financial Statements
DECEMBER 31,
CONSOLIDATED BALANCE SHEETS -------------------------------
(Amounts in Thousands, Except Share Data) 2000 1999
- ---------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks .................................................... $ 38,457 $ 36,400
Interest-bearing balances-FHLB ............................................. 11,786 1,391
Federal funds sold ......................................................... -- 6
Securities available for sale (amortized cost of $210,126, 2000;
$221,226, 1999 ......................................................... 207,562 212,105
Investment securities held to maturity:
U.S. Treasury securities ............................................... -- 100
U.S. Government agencies and corporations .............................. 2,103 3,663
State and political subdivisions ....................................... 72,264 73,640
Other securities ....................................................... 1,369 1,365
-------------------------------
Total investment securities held to maturity (estimated market value,
$78,030, 2000; $78,917, 1999) ................................. 75,736 78,768
Total loans, net of unearned income ........................................ 822,826 704,096
Less allowance for loan losses ......................................... 12,303 11,900
-------------------------------
Net loans .................................................................. 810,523 692,196
Premises and equipment ..................................................... 18,786 18,630
Other real estate owned .................................................... 2,406 1,950
Interest receivable ........................................................ 9,261 8,090
Other assets ............................................................... 19,299 15,178
Intangible assets .......................................................... 24,201 23,448
-------------------------------
TOTAL ASSETS ..................................................... $1,218,017 $1,088,162
-------------------------------
LIABILITIES
Deposits:
Demand ................................................................. $ 128,584 $ 115,288
Interest-bearing demand ................................................ 137,763 133,073
Savings ................................................................ 131,039 138,107
Time ................................................................... 502,517 446,790
-------------------------------
Total deposits ...................................................... 899,903 833,258
Interest, taxes and other liabilities ...................................... 13,238 13,436
Federal funds purchased .................................................... -- 86,700
Securities sold under agreements to repurchase ............................. 46,179 41,062
FHLB borrowings and other indebtedness ..................................... 138,015 10,218
-------------------------------
TOTAL LIABILITIES ................................................... 1,097,335 984,674
-------------------------------
STOCKHOLDERS' EQUITY
Common stock, $1 par value; 15,000,000 and 10,000,000 shares
authorized in 2000 and 1999, respectively; 9,052,113 shares
issued in 2000 and 8,991,586 in 1999; 9,040,370 and
8,726,836 shares outstanding in 2000 and 1999, respectively ............ 9,052 8,992
Additional paid-in capital ................................................. 35,273 34,264
Retained earnings .......................................................... 78,097 69,372
Treasury stock, at cost .................................................... (202) (2,945)
Unallocated ESOP shares .................................................... -- (722)
Accumulated other comprehensive (loss) ..................................... (1,538) (5,473)
-------------------------------
TOTAL STOCKHOLDERS' EQUITY .......................................... 120,682 103,488
-------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .......................... $1,218,017 $1,088,162
===============================
See Notes to Consolidated Financial Statements.
26
29
Consolidated Financial Statements
YEARS ENDED DECEMBER 31,
CONSOLIDATED STATEMENTS OF INCOME --------------------------------------------------
(Amounts in Thousands, Except Share and Per Share Data) 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Interest and fees on loans ............................................. $ 68,413 $ 58,036 $ 62,323
Interest on securities available for sale .............................. 12,831 13,217 9,060
Interest on investment securities:
U.S. Treasury securities ........................................... 3 41 117
U.S. Government agencies and corporations .......................... 202 269 1,034
States and political subdivisions, tax exempt ...................... 3,973 3,940 3,989
Other securities ................................................... 109 104 90
Interest and federal funds sold ........................................ 20 403 1,594
Interest on deposits in banks .......................................... 407 482 3,006
--------------------------------------------------
TOTAL INTEREST INCOME ........................................... 85,958 76,492 81,213
--------------------------------------------------
INTEREST EXPENSE
Interest on deposits ................................................... 30,718 29,137 34,374
Interest on short-term borrowings ...................................... 8,045 2,332 2,295
Interest on other indebtedness ......................................... 616 781 1,459
--------------------------------------------------
TOTAL INTEREST EXPENSE .......................................... 39,379 32,250 38,128
--------------------------------------------------
NET INTEREST INCOME ............................................. 46,579 44,242 43,085
Provision for loan losses .............................................. 3,986 2,893 6,250
--------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES ............. 42,593 41,349 36,835
--------------------------------------------------
NONINTEREST INCOME
Fiduciary income ....................................................... 1,804 2,092 1,682
Service charges on deposit accounts .................................... 4,007 3,640 3,746
Other service charges, commissions and fees ............................ 1,361 1,095 2,935
Mortgage banking income ................................................ 4,651 1,204 --
Net securities gains ................................................... 1 -- 25
Other operating income ................................................. 668 2,701 1,732
Pension termination gain ............................................... -- -- 1,062
--------------------------------------------------
TOTAL NONINTEREST INCOME ........................................ 12,492 10,732 11,182
--------------------------------------------------
NONINTEREST EXPENSE
Salaries and employee benefits ......................................... 16,046 13,132 12,242
Occupancy expense of bank premises ..................................... 2,482 2,128 1,943
Furniture and equipment expense ........................................ 1,698 1,743 1,965
Amortization of intangible assets ...................................... 2,154 2,049 2,061
Other operating expense ................................................ 8,588 8,405 10,541
--------------------------------------------------
TOTAL NONINTEREST EXPENSE ....................................... 30,968 27,457 28,752
--------------------------------------------------
Income before income taxes ............................................. 24,117 24,624 19,265
Income tax expense ..................................................... 7,054 7,772 6,164
--------------------------------------------------
NET INCOME ...................................................... $ 17,063 $ 16,852 $ 13,101
--------------------------------------------------
WEIGHTED AVERAGE BASIC AND DILUTED SHARES OUTSTANDING .................. 8,733,834 8,766,209 8,800,546
--------------------------------------------------
BASIC AND DILUTED EARNINGS PER COMMON SHARE ............................ $ 1.95 $ 1.92 $ 1.49
==================================================
See Notes to Consolidated Financial Statements.
27
30
Consolidated Financial Statements
YEARS ENDED DECEMBER 31,
CONSOLIDATED STATEMENTS OF CASH FLOW ----------------------------------------------
(Amounts in Thousands) 2000 1999 1998
- --------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Cash flows from operating activities:
Net income .................................................................. $ 17,063 $ 16,852 $ 13,101
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses ............................................... 3,986 2,893 6,250
Depreciation of premises and equipment .................................. 1,396 1,413 1,514
Amortization of intangibles assets ...................................... 2,156 2,020 1,915
Net investment amortization and accretion ............................... 233 483 32
Net gain on the sale of assets .......................................... (2,517) (832) (1,375)
Mortgage loans originated for sale ...................................... (106,169) -- --
Proceeds from sale of mortgage loans .................................... 100,148 -- --
(Increase) decrease in interest receivable .............................. (861) (1,060) 658
Decrease (increase) in other assets ..................................... 8,455 (3,668) 2,958
Increase (decrease) in other liabilities ................................ 66 (754) (1,033)
Other, net .............................................................. (296) 80 88
----------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES ............................ 23,660 17,427 24,108
----------------------------------------------
INVESTING ACTIVITIES
Cash flows from investing activities:
Proceeds from sales of securities available for sale ........................ 2,163 8,203 --
Proceeds from maturities and calls of securities available for sale ......... 17,849 30,881 100,920
Proceeds from maturities and calls of investment securities ................. 3,016 5,278 25,488
Proceeds from sale of credit card loans ..................................... -- -- 15,590
Purchase of securities available for sale ................................... (4,591) (69,611) (132,381)
Purchase of investment securities ........................................... -- -- (300)
Net (increase) decrease in loans made to customers .......................... (66,918) (87,986) 37,664
Purchase of bank-owned life insurance ....................................... (4,100) -- --
Cash provided by (used in) branch acquisitions, net of cash received ........ 3,065 (1,417) --
Purchase of premises and equipment .......................................... (1,019) (2,222) (726)
Proceeds from sale of equipment ............................................. 466 82 287
----------------------------------------------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES .................. (50,069) (116,792) 46,542
----------------------------------------------
FINANCING ACTIVITIES
Cash flows from financing activities:
Net (decrease) increase in demand and savings deposits ...................... (7,755) (23,154) 28,556
Net increase (decrease) in time deposits .................................... 22,731 (19,579) (6,351)
Net increase (decrease) in short-term debt .................................. 35,126 80,082 (7,376)
Repayment of long-term debt ................................................. (39) (7,993) (7,768)
Proceeds from long-term borrowings .......................................... -- -- 1,500
Acquisition of treasury stock ............................................... (2,870) (1,542) (1,796)
Cash paid in lieu of fractional shares ...................................... -- (18) (27)
Dividends paid .............................................................. (8,338) (7,730) (7,415)
----------------------------------------------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES .................. 38,855 20,066 (677)
----------------------------------------------
CASH AND CASH EQUIVALENTS
Net increase (decrease) in cash and cash equivalents ........................ 12,446 (79,299) 69,973
Cash and cash equivalents at beginning of year .............................. 37,797 117,096 47,123
----------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR .................................... $ 50,243 $ 37,797 $ 117,096
==============================================
See Notes to Consolidated Financial Statements.
28
31
Consolidated Financial Statements
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Amounts in Thousands, Except Share and Per Share Information)
ACCUMULATED
ADDITIONAL UNALLOCATED OTHER
COMMON PAID-IN RETAINED TREASURY ESOP COMPREHENSIVE
STOCK CAPITAL EARNINGS STOCK SHARES INCOME (LOSS) TOTAL
--------- ---------- --------- --------- ----------- ------------- ---------
BALANCE, DECEMBER 31, 1997 ............. $ 8,992 $ 34,306 $ 54,564 $ (1,271) $ -- $ 1,251 $ 97,842
Comprehensive income:
Net income ............................. -- -- 13,101 -- -- -- 13,101
Other comprehensive income
Unrealized holding losses on
securities available for sale,
net of tax ................... -- -- -- -- -- (11) (11)
Less reclassification adjustment
for gains realized in net
income, net of tax ........... -- -- -- -- -- (2) (2)
--------- --------- ---------
Comprehensive income ............ -- -- 13,101 -- -- (13) 13,088
Common dividends declared
($.84 per share) ................... -- -- (7,415) -- -- -- (7,415)
Purchase 55,914 ESOP shares at a
weighted cost of $29.76 per share .. -- -- -- -- (1,664) -- (1,664)
Purchase 5,156 treasury shares at
$25.50 per share ................... -- -- -- (132) -- -- (132)
---------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1998 .............. 8,992 34,306 60,250 (1,403) (1,664) 1,238 101,719
Comprehensive income:
Net income ............................. -- -- 16,852 -- -- -- 16,852
Other comprehensive income
Unrealized holding losses on
securities available for sale,
net of tax ................... -- -- -- -- -- (6,711) (6,711)
--------- --------- ---------
Comprehensive income ............ -- -- 16,852 -- -- (6,711) 10,141
Common dividends declared
($.88 per share) ................... -- -- (7,730) -- -- -- (7,730)
Purchase 71,589 treasury shares at
$21.54 per share ................... -- -- -- (1,542) -- -- (1,542)
Allocation of ESOP shares .............. -- (42) -- -- 942 -- 900
---------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1999 .............. 8,992 34,264 69,372 (2,945) (722) (5,473) 103,488
Comprehensive income:
Net income ............................. -- -- 17,063 -- -- -- 17,063
Other comprehensive income
Unrealized holding losses on
securities available for sale,
net of tax ................... -- -- -- -- -- 3,935 3,935
--------- --------- ---------
Comprehensive income ............ -- -- 17,063 -- -- 3,935 20,998
Common dividends declared
($.95 per share) ................... -- -- (8,338) -- -- -- (8,338)
Retirement of treasury shares .......... (374) (5,238) -- 5,612 -- -- --
Issuance of common stock ............... 434 6,343 -- -- -- -- 6,777
Purchase 145,682 treasury shares at
$19.70 per share ................... -- -- -- (2,869) -- -- (2,869)
Allocation of ESOP shares .............. -- (96) -- -- 722 -- 626
---------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 2000 .............. 9,052 35,273 78,097 (202) -- (1,538) 120,682
========= ========= ========= ========= ========= ========= =========
See Notes to Consolidated Financial Statements.
29
32
Notes to Consolidated Financial Statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accounting and reporting policies of First Community Bancshares, Inc. and
subsidiary (First Community or the Company) conform to accounting principles
generally accepted in the United States and to predominant practices within the
banking industry. In preparing financial statements, management is required to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates. Assets held in an agency or fiduciary capacity are not assets of the
Company and are not included in the accompanying consolidated balance sheets.
Certain amounts in the 1999 and 1998 financial statements have been reclassified
to conform to the 2000 presentation.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of First Community
and its wholly owned subsidiary. All significant intercompany balances and
transactions have been eliminated in consolidation.
CASH AND COMPENSATING BALANCES
Cash and cash equivalents include cash and due from banks, federal funds sold,
and interest-bearing balances available for immediate withdrawal. Interest and
income taxes paid were as follows:
2000 1999 1998
- ---------------------------------------------------------------------------
(Amounts in Thousands)
Interest $37,526 $33,175 $38,267
Income taxes 7,206 8,195 6,744
Pursuant to agreements with the Federal Reserve Bank, the Company has agreed to
maintain cash balances of approximately $1.0 million in lieu of charges for
check clearing and other services.
SECURITIES AVAILABLE FOR SALE
Securities to be held for indefinite periods of time including securities that
management intends to use as part of its asset/liability management strategy,
and that may be sold in response to changes in interest rates, changes in
prepayment risk, or other similar factors are classified as available for sale
and are recorded at market value. Unrealized appreciation or depreciation in
market value above or below amortized cost is included in stockholders' equity
net of income taxes which is entitled "Other Comprehensive Income." Premiums and
discounts are amortized to expense or accreted to income over the life of the
security. Gain or loss on sale is based on the specific identification method.
INVESTMENT SECURITIES HELD TO MATURITY
Investments in debt securities which management has the ability and intent to
hold to maturity are carried at cost. Premiums and discounts are amortized to
expense and accreted to income over the lives of the securities. Gain or loss on
the call or maturity of investment securities, if any, is on the specific
identification method. At December 31, 2000 and 1999, no securities were held
for trading purposes and no trading account was maintained.
RESERVE FOR LOAN LOSSES
The reserve for loan losses is available to absorb losses inherent in the
portfolio. The allowance is increased by provisions charged to operations and
reduced by losses, net of recoveries. The amount charged to operations is based
on several factors including: (1) analytical reviews of significant commercial
and commercial real estate loans and loan loss experience in relationship to
outstanding loans to determine an adequate reserve for loan losses required for
outstanding loans; (2) a continuing review of loans evaluated by the loan review
process as less than satisfactory, all nonperforming loans and overall portfolio
quality; (3) regular examinations and appraisals of the loan portfolio conducted
by federal and state supervisory authorities; and (4) management's judgment with
respect to current and expected economic conditions, the level of delinquencies
and nonaccrual loans, trends in the volume and term of loans, anticipated impact
from changes in lending policies and procedures, and any concentration of credit
in certain industries or geographic areas.
The reserve for loan losses related to impaired loans is based upon the
discounted cash flows or fair value of collateral when it is probable that all
amounts due pursuant to contractual terms of the loan will not be collected and
the recorded investment in the loan exceeds the fair value. The impairment
status of all loans designated as non-accrual or which have been classified as
"substandard" or "doubtful" is evaluated through the Company's loan review
process. Certain smaller balance, homogeneous loans, such as consumer
installment loans and residential mortgage loans, are evaluated for impairment
on an aggregate basis in accordance with the Company's policy.
30
33
Notes to Consolidated Financial Statements
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation of both buildings and improvements as well as for equipment is
computed on the straight-line method over estimated useful lives. Maintenance
and repairs are charged to current operations while betterments are capitalized.
Disposition gains and losses are reflected in current operations. Long-lived
assets to be held and those to be disposed of and certain intangibles are
regularly evaluated for impairment.
INCOME RECOGNITION
Accrual of interest on loans is based generally on the daily amount of principal
outstanding. It is the Company's policy to discontinue the accrual of interest
on loans based on their payment status and evaluation of the related collateral
and the financial strength of the borrower. The accrual of interest income is
normally discontinued when a loan becomes 90 days past due as to principal or
interest. Management may elect to continue the accrual of interest when the loan
is well secured and in process of collection. When interest accruals are
discontinued, interest accrued and not collected in the current year is reversed
and interest accrued and not collected from prior years is charged to the
reserve for possible loan losses. Consumer revolving credit loans that become
180 days past due are automatically charged to the reserve for loan losses.
LOAN FEE INCOME
Loan origination fees are recorded as a reduction of direct costs associated
with loan processing, including salaries, review of legal documents, obtainment
of appraisals, and other direct costs. Fees in excess of those related costs are
deferred and amortized over the life of the related loan. Loan commitment fees
are deferred and amortized over the related commitment period.
OTHER REAL ESTATE OWNED
Other real estate owned and acquired through foreclosure is stated at the lower
of cost or fair market value less estimated costs to sell. Losses arising from
the acquisition of such properties are charged against the reserve for possible
loan losses. Expenses incurred in connection with operating the properties,
subsequent write-downs and gains or losses upon sale are included in other non
interest income and expense.
UNALLOCATED ESOP SHARES
The cost of unallocated employee stock ownership plan shares is included as a
component of stockholders' equity. The plan shares are allocated to participant
accounts over a period not to exceed seven years based upon relative employee
compensation.
STOCK OPTIONS
The Company has a stock option plan for certain executives accounted for under
the intrinsic value method. Because the exercise price of the Company's employee
stock options equals the market price of the underlying stock on the date of
grant, no compensation expense is recognized.
INTANGIBLE ASSETS
The excess of cost over amounts attributable to identified tangible and
intangible assets at dates of acquisition is recorded as goodwill and is being
amortized to operations over a period of 15 to 20 years using the straight-line
method. The unamortized balance of goodwill was $23,794,000 and $22,913,000 at
December 31, 2000 and 1999, respectively. A portion of the cost of purchased
subsidiaries has been allocated to values associated with the future earnings
potential of acquired deposits and is being amortized over the estimated lives
of the deposits, ranging from seven to ten years. The unamortized balance of
identified intangibles associated with acquired deposits was $407,000 and
$535,000 at December 31, 2000 and 1999, respectively.
INCOME TAXES
Deferred income taxes, which are included in other assets, are recognized for
the tax consequences of "temporary differences" by applying enacted statutory
tax rates to the differences between the financial statement carrying amounts
and the tax bases of existing assets and liabilities. The components of other
comprehensive income have been computed using a 40% effective tax rate.
EARNINGS PER SHARE
Basic earnings per share is determined by dividing net income by the weighted
average number of shares outstanding. Diluted earnings per share is determined
by dividing net income by the weighted average shares outstanding increased by
the dilutive effect of stock options. Stock options had no effect on average
shares outstanding for purposes of computing diluted earnings per share for
2000, 1999, and 1998.
31
34
Notes to Consolidated Financial Statements
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities", as amended. The
Statement requires the Company to recognize all derivatives on the balance sheet
at fair value. Derivatives that are not hedges must be adjusted to fair value
through income. If the derivative is a hedge, depending upon the nature of the
hedge, changes in the fair value of derivatives are either offset against the
changes in the fair value of assets, liabilities or firm commitments through
earnings or recognized in other comprehensive income until the hedged item is
recognized in earnings. The Company adopted Statement 133 on January 1, 2001.
Because of the limited use of derivatives, adoption did not have a material
impact on the Company's financial statements. However, increased use of
derivatives is anticipated within UFM as the wholesale mortgage line of business
is fully established. The wholesale mortgage pipeline of loans will be hedged to
circumvent unusual fluctuations in the cash flows derived upon settlement of the
loans with the secondary market purchasers and consequently to achieve a desired
margin upon delivery. Hedge transactions will be used as a management tool to
mitigate risk and not for trading purposes.
NOTE 2. MERGER AND ACQUISITIONS
On October 31, 2000, First Community Bank, N.A. ("FCBNA"), the Company's
wholly-owned banking subsidiary, acquired 100% of the common stock of Citizens
Southern Bank, Inc. ("Citizens"), headquartered in Beckley, West Virginia.
Citizens, a state-chartered bank when acquired, had assets of approximately
$67.8 million with two Beckley offices. Pursuant to the Agreement, 1.74 shares
of the Company's common stock were exchanged for each of Citizens' 250,000
common shares. The excess of the consideration paid over the identifiable
tangible and intangible assets of approximately $3.3 million is being amortized
on a straight-line basis over a 20-year period. The acquisition was accounted
for under the purchase method of accounting. Accordingly, results of operations
of Citizens are included in the consolidated results from the date of
acquisition.
The following unaudited proforma financial information estimates the effect of
the Citizens' acquisition as if the transaction had been consummated as of the
beginning of 2000 and 1999:
2000 1999
- ----------------------------------------------------------------------------
Net interest income ............................... $48,305 $46,008
Net income ........................................ 16,510 16,937
Basic and diluted earnings per common share ....... 1.89 1.84
NOTE 3. SECURITIES AVAILABLE FOR SALE
As of December 31, the amortized cost and market value of securities classified
as available for sale are as follows:
2000
-------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
-------------------------------------------------
U.S. Government agency securities .............. $135,459 $ 194 $(1,496) $134,157
States and political subdivisions .............. 34,664 565 (581) 34,648
Other securities ............................... 40,003 323 (1,569) 38,757
-------------------------------------------------
Total ................................... $210,126 $1,082 $(3,646) $207,562
=================================================
1999
-------------------------------------------------
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
-------------------------------------------------
U.S. Government agency securities .............. $149,020 $ 73 $ (5,457) $143,636
States and political subdivisions .............. 35,068 340 (2,053) 33,355
Other securities ............................... 37,138 518 (2,542) 35,114
-------------------------------------------------
Total ................................... $221,226 $931 $(10,052) $212,105
=================================================
Securities available for sale with market values of $156,389,000 and
$175,911,000 at December 31, 2000 and 1999, respectively, were pledged to secure
public deposits, securities sold under agreements to repurchase and other
short-term borrowings and for other purposes.
At December 31, 2000, FCBNA owned approximately $6.8 million in stock in the
Federal Home Loan Bank of Atlanta, ("FHLB"), which is classified as available
for sale. As a condition to membership in the FHLB, the Company's wholly owned
banking subsidiary, FCBNA, is required to subscribe to a minimum level of stock.
32
35
Notes to Consolidated Financial Statements
The amortized cost and market value of securities available for sale by
contractual maturity, at December 31, 2000, are shown below. Expected maturities
may differ from contractual maturities because issuers may have the right to
call or prepay obligations with or without call or prepayment penalties. There
were no sales of securities available for sale during 1999 or 2000. Included in
the amounts below are U.S. Government Agency Securities that were acquired in
the October 31, 2000 acquisition of Citizens Southern Bank, Inc. The book and
estimated market values of these securities are $4,095,000 and $4,079,000,
respectively.
U.S. STATES TAX
GOVERNMENT AND EQUIVALENT
AGENCIES & POLITICAL OTHER PURCHASE
CORPORATIONS SUBDIVISIONS SECURITIES TOTAL YIELD
---------------------------------------------------------------------
(Amounts in Thousands)
AMORTIZED COST
Maturity:
Within one year ............................... $ 10,350 $ -- $ -- $ 10,350 5.41%
After one year through five years ............. 28,119 7,201 -- 35,320 6.49%
After five years through ten years ............ 41,811 3,623 28,976 74,410 6.38%
After ten years ............................... 55,179 23,840 11,027 90,046 6.81%
----------------------------------------------------------
Total amortized cost ....................... $135,459 $34,664 $40,003 $210,126
==========================================================
Tax equivalent purchase yield ..................... 6.23% 8.17% 6.15% 6.54%
Average maturity (in years) ....................... 10.79 11.69 13.55 11.47
MARKET VALUE
Maturity:
Within one year ............................... $ 10,299 $ - $ -- $ 10,299
After one year through five years ............. 27,880 7,346 -- 35,226
After five years through ten years ............ 41,493 3,825 27,409 72,727
After ten years ............................... 54,485 23,477 11,348 89,310
----------------------------------------------------------
Total market value ......................... $134,157 $34,648 $38,757 $207,562
==========================================================
NOTE 4. INVESTMENT SECURITIES
The following table presents amortized cost and approximate market values of
investment securities held to maturity at December 31:
2000
---------------------------------------------
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
---------------------------------------------
(Amounts in Thousands)
U.S. Treasury Securities ........... $ -- $ -- $ -- $ --
U.S. Government agency securities .. 2,103 5 (14) 2,094
States and political subdivisions .. 72,264 2,298 -- 74,562
Other securities 1,369 6 (1) 1,374
---------------------------------------------
Total ....................... $75,736 $ 2,309 $ (15) $78,030
=============================================
1999
---------------------------------------------
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------------------------------------------
(Amounts in Thousands)
U.S. Treasury securities ........... $ 100 $ -- $ -- $ 100
U.S. Government agency securities .. 3,663 3 (59) 3,607
States and political subdivisions .. 73,640 810 (613) 73,837
Other securities 1,365 10 (2) 1,373
---------------------------------------------
Total ....................... $78,768 $ 823 $ (674) $78,917
=============================================
Various investment securities classified as held to maturity with an amortized
cost of approximately $6,804,000 and $27,050,000, respectively, were pledged at
December 31, 2000 and 1999 to secure public deposits and for other purposes
required by law.
33
36
Notes to Consolidated Financial Statements
The following table presents maturities of investments by type on both an
amortized cost and market value basis at December 31, 2000:
U.S. STATES TAX
GOVERNMENT AND EQUIVALENT
AGENCIES & POLITICAL OTHER PURCHASE
CORPORATIONS SUBDIVISIONS SECURITIES TOTAL YIELD
-------------------------------------------------------------------------
(Amounts in Thousands)
AMORTIZED COST
Maturity:
Within one year ...................... $ 411 $ 846 $ -- $ 1,257 7.07%
After one year through five years .... 1,437 8,733 1,069 11,239 7.80%
After five years through ten years ... 255 31,559 300 32,114 8.53%
After ten years ...................... -- 31,126 -- 31,126 8.87%
--------------------------------------------------------
Total amortized cost .............. 2,103 $72,264 $1,369 $75,736
--------------------------------------------------------
Tax equivalent purchase yield ............ 6.50% 8.61% 7.74% 8.54%
Average maturity (in years) .............. 3.37 9.20 3.01 8.92
MARKET VALUE
Maturity:
Within one year ...................... $ 408 $ 846 $ -- $ 1,254
After one year through five years .... 1,426 8,885 1,074 11,385
After five years through ten years ... 260 32,545 300 33,105
After ten years ...................... -- 32,286 -- 32,286
--------------------------------------------------------
Total market value ................ $2,094 $74,562 $1,374 $78,030
========================================================
NOTE 5. LOANS
Loans consist of the following at December 31:
2000 1999
-------------------------
(Amounts in Thousands)
Real estate-commercial ..................................................... $222,571 $208,227
Real estate-construction ................................................... 73,087 24,684
Real estate-residential .................................................... 305,302 251,157
Commercial, financial and agricultural ..................................... 86,887 92,739
Loans to individuals for household and other consumer expenditures ......... 134,330 127,227
All other loans ............................................................ 649 62
-------------------------
$822,826 $704,096
=========================
The banking subsidiary of the Company is a party to financial instruments with
off balance sheet risk in the normal course of business to meet the financing
needs of its customers. These financial instruments include commitments to
extend credit, standby letters of credit and financial guarantees. These
instruments involve, to varying degrees, elements of credit and interest rate
risk beyond the amount recognized on the balance sheet. The contractual amounts
of those instruments reflect the extent of involvement the Company has in
particular classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit and financial guarantees written is represented by the
contractual amount of those instruments. The Company uses the same credit
policies in making commitments and conditional obligations as it does for on
balance sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long as
there is not a violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Company, upon extension of credit is based on
management's credit evaluation of the counterparts. Collateral held varies but
may include accounts receivable, inventory, property, plant and equipment, and
income-producing commercial properties.
34
37
Notes to Consolidated Financial Statements
Standby letters of credit and financial guarantees written are conditional
commitments issued by the Company to guarantee the performance of a customer to
a third party. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers.
To the extent deemed necessary, collateral of varying types and amounts is held
to secure customer performance under certain of those letters of credit
outstanding at December 31, 2000.
Financial instruments whose contract amounts represent credit risk at December
31, 2000, are commitments to extend credit (including availability of lines of
credit) - $119.4 million, and standby letters of credit and financial guarantees
written - $7.1 million. At December 31, 2000, neither the Company nor its
subsidiary have any amounts outstanding representing futures, forward exchange
contracts or interest swaps. The Company's mortgage subsidiary is in the process
of developing a wholesale loan sales line of business and anticipates using
forward purchase commitments of mortgage securities to hedge the cash flow risk
anticipated within the pipeline of loans that will be sold to investors.
In the normal course of business, the Company enters into loan commitments for
the potential origination of loans for investment purposes. Loan commitments
generally have fixed expiration dates or other termination clauses and may
require payment of fees. The Company evaluates each customer's creditworthiness
on a case-by-case basis. The amount of collateral deemed necessary by the
Company is based on management's credit evaluation and underwriting guidelines
for the particular loan. The total commitments outstanding at December 31, 2000,
are summarized as follows:
2000
---------------------------------
NOTIONAL
AMOUNT RATE
---------------------------------
(Amounts in Thousands)
Real estate-commercial (fixed) .................................................... $ 6,200 7.75 - 10.75%
Real estate-commercial (variable) ................................................. 44,686 7.50 - 12.00%
Real estate-construction (fixed) .................................................. 21,224 8.00 - 10.75%
Real estate-construction (variable) ............................................... 12,080 6.13 - 10.50%
Real estate-residential (fixed) ................................................... 2,488 7.16 - 11.00%
Real estate-residential (variable) ................................................ 8,193 7.45 - 18.00%
Commercial, financial, agricultural (fixed) ....................................... 12,311 5.60 - 18.00%
Commercial, financial, agricultural (variable) .................................... 14,181 5.54 - 12.50%
Loans to individuals for household and other consumer expenditures (fixed) ........ 4,266 4.15 - 18.00%
Loans to individuals for household and other consumer expenditures (variable) ..... 916 7.13 - 18.00%
--------
Total ...................................................................... $126,545
========
Management reviews the loan portfolio regularly for concentrations of credit
risk. Analysis of potential risk from concentrations includes specific
industries and geographic location. Lending activities over the last several
years have increased the Company's exposure to commercial real estate projects,
exceeding 25% of capital. These projects represent several different sectors of
the commercial real estate market, including residential land development,
apartment building operators, commercial real estate lessors, and hotel/motel
developers. Management believes that concentration risk from these loans is
minimal. Individual projects have been thoroughly underwritten and the majority
of the loans have maturities of five years or less. The projects are
geographically diverse and are generally located in economically strong
metropolitan markets in Virginia and North Carolina.
A majority of the loans in the current portfolio were made and collateralized in
West Virginia and the surrounding Mid-Atlantic area. Although portions of the
West Virginia economy are closely related to natural resource production, they
are supplemented by service industries. The current economies in the Company's
markets are seen as relatively stable and are not seen as highly subject to
volatile economic change. The Company's presence in three states, West Virginia,
Virginia, and North Carolina, provides additional diversification against
geographic concentrations of credit risk.
In the normal course of business, the banking subsidiary of the Company has made
loans to directors and executive officers of the Company and its subsidiary. All
loans and commitments made to such officers and directors and to companies in
which they are officers, or have significant ownership interest, have been made
on substantially the same terms, including interest rates and collateral, as
those prevailing at the time for comparable transactions with other persons. The
aggregate dollar amount of such loans was $10.2 million and $8.8 million at
December 31, 2000 and 1999, respectively.
35
38
Notes to Consolidated Financial Statements
Note 6. Reserve for Loan Losses
Activity in the reserve for loan losses was as follows:
2000 1999 1998
----------------------------
(Amounts in Thousands)
Balance, January 1 ...................................... $11,900 $11,404 $11,406
Recoveries credited to reserve .......................... 902 610 736
Provision for the year charged to operations ............ 3,986 2,893 6,250
Acquisition balance ..................................... 1,051 -- --
----------------------------
17,839 14,907 18,392
Loans charged-off ....................................... (5,536) (3,007) (6,988)
----------------------------
Balance, December 31 .................................... $12,303 $11,900 $11,404
============================
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 identified with
significant cash flow weakness and for which a collateral deficiency may be
present. The reserves established under the specific identification method are
judged based upon the borrower's estimated cash flow and projected liquidation
value of related collateral.
Formula reserves, based on historical loss experience, are available to cover
the 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
historical loss percentages. The calculated percentage is used to determine the
estimated reserve excluding any relationships specifically identified and
individually evaluated. While allocations are made to specific loans and
classifications within the various categories of loans, the reserve is available
for all loan losses.
The following table presents the Company's investment in loans considered to be
impaired and related information on those impaired loans:
2000 1999
-----------------------
(Amounts in Thousands)
Recorded investment in loans considered to be impaired ......................... $2,795 $5,851
Loans considered to be impaired that were on a non-accrual basis ............... 2,795 5,851
Allowance for loan losses related to loans considered to be impaired ........... 419 1,297
Average recorded investment in impaired loans .................................. 3,001 5,247
Total interest income recognized on impaired loans ............................. $ 15 $ 124
During 2000, 1999, and 1998, $2,530,000 $1,667,000 and $3,588,000 of assets were
acquired through foreclosure and transferred to real estate owned.
NOTE 7. PREMISES AND EQUIPMENT
Premises and equipment are comprised of the following as of December 31:
2000 1999
----------------------
(Amounts in Thousands)
Land ........................................................................... $ 5,807 $ 5,553
Bank premises .................................................................. 20,703 21,302
Equipment ...................................................................... 15,199 13,690
----------------------
41,709 40,545
Less: accumulated depreciation and amortization ................................ 22,923 21,915
----------------------
Total ................................................................... $18,786 $18,630
======================
36
39
Notes to Consolidated Financial Statements
NOTE 8. OTHER INDEBTEDNESS
Other indebtedness includes structured term borrowings from the FHLB of
$125,000,000 in the form of convertible and callable advances. If called, the
debt may be paid in full, converted to another FHLB credit product or converted
to an adjustable rate advance. Contractual maturities are $25,000,000 in 2002
and $100,000,000 in 2010. The weighted average rate for this debt is 5.98%.
The Company's banking subsidiary is a member of the FHLB which provides credit
in the form of short-term and long-term advances collateralized by various
mortgage assets. At December 31, 2000, credit availability with the FHLB totaled
$107.9 million. Advances from the FHLB are secured by stock in the FHLB of
Atlanta, qualifying first mortgage loans, mortgage-backed securities and certain
other investment securities. The FHLB advances are subject to restrictions or
penalties in the event of prepayment.
Other indebtedness consists of correspondent bank debt of $10,000,000 as of
December 31, 2000 and 1999. The correspondent bank debt has a weighted average
interest rate of 6.01% and $8,000,000 matures in 2003, while $2,000,000 matures
in 2008. Other various debt obligations of the Company approximated $3,015,000
at December 31, 2000 and $218,000 at December 31, 1999.
NOTE 9. DEPOSITS
At December 31, 2000, the scheduled maturities of certificates of deposit are as
follows:
(IN THOUSANDS)
--------------
2001 ........................................................ $378,738
2002 ........................................................ 85,700
2003 ........................................................ 19,577
2004 ........................................................ 4,011
2005 and thereafter ......................................... 14,491
----------
$502,517
==========
Time deposits, including Certificates of Deposit issued in denominations of
$100,000 or more, amounted to $136.6 million and $110.8 million at December 31,
2000 and 1999, respectively. Interest expense on these certificates was $6.5
million, $5.4 million, and $6.5 million for 2000, 1999, and 1998, respectively.
NOTE 10. INCOME TAXES
YEARS ENDED DECEMBER 31,
---------------------------------
2000 1999 1998
---------------------------------
(Amounts in Thousands)
INCOME TAXES ARE AS FOLLOWS:
Income exclusive of securities gains ........................... $7,053 $7,772 $6,154
Net securities gains ........................................... 1 -- 10
---------------------------------
$7,054 $7,772 $6,164
=================================
YEARS ENDED DECEMBER 31,
---------------------------------
2000 1999 1998
---------------------------------
(Amounts in Thousands)
INCOME TAXES PROVISIONS CONSISTS OF:
Current tax expense ............................................ $7,150 $8,324 $6,605
Deferred tax expense (benefit) .................................. (96) (552) (441)
---------------------------------
$7,054 $7,772 $6,164
=================================
37
40
Notes to Consolidated Financial Statements
The tax effects of significant items comprising the Company's net deferred tax
assets as of December 31, 2000 and 1999 are as follows:
2000 1999
-----------------------
(Amounts in Thousands)
DEFERRED TAX ASSETS:
Reserve for loan losses ......................................... $4,834 $4,659
Unrealized asset losses ......................................... 161 243
Deferred compensation ........................................... 908 1,050
Deferred insurance premiums ..................................... 253 326
Intangible assets ............................................... 389 --
Unrealized loss on securities available for sale ................ 1,025 3,628
-----------------------
Total deferred tax assets .................................... 7,570 9,906
DEFERRED TAX LIABILITIES:
Purchase accounting adjustments ................................. 1,359 1,384
Premises and equipment .......................................... 287 311
Gain on pension termination ..................................... -- 282
Other ........................................................... 1,055 553
-----------------------
Total deferred tax liabilities .................................. 2,701 2,530
-----------------------
Net deferred tax assets ...................................... $4,869 $7,376
=======================
The reconciliation between the federal statutory tax rate and the effective
income tax rate is as follows:
2000 1999 1998
----------------------------------
Tax at statutory rate .............................................. 35.00% 35.00% 35.00%
(Reductions) increase resulting from:
Tax-exempt interest on investment securities and loans ......... (8.40)% (7.90)% (9.60)%
State income taxes, net of federal benefit ..................... 0.80% 0.90% 1.30%
Amortization of nondeductible expenses ......................... 1.90% 1.80% 2.30%
Other, net ..................................................... --% 1.80% 3.00%
----------------------------------
Effective tax rate ................................................. 29.30% 31.60% 32.00%
==================================
NOTE 11. EMPLOYEE BENEFITS
EMPLOYEE STOCK OWNERSHIP PLAN
The Company maintains an Employee Stock Ownership and Savings Plan ("KSOP").
Coverage under the plan is provided to all employees meeting minimum eligibility
requirements. Annual contributions to the stock portion of the plan are made at
the discretion of the Board of Directors, and are allocated to plan participants
on the basis of relative compensation. Substantially all plan assets are
invested in common stock of the Company. Total expense recognized by the Company
related to the Employee Stock Ownership Plan was $992,000, $918,000 and $947,000
in 2000, 1999 and 1998, respectively.
EMPLOYEE SAVINGS PLAN
The Company provides a 401(k) Savings feature within the KSOP that is available
to substantially all employees meeting minimum eligibility requirements. The
cost of Company contributions under the Savings Plan component of the KSOP was
$66,000, $149,000, and $99,000 in 2000, 1999 and 1998, respectively. The
Company's matching contributions are at the discretion of the Board up to 50% of
elective deferrals of no more than 6% of compensation. The Company's matching
rate was 25% for 2000, 1999 and 1998.
38
41
Notes to Consolidated Financial Statements
EMPLOYEE WELFARE PLAN
The Company provides various medical, dental, vision, life, accidental death and
dismemberment and long-term disability insurance benefits to all full-time
employees who elect coverage under this program (basic life, accidental death
and dismemberment, and long-term disability coverage is automatic).
During 1998, the Company formed the First Community Bancshares Employee
Insurance Plan and Trust, a partially self-funded medical, dental, vision, and
prescription welfare plan. The health plan is managed by a third party
administrator ("TPA"). Monthly employer and employee contributions are made to
the trust, against which the TPA processes and pays claims. Stop loss insurance
coverage limits the Company's funding requirements and risk of loss to $50,000
and $1,699,000 for individual and aggregate claims, respectively. Expense for
the plan in 2000, 1999 and 1998 approximated $1,079,000, $935,000 and $871,000.
DEFERRED COMPENSATION PLAN
The banking subsidiary of the Company has deferred compensation agreements with
certain current and former officers providing for benefit payments over various
periods commencing at retirement or death. The balance sheet liability at
December 31, 2000 was approximately $793,000. The expenses associated with this
plan for 2000, 1999 and 1998 were $138,000, $76,000 and $(11,000), respectively.
As a result of an actuarial adjustment to the life expectancies and the discount
rate used in computing the present value of the future benefits, the 1998 cost
reflected a reduction in total benefit cost resulting in a net credit of
$11,000.
EXECUTIVE RETENTION PLAN
The Company maintains an Executive Retention Plan for key members of senior
management. This Plan provides for a benefit at normal retirement (age 65)
targeted at 15% of final compensation projected at an assumed 3% salary
progression rate. Benefits under the Plan become payable at age 62. Actual
benefits payable under the Retention Plan are dependent on an indexed retirement
benefit formula which accrues benefits equal to the aggregate after-tax income
of associated life insurance contracts less the Company's tax-effected cost of
funds for that plan year. Benefits under the Plan are dependent on the
performance of the insurance contracts and are not guaranteed by the Company.
The Company funded the contracts during the first quarter of 2000 through the
purchase of bank-owned life insurance "BOLI," which is anticipated to fully fund
the projected benefit payout after retirement. The total amount invested in BOLI
during 2000 and the corresponding cash surrender value at December 31, 2000 was
$4.1 million and $4.3 million, respectively. Additionally, the associated
obligation expense required and the corresponding life insurance increase due to
the appreciation in the policy were $193,000 and $184,000, respectively.
In connection with the Executive Retention Plan, the Company has also entered
into Life Insurance Endorsement Method Split Dollar Agreements (the
"Agreements") with the executives covered under the Retention Plan. Under the
Agreements, the Company shares 80% of death benefits (after recovery of cash
surrender value) with the designated beneficiaries of the executives under life
insurance contracts referenced in the Retention Plan. The Company as owner of
the policies retains a 20% interest in life proceeds and a 100% interest in the
cash surrender value of the policies.
The Retention Plan also contains provisions for change of control, as defined,
which allow the executives to retain benefits under the Plan in the event of a
termination of service other than for cause during the twelve months prior to a
change in control or anytime thereafter, unless one of the executives
voluntarily terminates his employment within 90 days following the change in
control.
Because the Retention Plan was designed to retain the future services of key
executives, no benefits are payable under the Plan in the event of voluntary
termination prior to retirement age of 62.
STOCK OPTION PLAN
In 1999, the Company instituted a Stock Option Plan to encourage and facilitate
investment in the common stock of the Company by key executives and to assist in
the long-term retention of service by those executives. The Plan covers key
executives as determined by the Company's Board of Directors from time to time.
Options under the Plan were granted in the form of non-statutory stock options
with the aggregate number of shares of common stock available for grant under
the Plan set at 275,000 shares. Total options authorized under the Plan during
1999 represent the rights to acquire 272,578 shares with deemed grant dates of
January 1 for each year 1999 through 2003. All stock options granted pursuant to
the Plan vest ratably on the first through the seventh anniversary dates of the
deemed grant date. The option price of each stock option is equal to the fair
market value (as defined by the Plan) of the Company's common stock on the date
of each deemed grant during the five-year grant period. Vested stock options
granted pursuant to the Plan are exercisable for a period of five years after
the date of the grantee's retirement (provided retirement occurs at or after age
62), and at disability, or death. If employment is terminated other than by
retirement, disability, or death, vested options must be exercised within 90
days after the effective date of termination. Any option not exercised within
such period will be deemed cancelled.
39
42
Notes to Consolidated Financial Statements
Pro forma disclosure information regarding net income and earnings per share has
not been presented herein because the effect of applying the fair value method
to the Company's stock-based awards in 2000 and 1999 results in net income and
net income per share that are not materially different from amounts reported
herein. The fair value of options for the current year was estimated at the date
of grant using the Black-Scholes option pricing model under the following
assumptions: i) risk-free interest rate of 6.00%; ii) a dividend yield of 5.21%;
iii) volatility factors for the expected market price of the Company's common
stock of 26.1%; and iv) a weighted average expected life of the option of 13.74
years.
A summary of the Company's stock option activity, and related information for
the years ended December 31, 2000 and 1999 is as follows:
2000 1999
------------------------------------------------------------
OPTION WEIGHTED AVERAGE Option Weighted Average
SHARES EXERCISE PRICE SHARES Exercise Price
------------------------------------------------------------
Outstanding, beginning of year ................................... 54,516 $24.20 54,516 $24.20
Granted .......................................................... 54,516 19.36 -- --
Exercised ........................................................ -- -- -- --
Forfeited ........................................................ 32,258 21.78 -- --
------------------------------------------------------------
Outstanding, end of year ......................................... 76,774 $21.78 54,516 $24.20
============================================================
Weighted average fair value of
options granted during the year .............................. $ 3.27 $ 4.47
The weighted average exercise price for options outstanding as of December 31,
2000 was $21.78; however, no options are currently exercisable. The estimate of
the weighted average remaining contractual life of all options is 13.74 years.
DEFINED BENEFIT PENSION PLAN
In October 1996, the Company's non-contributory defined benefit pension plan was
terminated and the Company recorded a curtailment gain for the pending
termination of the defined benefit pension plan of $1,450,000. Additionally, in
the first quarter of 1998, after distributing all participant accrued benefits
and paying required excise taxes on the dissolution of the defined benefit plan,
an additional $1,062,000 termination gain was recognized. There was no pension
cost for 1998 or later years.
NOTE 12. LITIGATION
In the normal course of business, there are various outstanding commitments and
contingent liabilities such as threatened legal action and legal proceedings in
which the Company and its subsidiary are defendants.
The most significant matter of litigation against the Company was resolved in
October 2000, when the Circuit Court of Mercer County ruled in favor of the
Company in a three-year contest by heirs of a benefactor who established a
charitable foundation in the bank's Trust and Financial Services Division. The
heirs objected to the continuation of the charitable foundation established by
the trust customer prior to her death. The bank prevailed in protecting the
interest of its client and was also awarded its out-of-pocket costs in its
successful defense of the matter. Although an appeal of the court's rulings is
possible, both management and the Company's legal counsel believe that even a
successful appeal by plaintiffs would be successfully defended and have no
material adverse impact on the Company's financial condition.
In the normal course of business, there are various outstanding commitments and
contingent liabilities such as threatened legal action and legal proceedings in
which the Company and its subsidiary are defendants. In the opinion of
management, the resolution of these claims will not have a material effect on
the Company's financial position.
NOTE 13. REGULATORY CAPITAL REQUIREMENTS AND RESTRICTIONS
The primary source of funds for dividends paid by the Company is dividends
received from its subsidiary bank. Dividends paid by the subsidiary bank are
subject to restrictions by banking regulations. The most restrictive provision
of the regulations requires approval by the Office of the Comptroller of the
Currency if dividends declared in any year exceed the year's net income, as
defined, plus retained net profit of the two preceding years. At December 31,
2000, subsidiary accumulated earnings available for distribution as dividends to
the Company without prior approval were $21.7 million plus earnings for the
period up to the dividend date.
40
43
Notes to Consolidated Financial Statements
First Community Bancshares, Inc. and First Community Bank, N. A. (collectively
referred to as "the Bank") are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Company's financial statements. Under the capital
adequacy guidelines and the regulatory framework for prompt corrective action,
which applies only to the Bank, the bank must meet specific capital guidelines
that involve quantitative measures of the entity's assets, liabilities, and
certain off balance sheet items as calculated under regulatory accounting
practices. The entity's capital amounts and classifications are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors.
Quantitative measures established by regulation to ensure capital adequacy
require First Community Bancshares, Inc. and the Bank to maintain minimum
amounts and ratios for total and Tier I capital (as defined in the regulations)
to risk-weighted assets (as defined), and of Tier I capital (as defined) to
average assets (as defined). As of December 31, 2000, the Company and banking
subsidiary met all capital adequacy requirements to which they are subject.
As of December 31, 2000 and 1999, the most recent notifications from the Federal
Reserve Board categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well capitalized,
the Bank must maintain minimum Total Risk-Based, Tier I Risk-Based, and Tier I
leverage ratios as set forth in the table. There are no conditions or events
since those notifications that management believes have changed the
institution's category.
DECEMBER 31, 2000
-------------------------------------------------------------------------------
TO BE WELL
FOR CAPITAL CAPITALIZED UNDER
ADEQUACY PROMPT CORRECTIVE
ACTUAL PURPOSES ACTION PROVISIONS
-------------------------------------------------------------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------------------------------------------------------------------------------
TOTAL CAPITAL TO RISK-WEIGHTED ASSETS
First Community Bancshares, Inc. ............. $108,535 12.93% $ 67,162 8.00% $ N/A $ N/A
First Community Bank, N.A .................... 96,717 11.57% 66,858 8.00% 83,573 10.00%
-------------------------------------------------------------------------------
TIER 1 CAPITAL TO RISK-WEIGHTED ASSETS
First Community Bancshares, Inc. ............. $ 98,019 11.68% $ 33,581 4.00% $ N/A $ N/A
First Community Bank, N.A .................... 86,247 10.32% 33,429 4.00% 50,144 6.00%
-------------------------------------------------------------------------------
TIER 1 CAPITAL TO AVERAGE ASSETS (LEVERAGE)
First Community Bancshares, Inc. ............. $ 98,019 8.37% $ 46,827 4.00% $ N/A $ N/A
First Community Bank, N.A .................... 86,247 7.39% 46,684 4.00% 58,354 5.00%
===============================================================================
December 31, 1999
-------------------------------------------------------------------------------
To Be Well
For Capital Capitalized Under
Adequacy Prompt Corrective
Actual Purposes Action Provisions
-------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
-------------------------------------------------------------------------------
TOTAL CAPITAL TO RISK-WEIGHTED ASSETS
First Community Bancshares, Inc. ............. $94,484 13.22% $57,182 8.00% $ N/A $ N/A
First Community Bank, N.A. ................... 79,226 11.12% 56,999 8.00% 71,248 10.00%
-------------------------------------------------------------------------------
TIER 1 CAPITAL TO RISK-WEIGHTED ASSETS
First Community Bancshares, Inc. ............. $85,513 11.96% $28,591 4.00% $ N/A $ N/A
First Community Bank, N.A. ................... 70,283 9.86% 28,499 4.00% 42,749 6.00%
-------------------------------------------------------------------------------
TIER 1 CAPITAL TO AVERAGE ASSETS (LEVERAGE)
First Community Bancshares, Inc. ............. $85,513 8.25% $41,442 4.00% $ N/A $ N/A
First Community Bank, N.A. ................... 70,283 6.80% 41,364 4.00% 51,704 5.00%
===============================================================================
41
44
Notes to Consolidated Financial Statements
NOTE 14. OTHER OPERATING EXPENSES
Included in other operating expenses are certain functional costs, the total of
which exceeds one percent of combined interest income and non interest income.
Following are such costs for the years indicated:
YEARS ENDED DECEMBER 31,
-------------------------------
2000 1999 1998
-------------------------------
(Amounts in Thousands)
Credit card fees paid ....................................................... $ * $ * $1,315
Supplies cost ............................................................... * * 959
* Cost did not exceed one percent for the reported period.
NOTE 15. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires
disclosure of fair value information about financial instruments, whether or not
recognized on the balance sheet, for which it is practical to estimate the
value. Statement No. 107 defines a financial instrument as cash, evidence of
ownership in an entity, or a contract that conveys or imposes on an entity that
contractual right or obligation to either receive or deliver cash for another
financial instrument. Fair value is defined as the amount at which a financial
instrument could be exchanged in a current transaction between willing parties,
other than in a forced sale or liquidation, and is best evidenced by a quoted
market price if one exists.
The following summary presents the methodologies and assumptions used to
estimate the fair value of the Company's financial instruments presented below.
The information used to determine fair value is highly subjective and judgmental
in nature and, therefore, the results may not be precise. Subjective factors
include, among other things, estimates of cash flows, risk characteristics,
credit quality, and interest rates, all of which are subject to change. Since
the fair value is estimated as of the balance sheet date, the amounts that will
actually be realized or paid upon settlement or maturity on these various
instruments could be significantly different.
2000 1999
--------------------------------------------------------
CARRYING Carrying
AMOUNT FAIR VALUE Amount Fair Value
--------------------------------------------------------
(Amounts in Thousands)
Assets:
Cash and due from banks ............................. $ 50,243 $ 50,243 $ 37,791 $ 37,791
Securities available for sale ....................... 207,562 207,562 212,105 212,105
Investment securities ............................... 75,736 78,030 78,768 78,917
Federal funds sold .................................. -- -- 6 6
Loans (net of reserve for loan losses) .............. 810,523 818,517 692,196 701,020
Interest receivable ................................. 9,261 9,261 8,090 8,090
Liabilities:
Demand deposits ..................................... 128,584 128,584 115,288 115,288
Interest-bearing demand deposits .................... 137,763 137,763 133,073 133,073
Savings deposits .................................... 131,039 131,039 138,107 138,107
Time deposits ....................................... 502,517 499,661 446,790 443,611
Federal funds purchased ............................. -- -- 86,700 86,700
Securities sold under agreements to repurchase ...... 46,179 46,179 41,062 41,062
Interest, taxes and other obligations ............... 13,238 13,238 13,436 13,436
FHLB and other indebtedness ......................... 138,015 142,368 10,218 9,276
42
45
Notes to Consolidated Financial Statements
FINANCIAL INSTRUMENTS WITH BOOK VALUE EQUAL TO FAIR VALUE
The book values of cash and due from banks, federal funds sold and purchased,
securities sold under agreements to repurchase, interest receivable, and
interest, taxes and other liabilities are considered to be equal to fair value
as a result of the short-term nature of these items.
SECURITIES AVAILABLE FOR SALE
For securities available for sale, fair value is based on current market
quotations, where available. If quoted market prices are not available, fair
value has been based on the quoted price of similar instruments.
INVESTMENT SECURITIES
For investment securities, fair value has been based on current market
quotations, where available. If quoted market prices are not available, fair
value has been based on the quoted price of similar instruments.
LOANS
For all categories of loans, fair value is estimated by discounting the future
cash flows using the current rates for similar loans.
DEPOSITS
Deposits without a stated maturity, including demand, interest-bearing demand,
and savings accounts, are reported at their carrying value in accordance with
Statement No. 107. No value has been assigned to the franchise value of these
deposits. For other types of deposits with fixed maturities, fair value has been
estimated by discounting future cash flows based on interest rates currently
being offered on deposits with similar characteristics and maturities.
OTHER INDEBTEDNESS
Fair value has been estimated based on interest rates currently available to the
Company for borrowings with similar characteristics and maturities.
COMMITMENTS TO EXTEND CREDIT, STANDBY LETTERS OF CREDIT, AND FINANCIAL
GUARANTEES
The amount of off balance sheet commitments to extend credit, standby letters of
credit, and financial guarantees is considered equal to fair value. Because of
the uncertainty involved in attempting to assess the likelihood and timing of
commitments being drawn upon, coupled with the lack of an established market and
the wide diversity of fee structures, the Company does not believe it is
meaningful to provide an estimate of fair value that differs from the given
value of the commitment.
43
46
Notes to Consolidated Financial Statements
NOTE 16. PARENT COMPANY FINANCIAL INFORMATION
Condensed financial information related to First Community Bancshares, Inc. as
of December 31, 2000 and 1999, and for each of the three years in the period
ended December 31, 2000, 1999 and 1998 is as follows:
CONDENSED BALANCE SHEETS
- ----------------------------------------------------------------------------------------
(Amounts in Thousands)
DECEMBER 31,
--------------------------
2000 1999
--------------------------
ASSETS
Cash ....................................................... $ 8,515 $ 13,421
Investment in subsidiary ................................... 108,722 87,962
Other assets ............................................... 3,746 2,267
--------------------------
Total Assets ........................................... $120,983 $103,650
==========================
LIABILITIES
Other liabilities .......................................... $ 301 $ 162
STOCKHOLDERS' EQUITY
Common stock ............................................... 9,052 8,992
Additional paid-in capital ................................. 35,273 34,264
Retained earnings .......................................... 76,559 63,899
Treasury stock ............................................. (202) (2,945)
Unallocated ESOP shares .................................... -- (722)
--------------------------
Total Stockholders' Equity ............................. 120,682 103,488
--------------------------
Total Liabilities and Stockholders' Equity ............. $120,983 $103,650
==========================
CONDENSED STATEMENTS OF INCOME
- -------------------------------------------------------------------------------------------------
(Amounts in Thousands Except Per Share Data)
DECEMBER 31,
-------------------------------------------
2000 1999 1998
-------------------------------------------
Cash dividends received from subsidiary banks ...... $ 7,000 $ 6,500 $ 7,500
Other income ....................................... 339 275 112
Operating expense .................................. (278) (468) (1,143)
-------------------------------------------
7,061 6,307 6,469
Income tax (expense) benefit ....................... (18) 62 331
Equity in undistributed earnings of subsidiary ..... 10,020 10,483 6,301
-------------------------------------------
Net income ......................................... $17,063 $16,852 $13,101
-------------------------------------------
Basic and diluted earnings per share ............... $ 1.95 $ 1.92 $ 1.49
===========================================
44
47
Notes to Consolidated Financial Statements
CONDENSED STATEMENTS OF CASH FLOWS
- ---------------------------------------------------------------------------------------------------------------
(Amounts in Thousands)
YEARS ENDING DECEMBER 31,
-------------------------------------------
2000 1999 1998
-------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ........................................................ $ 17,063 $ 16,852 $13,101
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed earnings of subsidiary ................ (10,020) (10,483) (6,301)
Decrease in other assets ...................................... 132 118 271
Increase (decrease) in other liabilities ...................... 138 51 (194)
-------------------------------------------
Net cash provided by operating activities ......................... 7,313 6,538 6,877
-------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of securities available for sale ......................... (1,038) -- --
Proceeds from sale of securities available for sale ............... 26 -- --
Proceeds from investment in subsidiary ............................ -- 24,719 --
-------------------------------------------
Net cash (used in) provided by investing activities ............... (1,012) 24,719 --
-------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance on long-term debt .......................... -- -- 3,000
Repayment of long-term debt ....................................... -- (9,378) (2,851)
Acquisition of treasury stock ..................................... (2,869) (1,542) (132)
Dividends paid .................................................... (8,338) (7,730) (7,415)
-------------------------------------------
Net cash used in financing activities ............................. (11,207) (18,650) (7,398)
-------------------------------------------
Net (decrease) increase in cash and cash equivalents .............. (4,906) 12,607 (521)
Cash and cash equivalents at beginning of year .................... 13,421 814 1,335
-------------------------------------------
Cash and cash equivalents at end of year .......................... $ 8,515 $ 13,421 $ 814
===========================================
45
48
Notes to Consolidated Financial Statements
NOTE 17. SEGMENT INFORMATION
The Company operates two business segments: community banking and mortgage
banking. These segments are primarily identified by the products or services
offered and the channels through which they are offered. The community banking
segment consists of the Company's full-service banks that offer customers
traditional banking products and services through various delivery channels. The
mortgage banking segment consists of mortgage brokerage facilities that
originate, acquire, and sell mortgage products. The accounting policies for each
of the business segments are the same as those of the Company described in
Note 1.
Information for 2000 for each of the segments is included below. Information for
the mortgage banking segment is not material for years prior to 2000 and the
consolidated financial information for 1999 and 1998, as reported, is reflective
of the community banking segment.
COMMUNITY MORTGAGE
BANKING BANKING PARENT ELIMINATIONS TOTAL
-------------------------------------------------------------------
(Amounts in Thousands)
Net interest income ..................................... $ 45,969 $ 65 $ 339 $ 206 $ 46,579
Provision for loan losses ............................... 3,986 -- -- -- 3,986
-------------------------------------------------------------------
Net interest income after provision for loan losses ..... 41,983 65 339 206 42,593
Other Income ............................................ 7,911 4,651 -- (70) 12,492
Other Expenses .......................................... 25,560 4,994 278 136 30,968
-------------------------------------------------------------------
Income (loss) before income taxes ....................... 24,334 (278) 61 -- 24,117
Income tax expense (benefit) ............................ 7,122 (86) 18 -- 7,054
-------------------------------------------------------------------
Net income .............................................. $ 17,212 $ (192) $ 43 $ -- $ 17,063
-------------------------------------------------------------------
Average Assets .......................................... $1,124,304 $7,024 $108,153 $(111,782) $1,127,679
===================================================================
46
49
Notes to Consolidated Financial Statements
NOTE 18. SUPPLEMENTAL FINANCIAL DATA (UNAUDITED)
Quarterly earnings for the years ended December 31, 2000 and 1999 are as
follows:
2000
------------------------------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
------------------------------------------------------
(Amounts in Thousands, Except Per Share Data)
Interest income .................................................. $20,375 $21,069 $21,632 $22,882
Interest expense ................................................. 8,905 9,362 10,032 11,080
------------------------------------------------------
Net interest income .............................................. 11,470 11,707 11,600 11,802
Provision for loan losses ........................................ 662 1,218 842 1,264
------------------------------------------------------
Net interest income after provision for possible loan losses ..... 10,808 10,489 10,758 10,538
Other income ..................................................... 2,764 3,276 3,054 3,398
Other expenses ................................................... 8,176 7,479 7,691 7,622
------------------------------------------------------
Income before income taxes ....................................... 5,396 6,286 6,121 6,314
Income taxes ..................................................... 1,718 1,957 1,836 1,543
------------------------------------------------------
Net income ....................................................... $ 3,678 $ 4,329 $ 4,285 $ 4,771
======================================================
Per share:
Basic and diluted earnings ................................... $ 0.42 $ 0.50 $ 0.50 $ 0.53
Dividends .................................................... $ 0.22 $ 0.23 $ 0.23 $ 0.27
Weighted average basic and diluted shares outstanding ............ 8,715 8,666 8,647 8,906
1999
------------------------------------------------------
March 31 June 30 Sept. 30 Dec. 31
------------------------------------------------------
(Amounts in Thousands, Except Per Share Data)
Interest income .................................................. $18,736 $18,896 $19,088 $19,772
Interest expense ................................................. 8,404 7,926 7,771 8,149
------------------------------------------------------
Net interest income .............................................. 10,332 10,970 11,317 11,623
Provision for loan losses ........................................ 444 391 505 1,553
------------------------------------------------------
Net interest income after provision for possible loan losses ..... 9,888 10,579 10,812 10,070
Other income ..................................................... 2,138 2,215 1,928 4,451
Other expenses ................................................... 6,450 6,889 6,745 7,373
------------------------------------------------------
Income before income taxes ....................................... 5,576 5,905 5,995 7,148
Income taxes ..................................................... 1,742 1,787 1,941 2,302
------------------------------------------------------
Net income ....................................................... $ 3,834 $ 4,118 $ 4,054 $ 4,846
======================================================
Per share:
Basic and diluted earnings ................................... $ 0.44 $ 0.47 $ 0.46 $ 0.55
Dividends .................................................... $ 0.20 $ 0.21 $ 0.22 $ 0.25
Weighted average basic and diluted shares outstanding ............ 8,786 8,777 8,766 8,737
47
50
Report of Independent Auditors
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors of First Community Bancshares, Inc.
We have audited the accompanying consolidated balance sheet of First Community
Bancshares, Inc. and subsidiary as of December 31, 2000, and the related
consolidated statements of income, stockholders' equity and cash flows for the
year then ended. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audit. The accompanying
consolidated balance sheet of the Company as of December 31, 1999 and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for the years ended December 31, 1999 and 1998 were audited by other
auditors whose report dated January 28, 2000 expressed an unqualified opinion on
those statements.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes, examining on a
test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the 2000 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of First Community
Bancshares, Inc. and subsidiary at December 31, 2000, and the consolidated
results of their operations and cash flows for the year then ended in conformity
with accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
Charleston, West Virginia
January 26, 2001
48
51
Report of Management's Responsibilities
REPORT OF MANAGEMENT'S RESPONSIBILITIES
The management of First Community Bancshares, Inc. is responsible for the
integrity of its financial statements and their preparation in accordance with
accounting principles generally accepted in the United States. To fulfill this
responsibility requires the maintenance of a sound accounting system supported
by strong internal controls. The Company believes it has a high level of
internal control which is maintained by the recruitment and training of
qualified personnel, appropriate divisions of responsibility, the development
and communication of accounting and other procedures, and comprehensive internal
audits.
Our independent auditors (Ernst & Young LLP) are engaged to examine, and render
an opinion on, the fairness of our consolidated financial statements in
conformity with accounting principles generally accepted in the United States.
Our independent auditors obtain an understanding of our internal accounting
control systems, review selected transactions and carry out other auditing
procedures before expressing their opinion on our consolidated financial
statements.
The Board of Directors has appointed an Audit Committee, composed of outside
directors, that periodically meets with the independent auditors, bank
examiners, management and internal auditors to review the work of each. The
independent auditors, bank examiners and the Company's internal auditors have
free access to meet with the Audit Committee without management's presence.
/s/ John M. Mendez
John M. Mendez
President & Chief Executive Officer
/s/ Kenneth P. Mulkey
Kenneth P. Mulkey
Acting Chief Financial Officer
/s/ Robert L. Schumacher
Robert L. Schumacher
Senior Vice President-Finance
49
52
Board of Directors
BOARD OF DIRECTORS, FIRST COMMUNITY BANCSHARES, INC.
SAM CLARK
Agent, State Farm Insurance
ALLEN T. HAMNER
Professor of Chemistry, West Virginia Wesleyan College; Member
Executive Committee and Audit Committee
JAMES L. HARRISON, SR.
Former President and Chief Executive Officer, First Community Bancshares, Inc.;
Former President, First Community Bank, N. A.
B. W. HARVEY
President, Highlands Real Estate Management, Inc.; Member Executive Committee
and Audit Committee
I. NORRIS KANTOR
Partner, Katz, Kantor & Perkins, Attorneys-at-Law
JOHN M. MENDEZ
President and Chief Executive Officer, First Community Bancshares, Inc.;
Executive Vice President and Secretary, First Community Bank, N. A.
A. A. MODENA
Past Executive Vice President and Secretary, First Community Bancshares, Inc.;
Past President & Chief Executive Officer, The Flat Top National Bank of
Bluefield; Member Executive Committee
ROBERT E. PERKINSON, JR.
Past Vice President - Operations, MAPCO Coal, Inc. - Virginia Region
WILLIAM P. STAFFORD
President, Princeton Machinery Service, Inc.; Chairman, First Community
Bancshares, Inc.; Member Executive Committee and Audit Committee
WILLIAM P. STAFFORD, II
Attorney at Law, Brewster, Morhous & Cameron, PLLC; Member Executive Committee
W. W. TINDER, JR.
Chairman of the Board and Chief Executive Officer, Tinder Enterprises, Inc.;
President, Tinco Leasing Corporation (Real Estate Holdings); Member Executive
Committee
OFFICERS, FIRST COMMUNITY BANCSHARES, INC.
JOHN M. MENDEZ
President and Chief Executive Officer
ROBERT L. SHUMACHER
Senior Vice President-Finance
ROBERT L. BUZZO
Vice President and Secretary
E. STEPHEN LILLY
Chief Operating Officer
KENNETH P. MULKEY
Acting Chief Financial Officer
BOARD OF DIRECTORS, FIRST COMMUNITY BANK, N. A.
K. A. AMMAR, JR.
President and Chief Executive Officer,
Ammar's Inc. and Magic Mart
DR. JAMES P. BAILEY
Veterinarian, Veterinary Associates, Inc.
Chairman, First Community Bank, N. A.
W. C. BLANKENSHIP, JR.
Agent, State Farm Insurance
D. L. BOWLING, JR.
President, True Energy, Inc.
JUANITA G. BRYAN
Homemaker
ROBERT L. BUZZO
Vice President and Secretary,
First Community Bancshares, Inc.
President, First Community Bank, N.A.
SAM CLARK
Agent, State Farm Insurance
C. WILLIAM DAVIS
Attorney at Law, Richardson & Davis
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Board of Directors
ALLEN T. HAMNER, PH.D.
Professor of Chemistry,
West Virginia Wesleyan College
B. W. HARVEY
President, Highlands Real Estate Management, Inc.
I. NORRIS KANTOR
Partner, Katz, Kantor & Perkins,
Attorneys at Law
JOHN M. MENDEZ
President and Chief Executive Officer, First Community Bancshares, Inc.;
Executive Vice President and Secretary, First Community Bank, N. A.
A. A. MODENA
Past Executive Vice President and Secretary,
First Community Bancshares, Inc.;
Past President and Chief Executive Officer,
The Flat Top National Bank of Bluefield
ROBERT E. PERKINSON, JR.
Past Vice President - Operations, MAPCO Coal, Inc. - Virginia Region
CLYDE B. RATLIFF
President, Gasco Drilling, Inc.
RICHARD G. RUNDLE
Attorney at Law, Rundle and Rundle, LC
WILLIAM P. STAFFORD
President, Princeton Machinery Service, Inc.
WILLIAM P. STAFFORD, II
Attorney at Law, Brewster, Morhous and
Cameron, PLLC
W. W. TINDER, JR.
Chairman and Chief Executive Officer,
Tinder Enterprises, Inc.
DALE F. WOODY
President, Woody Lumber Company
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Locations & Other
FIRST COMMUNITY BANK, N. A.
(A NATIONAL ASSOCIATION - MEMBER FDIC)
1001 Mercer Street
Princeton, West Virginia
24740-5939
(304) 487-9000 or (304) 327-5175
Pine Plaza Branch (304) 431-2225
211 Federal Street
Bluefield, West Virginia 24701-0950
(304) 325-7151
Mercer Mall Branch (304) 327-0431
Blue Prince Road, Green Valley
Bluefield, West Virginia 24701-6160
(304) 325-3641
Highway 52
Bluefield, West Virginia 24701-3068
(304) 589-3301
Corner of Bank & Cedar Streets
Pineville, West Virginia 24874-0269
(304) 732-7011
East Pineville Branch
(304) 732-7011
600 Guyandotte Avenue
Mullens, West Virginia 25882-1024
(304) 294-0700
Route 10, Cook Parkway
Oceana, West Virginia 24870-1680
(304) 682-8244
2 West Main Street
Buckhannon, West Virginia 26201-0280
(304) 472-1112
100 Market Street
Man, West Virginia 25635
(304) 583-6525
77 North Morgan Boulevard
Logan, West Virginia 25601
(304) 752-8102
Corner of Main & Latrobe Streets
Grafton, West Virginia 26354-0278
(304) 265-1111
216 Lincoln Street
Grafton, West Virginia 26354-1442
(304) 265-5111
Main Street
Rowlesburg, West Virginia 26425
(304) 454-2431
16 West Main Street
Richwood, West Virginia 26261
(304) 846-2641
Railroad and White Avenue
Richwood, Virginia 26261
(304) 846-2641
874 Broad Street
Summersville, West Virginia 26651
(304) 872-4402
Route 20 & Williams River Road
Cowen, West Virginia 26206
(304) 226-5924
Route 55, Red Oak Plaza
Craigsville, West Virginia 26205
(304) 742-5101
111 Citizens Drive
Beckley, West Virginia 25801-2970
(304) 252-9400
50 Brookshire Lane
Beckley, West Virginia 25801-6765
(304) 254-9041
643 E. Riverside Drive
Tazewell, Virginia 24651
(540) 988-5577
302 Washington Square
Richlands, Virginia 24641
(540) 964-7454
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Locations & Other
Chase Street & Ally 7
Clintwood, Virginia 24228
(540) 926-4671
747 Fort Chiswell Road
Max Meadows, Virginia 24360
(540) 637-3122
8044 Main Street
Pound, Virginia 24279
(540) 796-5431
910 East Main Street
Wytheville, Virginia 24382
(540) 228-1901
101 Brookfall Dairy Road
Elkin, North Carolina 28621
(336) 835-2265
5519 Mountain View Road
Hays, North Carolina 28635
(336) 696-2265
57 N. Main Street
Sparta, North Carolina 28675
(336) 372-2265
150 N. Center Street
Taylorsville, North Carolina 28681
(828) 632-2265
UNITED FIRST MORTGAGE, INC.
(A WHOLLY-OWNED SUBSIDIARY OF
FIRST COMMUNITY BANK, N. A.)
1503 Santa Rosa Road, Suite 109
P. O. Box K-177
Richmond, VA 23288
(804) 282-5631
FINANCIAL INFORMATION
CORPORATE HEADQUARTERS
One Community Place
P.O. Box 989
Bluefield, Virginia
24605-0989
(540) 326-9000
STOCK REGISTRAR AND TRANSFER AGENT
First Community Bank, N. A.
Trust and Financial Services Division
P. O. Box 950
Bluefield, West Virginia
24701-0950
(304) 325-7151
FORM 10-K
The Annual Report on Form 10-K, filed with the Securities and Exchange
Commission, is available to shareholders upon request to the Senior Vice
President-Finance of First Community Bancshares, Inc.
FINANCIAL CONTACT
Robert L. Schumacher
Senior Vice President-Finance
First Community Bancshares, Inc.
P. O. Box 989
Bluefield, Virginia
24605-0989
(540) 326-9000
INTERNET ACCESS
Website: www.fcbinc.com
E-Mail: fcbcorp@aol.com
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[LOGO]
FIRST COMMUNITY BANK
YOUR FIRST FINANCIAL RESOURCE.
First Community Bancshares, Inc.
One Community Place o Bluefield, VA 24605
(540) 326-9000 o www.fcbinc.com