First Community Bancshares, Inc.
Annual Report 1998

Plain-text annual report

** ~cSFirst Community Bancshares,Inc. & & & # P l l 598 1 o began in Princeton, West Virginia in 1874, as opened of a courthouse, its doors to a town post office, shop and a dozen or so homesteads. history Our Company’s the Bank of Princeton photo) that consisted maker’s historical and the first West Virginia, Virginia. The First National West Virginia, later became banks on October event, 31, 1988. as it was one of the first to be chartered Bank of Grafton, a member tanyard, (as illustrated store, in the shoe- The bank’s opening was a in to be chartered in all of southern West four banks the first bank chartered in family of of the First Community The Bank was located store and the community bound directors, who usually trunk and important building in a frame post office. Cash was kept documents were divided that also housed a general in an old leather- among the bank’s carried the papers in the tops of their hats. One of the Bank’s most famous (or infamous) visitors was Frank James — a member brother, worth impression the legendary trunk. leather of the notorious James Gang, which was led by Frank’s Jesse. James robbing. However, rode into Princeton its small the small bank was not worth size and poor that to survey the Bank to see it was gave him the appearance the effort. Little did in gold rested in the Bank’s old outlaw know that $25,000 Change has erased the days of our old leather-bound by a technological long since replaced life untouched. and capitalize why we are blessed with the celebration Our Company’s on the opportunities ability to adapt presented age that has managed to changing by change is the reason of an anniversary of 125 years. trunk — an era to leave no environments Financial Highlights (Amounts in Thousands, Except Percent and Per Share Data) Earnings and Dividends income Net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Basic and diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash dividends per share Return on average equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Return on average assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 13,101 $ 1.86 1.05 13.02% 1.24% 15,094 2.14 1.04 16.05% 1.590/0 $ 13,917 1.98 .91 16.26”% 1.73% 1998 1997 1996 Balance Sheet Data at Year-End Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Earning assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deposits Securities . . . . . . . . . . . . . sold under agreements equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stockholders’ to repurchase $1,054,006 971,856 875,996 47,680 101,737 $1,042,322 955,337 853,507 52,351 97,860 1998 1997 1996 $837,615 775,244 643,497 53,031 89,276 1 Table of Contents Message to StocWolders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Management’s Discussion and Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Board of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 9 23 49 Message To Stockholders To Our Stockholders: First Community Bancshares, Inc. enjoyed another great year in 1998. We are pleased to provide this report on the financial performance of your Company for that year and to review with you other activities, both completed and ongoing, which are directed to ensuring continuing financial success in the future. The world is counting the days to December31, readiness for the Year 2000 and its impact 1999, and the beginning of a new millennium. Computer on the world economy is an ongoing topic of discussion and has resulted in misinformation and the unnecessary heightening of concerns that banks and the financial system may not be ready for the transition. The Year 2000 issue in its most simple form is based upon the inability of some computer chips and software to distinguish between the years 2000 and 1900. First Community began its Y2K efforts in 1997, carefully reviewing all computer hardware and software purchases for Y2K readiness. Early in 1998, the Board of Directors appointed a Y2K coordinator and established a committee to review all operations of the Company to ensure we are well prepared to make the millennium change smoothly. First Community’s core processing systems information which support customers and other applications are dependent upon hardware and software used by literally hundreds of other financial institutions are state-of-the-art readiness testing since 1997, first by the vendors themselves then by users similar to First Community. Our systems have been tested by artificially advanc- ing the internal system dates gradually through the year 2000 and beyond while processing data. Our core systems all have performed well which was expected as they have been certified by vendors of substantial reputation as Y2K compliant and have testing by other undergone substantial users with similar good results. Other non-customer computer applications have been or are being tested throughout the Company and where necessary both software and hardware replaced and retested. The Company has budgeted $150,000 in one-time costs to prepare for the Y2K transition. As a further precau- tion, a contingency plan was developed early in 1999 to ensure there is no disruption of service to our customers or disruption of operations in the unlikely event our testing fails to identify a potential problem the country. These systems and have been undergoing Y2K independent throughout or should a vendor critical ence problems with the millennium date change. to our operations experi- 1,200} 1,000 800 600 400 200 0 I I 1994 1995 1996 1997 1998 m the With these testing efforts continuing throughout remainder of 1999, our efforts have now been directed to communicating with customers our state of readiness and to working with customers to ensure they too are well-prepared. All of these activities should ensure that event for First Community and, as one of our Y2K marketing pieces states, “we want to ensure that the only ball dropped on New Year’s Ewe is in Times Square.” the century date change is a non- Net income for 1998 was $13.101 million, significantly lower than the $15.094 million reported for 1997 and lower than our plan. Late in the second quarter the Company recorded a one-time $2,900,000 loan loss provision related to a single commercial loan charge-off resulting from foreclosure on a West Virginia based furniture manufacturing facility. Although reserves had been established in prior periods related to this loan, a single provision adequate to absorb the entire loss significantly strengthened the Company’s reserves and positioned us well to speedily dispose of the real estate acquired through foreclosure. This extraordinary loan loss provision, while undesirable, a community bank which includes contributing to and supporting community development efforts which create jobs and add to the ongoing economic vitality is a result of our role as 3 of the areas we serve. Over the years, First Commu- nity Banks have been lenders to the small business community and have always been supporters of new business and business expansion through involvement in loans to developing enterprises. Most of these investments have yielded great dividends in the form of new jobs and the improvement of local economies. From time to time, however, success is not realized and assets which serve as collateral must be liqui- dated often at values which are inadequate to repay the entire debt. First Community will, however, continue to play a significant role in the economic development process within the bounds of prudent underwriting and tolerable risk as we believe that and willingness to invest community involvement efforts to improve the economic health of our communities Company. We are pleased to report facturing facility is under contract closing expected in March 1999, and that owner will not only create jobs at the facility but will immediately begin a substantial building expan- sion which will create even more opportunity and employment to sell with the the new is one of the primary roles of your in our market area. the manu- that in Earnings per share were $1.86 in 1998 compared with $2.14 for the preceding year while dividends paid were $1.05 and $1.04 in 1998 and 1997, respectively. Return on Average Equity which mea- sures our stewardship of your equity was 13.02% for 1998, very comparable to our peers, but somewhat off the 16% standard set by First Community in recent 2.50 t 2.00- 1.50- 1.00- 0.50 0.00~ I 2.14 1.98 1994 1995 1996 1997 1998 ~’ — ~g::;ity Bancshares, Inc. income combined with years. Return on Average Assets measures our ability to use assets to produce net the effective use of capital resources. Acquisitions completed during 1997 which added over $200 mil- lion in resources, negatively impacted our Return on Average Assets. This reduction is part of our overall strategic plan which requires more effective leverag ing of capital with asset growth through acquisitions that produce initial returns on assets of less than 1Yo. Return on Average Assets was 1.24% in 1998, 1.59% in 1997 and 1.73Yoin 1996, reflecting the impact of acquisitions completed during 1997. I 1 u 1994 1995 1996 1997 1998 ““” q ReturnonAverageEquity ReturnonAverageAssetsn While the extraordinary provision for loan losses income, discussed above significantly impacted net earnings per share, return on average equity and return on average assets, a rapid downturn in overall interest interest rates to 30-Year lows compressed net margins during 1998 as assets repriced more rapidly In addition, current attitudes of than did liabilities. many bank and non-bank financial service providers which have relaxed what we consider prudent risk/ reward standards resulted in the prepayment of approximately $40 million in outstanding commercial loans in 1998. The U.S. economy is more robust than ever in history. However, opinion, never a time when it makes good long-term sense to weaken commercial and other writing standards, as any future economic downturn will have signifi- cant negative impact on the collection of poorly underwritten credit. Our approach continues one of care, caution and patience as we remain regardless of competitive pressures, there is, in our loan under. to be willing to give up some current period net income to avoid substantial exposure to losses in the future. interest the foundation Total assets grew to $1.054 billion at year-end 1998 compared with $1.042 billion at year-end 1997. Earning assets, those which produce revenue, grew to an impressive $971.9 million from $955.3 million one year earlier. Stockholders’ equity, upon which the Company is based, broke the $100 million mark in 1998 and was $101.7 million at year end with book value per share of $14.50 compared with $13.85 at the end of 1997. Reserves for loan losses were $11.4 million at year end 1998 or 1.86% of outstanding loans, an increase of 9.86% over the 1.70% reported at the end of 1997. Record levels of assets, capital and reserves position First Community well for the new millennium and the years to follow. Wide-ranging issues including deterioration in the flattening of the yield curve, concern over relaxation of underwriting standards, the global economy, projected costs of Y2K remediation, indust~wide slowdown in industry consolidation and the threat of a deflationary recession took its toll on the market value of stock in the financial services sector during the third and fourth quarters of 1998 and continuing adjustment has been experienced in early 1999. - + + + S&P500Index FCBC PEERGroup 3oiI- 250- 200- 150- 100 decline in the market for bank stock with a market value of $29.25 at December 31, 1998, compared with $30.45 at year end 1997, and slipping to $27.00 during January and February 1999. Cumulative returns on your First Community stock, however, continue to out-perform our peers which also were negatively impacted by the decline in the broader market, but for the first time in recent years were slightly below the S&P 500. The decline in market value afforded the Company the opportunity to reinstate our Stock Repurchase Program in the third quarter of 1998 which had been suspended since 1996 due to pending business combinations. Your Company’s Board of Directors has authorized the repurchase of up to 100,000 shares of FCBC stock on the open market. The timing, price and quantity of purchases are at the discretion of the Corporation and the program may be discontinued or suspended at any time. The Board believes that current market prices present an attractive buying opportunity for the Company and will make the shares available for general corporate purposes which may include poten- tial acquisitions, shareholder dividend reinvestment and employee benefit plans. 35 30 25 20 15 10 5 of I 1994 1995 1996 1997 1998 q MarketValuePerShwe Stockholders’Equityn (2nthousands) 20,00( 100,OOC 80,000 60,000i 40,000 20,000 3 I ‘- 1993 1994 1995 1996 1997 1998 In June 1998, your Board of Directors adopted a Currently, bank stocks are trading at approximately 58% of the S&P 500 versus historical averages of 63% on a relative price/earnings basis, in spite of record levels of capital and reserves, lower levels of non-performing assets and record earnings in the industry. First Community did not escape the broad new ~lan of strate~ic vision for &e Company which prov{des both dire;tion and goals well into the future. The 1998 Strategic Plan provides a new statement of purpose, vision and culture specifically focused on stockholders, customers and employees. Although no area of operation is untouched by the Plan, its primary focus is on raising the level of 5 service quality to all those we serve. Initiatives incorporated in the Plan transform the entire organi- zation into one which is more proactive, moving from a focus on products and delivery to a greater focus on customer relationships and their needs. The entire financial services community is undergoing rapid change and we are excited that the activities contemplated by our Strategic Plan will create an organization of service second to none, providing the financial products and services necessary for our customers to reach their maximum financial potential as we go through the years ahead together. We think that success in the future will be the result of First Community growing with its well-established cus- tomer base, and we are confident Plan provides the guidance to ensure that future success. the new Strategic of During 1999, we celebrate 125 Years to customers, communities fewer and fewer true community service and sharehold- ers. Rich in history and heritage, we enjoy a unique position in that banking institutions exist today. We quietly invest our time, our economic resources and ourselves in the communities which we call home to ensure their continual success as ours is an effort of the strongest intelligent, but . . . that survive, nor the the one most responsive to cooperation — an effort of community — simply what we are about. One well-known author suc- cinctly stated the challenge of the future when he said, “It is not most change.” We do not wish only to survive by being responsive to the changes around us, but desire to thrive in the new millennium and the years to come by being a proactive agent of change. First Commu- nity is celebrating 125 years of success and, armed is well-prepared for the century with a new vision, the opportunities date change and is excited about which lie in its future. As always, we greatly appreciate your loyalty and support as customers and stockholders and welcome your input and suggestions. Sincerely, +“”& James L. Harrison, Sr. President & Chief Executive Officer The Oficers of First Community Bancshares, Inc. from kft to right: John M. Mendez, Vice President James L. Harrison, Sr. President and Chief Financial Officer and Chief Executive Officer Robert L. Buzzo, Vice President Year 2000 Statement First Community Bancshares has made a commitment to Year 2000 readiness which began in 1997 and will continue until the issue is resolved in the coming New Year. The Year 2000 problem revolves around a computer programming oversight which was made when program date fields were written in two character (i.e., 99) instead of four character (i.e. 1999) formats. It is feared that when the date changes from 1999 to 2000, some systems may not properly recognize the step forward to 2000 and revert to 1900. This incorrect assumption may cause the non-Y2K ready systems to malfunction or fail. What is First Community Bancshares’ solution for the Y2K problem? Our solution is extensive planning and preparation. Our Board of Directors and senior management have made Year 2000 readiness a top priority. An in-depth Year 2000 Plan was devised and a Board-appointed Steering Committee composed of senior level management and internal technology specialists was assembled to address our Year 2000 concerns. Our Year 2000 Plan not only addresses First Community’s Y2K preparation, but also works to veri~ that our vendors are prepared and will not fail to deliver the services upon which we rely. The Plan incorporates the Federal Financial Institution Examination Council’s guidelines and deadlines for bank Y2K preparations, These guidelines are divided into five phases: Awareness, Assessment, Renovation, Testing and Implementation. The Plan also focuses on evaluating the ability of our primary borrowers to operate and keep their relationships in good standing. The results of this evaluation have been encouraging and indicate that most of our customers and vendors are aware of and are working to eliminate the Y2K issues they may face. First Community Bancshares’ Year 2000 Steering Committee began a full risk assessment of hardware, software and service providers during the fourth quarter of 1997. The Committee has used this risk assessment to help monitor Year 2000 remediation and testing efforts for computer systems throughout our organization. Special attention has been focused on “mission critical” system — those systems upon which our Company most heavily relies for daily operation. The key component in our system is the central mainframe computer, which is an IBM AS400. Not relying upon hardware and software manufacturer reassurances, the Steering Committee acquired an additional AS400 computer in September 1998 for use as a “time machine.” The AS400 “time machine” enabled First Community’s specialists to leap forward into the future to December 31, 1999. On this simulated New Year’s Eve the test team ran our actual core application software (CBS Fiserv) on the same type of computer that drives the bank’s daily operations. Both hardware and software ran smoothly through the simulated New Year’s date change, through the leap year and other key processing dates which have generated concern. So far, &is test has provided us with assurance that our core system and its connected sub-systems have been properly remediated and will be able to deliver non-interrupted service to our customers in the new millennium. All other mission critical systems have also performed superbly in extensive Y2K testing, the results of which have been verified by system users and our audit department’s quality control staff. In addition to our testing, the hardware and software used by our Company is used by other banks nationally and has withstood their testing regimens. 7, Although First Community Bancshares’ important systems have been tested and proven Y2K ready, a contingency plan has been developed. This plan provides further assurance that no disruption of service will occur in the unlikely event our testing efforts have failed to identify a potential Year 2000 problem. The second and third quarters of 1999 will be devoted to Year 2000 contingency plan training and testing. Our in-depth risk assessment also isolated some systems which were not capable of working in the new millennium. The systems which have been or are being replaced include payroll, several personal computers and their operating systems and some telephone equipment. Non-compliant systems will be replaced and thoroughly tested before the century date change. Our projected Year 2000 direct expenses are expected to total $150,000. Due to our practice of investing in top quality technology, the actual direct expense to date has been approximately $47,000. These expenses have been aimed at replacing non-compliant systems and personnel costs associated with our comprehensive testing and test results validation. In addition to these direct expenses, $30,000 in administrative costs have been realized to assure proper management of the project. We are proud of the efforts and results of our Year 2000 preparation and are excited by the level of readiness it has given our Company. The commitment and energy of our board, management and staff will ensure that our 125 year old company will be there to provide service in the new millennium. Management’s Discussion and Analysis Introduction, . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Summary Financial Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Five-Year Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Common Stock and Dividends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net Interest Margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net Interest Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for Loan Losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-Interest Income........,.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-Interest Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income Tax Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ,. Securities Available for sake.... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loan Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reserve for Loan Losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-Performing Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Short-Term Borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stockholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Liquidity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest Rate Sensitivity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Year 2000 Preparedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 10 10 12 12 13 14 14 15 15 17 17 17 17 18 19 19 19 19 20 20 20 21 9 Management’s Discussion and Analysis of Financial Condition and Results of Operations Introduction This discussion should be read in conjunction with this report and the the consolidated financial statements, notes and tables included throughout Company’s Annual Report on Form 1O-K. Manage- ment’s discussion and analysis may contain forward- looking statements that are provided to assist in the understanding of future financial performance. How- ever, such performance involves risks and uncertain- ties, which may cause actual results to differ materially from those expressed in forwarding-looking statements. First Community Bancshares, Inc. (the “Company” is currently a multi-state, or “First Community”) multi-bank holding company headquartered in Princeton, West Virginia. With to~al resources of $1.054 billion at year-end 1998, First Community provides financial and trust services to individuals and commercial customers through 33 full-service banking locations in West Virginia, Virginia and North Carolina. In February 1999, the respective boards of the four Inc. affiliate banks adopted a merger and reorganization agreement providing for the merger of all affiliate banks of First Community Bancshares, into a single national association. The mergers are expected to be complete on or about April 30, 1999, at which time all banking operations will be conducted within First Community Bank, N.A., a national association to supervision of the Comptroller of the subject Currency. The mergers are designed to enhance operational efficiency and streamline regulatory considerations. The completion of bank and branch acquisitions in 1997 resulted in significant growth in total resources of the Company between 1996 and 1997 and have a material discussion of financial condition and results of operations in comparison with other periods presented. impact on the following Acquisitions The Company acquired Citizens Bank of Tazewell in Tazewell, Virginia in July 1996 and (“Citizens”) Blue Ridge Bank (“Blue Ridge”) Carolina in April 1997. Additionally, in Sparta, North the Company a*First Community Bancshares,Inc. acquired three Virginia branches in July 1997 and one additional West Virginia branch in Septem. ber 1997. All of the above acquisitions, except Citizens, were accounted for as “purchase” transac- tions. “Purchase” accounting does not require restate- ment of prior years’ results; accordingly, the addition of Blue Ridge and the branches result changes in balance sheet expenses. in material items and revenues and The Company’s common stock was split five shares for four on March 31, 1997 and March 31, 1998. All share and per share data in this report have been retroactively adjusted to reflect these two stock splits. Summary Financial Results 20 .—...—— ;:. $15,094 i 15 10 50 0 Net loan loss provisions in the second income for 1998 was $13.1 million, or $1.86 per share, down $1.99 million from $15.09 mil- lion or $2.14 per share in 1997. The decrease in net income between 1997 and 1998 is primarily attribu- table to higher quarter of 1998 due to the resolution through foreclosure of a $4.7 million commercial tionship. Other results include the increase in operating costs and intangible amortization associated with the bank and branch acquisitions and the decline in net margin from 5.25% in 1997 to the 1998 level of factors negatively affecting 1998 loan rela- interest 4.8 1%. The reduction in net interest margin reflects the addition of interest cost on acquisition indebted. ness, a decrease in the Company’s loan-to-deposit ratio, and declining asset yields as a result of the overall decreasing trend in the interest ment throughout- 1998. rate environ- 2.0 1.5 I I 1.0 0.5 0.0 1.70% 1.73% 1.59% 1994 1995 1996 1997 1998 The Company’s key profitability ratios of Return on Average Assets (ROA) and Return on Average Equity (ROE) continue to reflect the strong earnings performance of the Company and compare favorably with regional and national peer groups. ROA,which measures the Company’s stewardship of assets, was in large part, 1.24%, down from 1.59% in 1997 and 1,73% in 1996. These decreases in ROA relate, to branch acquisitions and related increases in average assets in 1997 and 1998 designed to maintain the Company’s capital leverage position. ROE for the Company remained strong in 1998 at 13.02% but reflects a decrease from 16.05% in 1997 and 16.26% in 1996. The declining ROE reflects the effect of capital growth from $80.4 million in 1995 to $101.7 million at the close of 1998 and the lower net paragraph. income in 1998 as discussed in the preceding 20 15 I I 10 5 0 16.33% —_____ 13.02% 1YY4 lYY> 19Y6 1997 11 Five-Year Selected Financial Data (Amounts in Thousands, Except Percent and Per Share Data) $ $ $ Balance Sheet Summary (at end of period) Loans, net of unearned income . . . . . . . . . . . Reserve for loan losses . . . . . . . . . . . . . . . . . . Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Lon~term debt . . . . . . . . . . . . . . . . . . . . . . . . Stockholders’ Equity . . . . . . . . . . . . . . . . . . . . Summary of Earnings interest income . . . . . . . . . . . . . . . . . . . Total Total interest expense . . . . . . . . . . . . . . . . . . . Provision for loan losses . . . . . . . . . . . . . . . . . income . . . . . . . . . . . . . . . . . . . . Non-interest Non-interest expense . . . . . . . . . . . . . . . . . . . Income tax expense . . . . . . . . . . . . . . . . . . . . Income . . . . . . . . . . . . . . . . . . . . . . . . . . . Net Per Share Data . . . . . . . . . . . . . . . Basic and diluted easings Cash dividends . . . . . . . . . . . . . . . . . . . . . . . . Book value at year-end . . . . . . . . . . . . . . . . . . Selected Ratios Return on average assets . . . . . . . . . . . . . . . . Return on average equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dividend payout Equity to year-end assets . . . . . . . . . . . . . . . . Risk based capital . . . Leverage ratio . . . . . . . . . . . . . . . . . . . . . . . . . to risk adjusted assets. 1998 1997 1996 1995 1994 611,493 11,404 277,210 1,054,006 875,996 18,176 101,737 $ 6[;,~~[ $54~,j~: 270;969 1,042,322 853,507 24,330 97,860 236:441 837,615 643,497 15,000 89,276 $485,151 8,321 246,578 780,253 622,723 15,000 80,411 $421,189 8,479 268,906 744,686 616,226 10,000 70,149 $ $ 81,213 38,128 6,250 11,182 28,752 6,164 13,101 1.86 1.05 14.50 75,834 32,890 4,963 8,661 24,672 6,876 15,094 $64,941 $58,954 $53,723 26,933 2,273 9,070 24,358 6,530 13,917 23,482 2,235 7,214 22,694 4,968 12,789 19,846 1,764 7,035 23,238 4,456 11,454 2.14 1.04 13.85 $ 1.98 .91 12.64 $ 1.82 .78 11.50 $ 1.62 .68 9.97 1.24% 13.02% 56.45% 9.65% 13.25% 7.370/0 1.59% 16.05% 48.60% 9.39% 11.96% 6.96% 1.73% 16.26% 45.96% 10.66% 17.02% 10.33% 1.70% 16.77% 42.86% 10.31% 17.29% 9.86% 1.55% 16.33% 41.98% 9.42% 17,22% 9.49% Common Stock and Dividends The Company’s common stock istraded inthe over-the-counter market. Daily bid and ask quota- tions are available through the NASDAQ Level 111 Electronic Billboard under the symbol FCBC. On December 31, 1998, First Community’s common stock price was $29.25, a decrease of 3.9% from the split adjusted December 31, 1997 closing price of $30.45. The year-end market price for First Community common stock of $29.25 represents 202% of the Company’s book value as of the close of the year and reflects total market capitalization of $205 million. Utilizing the year-end market price and 1998 basic earnings per share, First Community common stock closed the year trading at a price/earnings multiple of 15.73 times 1998 basic earnings per share. Book value per common share was $14.50 at December 31, 1998, compared with $13.85at December 31, 1997, and $12.64 at the close of 1996. Dividends for 1998 totaled $1.05 per share, up $.01 from $1,04 paid in 1997. The 1998 dividends resulted in a cash yield on year-end market of 3 .59Y0. ~og$;;iti Bancshares, Inc. 1.2-T ‘--- 1.0 0.8 0.6 0.4 0.2 ..- 00 I 1997 1998 lstQ.tier 2ndQuarter 3rdQuarter n 4thQuarter n Cumulative Market Price and Dividends 1998 First Quarter Second Quarter Third Quarter Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bid Low $24.48 36.00 31.00 26.50 High $29.60 43,00 42.75 33.75 Book Value Per Share $14,18 14.01 14.35 14.50 1997 First Quarter Second Quarter Third Quarter Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $23.68 26.40 28.90 32.00 $21.76 22.60 25.40 26.20 $12.83 13.30 13.58 13.85 Cash Dividends Per Share $.25 .25 .25 .30 $1.05 $ .22 .25 .25 .32 $1.04 Net Interest Margin Net interest margin measures net interest income of average earning assets. In 1998, interest margin declined to 4.81% for the year as apercentage net from 5.25% in1997 decrease was due in large part yield which decreased 26 basis points, largely in the taxable portion of the “available for sale” securities portfolio andshort-term investments. During 1998, a and 5.39% in1996. This toa declining asset further reducing the assets was invested in lower larger portion ofeaming yield, short-term investments overall asset yield. Increases in the Company’s cost of 19980f10 funds during 1997and 14 basis Points, respectively, also had a negative impact on net adversely impacted by branch acquisitions which brought with them a relatively higher cost of funds. interest margin. The cost of funds was basis points and 13 q q q . 5.39% 5.25% 2 1 0 ,- 1994 1995 1996 1997 1998 50,000 40,000 30,000 120,000 10,000 0 I $40,395 1994 1995 1996 1997 1998 Net Interest Income Provision for Loan Losses in the Company’s loan portfolio. The level The provision for loan losses represents charges against operations to establish reserves for loan losses inherent of expense, as well as the required level of reserves, is dependent upon a number of factors including historical specific credit weaknesses within the portfolio, con- centrations of credit, assessment of the prevailing economic climate, and other factors which may affect the overall condition of the loan portfolio. loss ratios by loan type, assessment of The provision for loan losses was $6.3 million in 1998, $5.0 million in 1997 and $2.3 million in 1996. The increase in the provision for loan losses in 1998 of $1.3 million was largely the result of a second quarter provision taken in response to a commercial loan foreclosure. Elevated provisions in both 1997 and 1998 also levels of consumer include higher loan charge-offs in the Company’s credit card division and indirect auto financing program. Each of these programs were curtailed in 1998 and losses associated with these types of retail lending are expected to be substan- tially reduced. The fundamental source of the Company’s ear- interest income, is defined as the difference nings,net between income on earning assets and the cost of funds supporting those assets. Significant categories of earning assets are loans and securities while deposits and short-term borrowings represent the major por- tion of interest-bearing liabilities. On a tax equivalent basis, net interest income increased $726,000 or 1.6% in 1998 and $5.3 million or 13.1 Yoin 1997. Average earning assets increased 10.9% in 1998 and 16.1% in 1997. These increases were primarily the result of bank and branch acquisitions occurring throughout tributed new earning assets and increases in tax equivalent net 1997 which con- income. interest The modest increase in tax equivalent net interest income for 1998 is impacted by the sale of approxi- mately $14.0 million in credit card revolving loan accounts which reduced interest and fees on loans approximately $747,000 in 1998. The proceeds of the sale were reinvested in interest bearing balances which yielded substantially lower earnings and, accordingly, income. The portfolio sale was part of an overall exit strategy for the credit card division. reduced current year net interest @~ Firstl Community Bancshares,Inc. Non-Interest Income Non-interest income consists primarily of fiduciary income on trust services and service charges on deposit accounts. Non-interest $11.2 million in 1998, a $2.5 million increase or 29.1% over the $8.7 million in 1997 and $2.1 roil. lion or 23.3% improvement over the 1996 totals of $9.1 million. income totaled Total non-interest revenues from continuing sources increased $1.04 million between 1996 and 1997 with this increase due largely to the acquisi- tions of Blue Ridge Bank in 1997 which contributed $457,000 in other revenues and new branches which added an additional $179,000. When comparing 1998 with 1997, the full year of Blue Ridge and branches contributed an additional $509,000 in other operating revenues with non-interest continuing sources increasing approximately $260,000. income from .30 .25 .20 .15 .10 .05 .00 - Higher levels of non-interest income for 1998 and and termination 1996 include pension curtailment gains of $1,062,000 (net of federal excise tax of $764,000) and $1,450,000, the Company’s termination of its Defined Benefit Pension Plan, which was completed in the first quarter of 1998. respectively, as a result of Included in other operating income for 1998 are relationships in the Company’s credit card gains totaling $1.2 million on the sale of substan- tially all revolving loan accounts and all merchant account division. The Company’s decision to exit this line of business was based on its relatively small share of this market, vigorous competition for credit card accounts and rising consumer delinquencies. At year-end 1998, the Company retained approximately $2 million in revolving private label credit card accounts. Service charges on deposit accounts are the largest income. Service charge income source of non-interest totaled $3.8 million in 1998, an increase of $457,000 or 13.9% over 1997. This compares with a 10.5% increase of $313,000 between 1997 and 1996. Other service charges, commissions and fees declined slightly in 1998 versus 1997. Alternatively, a 30.5% increase in 1997 of $696,000 was exper- ienced over 1996 levels. The increase in 1997 is the result of an increased emphasis on fee bwed revenues throughout the organization as well as the addition of Blue Ridge Bank and branch acquisitions occurring in 1997 which added approximately $142,000. Other transaction volume also increased in 1997, adding fee revenues of approximately $614,000. Fiduciary income continued at a strong level and totaled $1.7 million in 1998, 1997 and 1996. Tmst revenues are comprised of fees for asset management and estate settlement. Expenses associated with the operation of the Tmst and Financial Services Divi- sion are included in non-interest expense. Non-interest Expense Non-interest expenses consist of salaries and bene- fits, occupancy, equipment and all other operating expense incurred by the Company. Non-interest expense totaled $28.8 million in 1998, as compared with $24.7 million and $24.4 mil- lion in 1997 and 1996, respectively. The substantial increase in 1998 operating costs was attributable to the full year costs of Blue Ridge Bank and the various branches in 1998 versus the partial year of operation in 1997. When comparing 1998 to 1997, the addition of Blue Ridge Bank and branches acquired throughout 1997 added approximately $956,000 and $1,268,000, 1997 levels. The total respectively, over their increase in 1997 over 1996 for 15 the bank and branch acquisitions was approximately $3,301,000 and $722,000, respectively. In November 1996, the Company detected a “payments system fraud” perpetrated by a business customer and certain of its principals, all of whom were long-term customers of a subsidiary of the Company. The transaction commonly referred to as a funds “kite” involved the transfer of non-existent between a subsidiary bank of the Company and a third party to cover existing overdrafts. The Com- pany recorded associated losses in December of 1996 totaling $3.4 million. These losses are reflected as a expenses for 1996. separate line item in non-interest The Company expects partial repayment from either the principals or their business interests. Partial in 1997 totaled $177,000 and is reflected repayment in other operating income. There were no recoveries recognized in 1998. ($700,000) The nominal increase in total non-interest expense between 1996 and 1997 reflects the net effect of the check collection losses in 1996 and the added operating cost of Blue Ridge Bank ($3.3 million) and new branches in 1997. Partially offsetting the cost of operation of new branches in 1997, was the recognition of a $439,000 credit in lieu of pension expense due to the benefit freeze and pending plan termination and the reversal of $700,000 in litigation reserves established in 1995 and 1996. The Company was able to reverse the largest portion of $1.1 million in reserves established to provide for possible losses on litigation which was ultimately settled in the second quarter of 1997 at a total cost of approximately $460,000. Salaries and employee benefits increased $906,000 or 8.090 when comparing 1998 with 1997 and relate almost exclusively to the addition of Blue Ridge and five new branches acquired in 1997. The effect of a fill year of operations of these facilities in 1998 versus a partial year in 1997 resulted in additional personnel costs of approximately $1,118,000 in 1998. Blue Ridge contributed an additional $521,000 of this total while the branch acquisitions added an additional $597,000 in 1998. When comparing 1997 to 1996, the increase of approximately $1.8 million is largely the result of the Blue Ridge and branch acquisitions occurring in 1997 which added an additional $1,653,000 over 1996. Blue Ridge added an additional $1,355,000 while the branches added an additional $298,000 in personnel cost. occupancy expense increased $264,000 or 15.7% between 1998 and 1997. The acquisition of Blue Ridge and new branches in 1997 resulted in addi- tional occupancy cost in 1998 of approximately $195,000. The $323,000 increase (19.7%) in firniture and equipment expense in 1998 reflects not only the impact of acquisitions, which added approximately $197,000 in additional cost, but also includes depre- associated with the imple- ciation and maintenance mentation of new check processing technology and the advent of electronic banking services imple- mented in 1997 and early 1998. 1— — 3.0 2.5 2.0 I 1.5 1.0 0.5 0.0 —— rhe Company’s net overhead ratio (non-interest income excluding security expense less non-interest ga;ns and non-recurring gains divided by average earning assets) is a measure of its ability to manage and contr~l costs. As this ratio decreases, more of the net The net overhead ratios for 1998, 1997 and 1996 were 2.06Y0, 1.84% and 2.22Y0, respectively. income earned is realized as net income. interest The Company’s efficiency ratio also measures management’s ability to control costs and maximize revenue growth. The efficiency ratio is computed by dividing non-interest expense by the sum of the net income (all non- interest recurring items excluded). The efficiency ratio for 1998 was 47.4%. The efficiency ratio for both 1997 and 1996 was 42.2% income plus non-interest q (cid:151) Income Tax Expense Income tax expense totaled $6.2 million in 1998, compared with $6.9 million in 1997 and $6.5 million in 1996. The major difference between the statutory tax rate and the effective tax rate (income tax expense divided bypre-tax income which is not purposes. The primary category of non-taxable income is that of state and municipal securities and industrial effective tax rate for 1998 was 32.0% as compared with 31.3% for 1997 and 31.9% in 1996. book income) taxable for Federal revenue bonds and tax-free loans. The income tax results from Investment Securities Investment securities are comprised largely of U.S. Agency obligations and state and municipal securi- ties. U.S. Agency obligations include securities issued by various government corporations and agencies, including FHLB, FNMA, GNMA, SLMA, FFCB, and FHLMC. Obligations of States and Political Subdivisions totaling $75.0 million are comprised of high grade municipal securities generally carrying AAA bond ratings, many of which also carry credit enhancement insurance by major insurers of investment obligations. The average maturity of the investment portfolio increased from 9.08 years in 1997 to 10.05 years in 1998 with the tax equivalent yield increasing from 7.87% at year-end 1997 to 8.38% at the close of 1998. The increase in yield reflects the change in portfolio composition which shifted toward the municipal bond sector. The investment portfolio totaling $84.0 million decreased $25.2 million between 1997 and 1998. This decrease is the result of large prepayments and calls occurring as a result of the declining interest in 1998. Portions of these cash rate environment flows were invested in overnight interest bearing balances with the Federal Home Loan Bank and correspondent banking institutions. Securities Available for Sale Securities available for sale are used as part of management’s asset/liability strategy. These securities may be sold in response to changes in interest rates, changes in prepayment other factors. These securities are recorded at market value. risk, for liquidity needs and At December 31, 1998, the Company had $193.2 million in securities available for sale, com- pared with $161.8 million at year-end 1997. The increase in this portfolio reflects the reinvestment of funds received from loan principal prepayments arising from early payoffs and calls and maturities of investment securities. The market value of securities available for sale exceeded book value at year-end 1998 by $2.1 mil- lion. The tax equivalent purchase yield on securities available for sale in 1998 was 6.56% and the tax equivalent purchase yield in 1997 was 6.99Y0. The 43 basis point decrease in yield on the portfolio is a rates direct result of a general decline in interest which triggered above average calls and prepayments. These prepayments were then invested at prevailing lower market rates along with additional derived from reductions in the loan portfolio. funds The average maturity of the portfolio was 15.6 years and 11.8 years at December 31, 1998 and 1997, respectively. The extended average maturity reflects an increase in longer term municipal securi- ties as a percentage of the total portfolio as well as the replacement of short-term agency securities with longer term instruments. Most of these longer term ~ecurities have call provisions and many are expected :0 be called prior to &eir final maturity. RealEstate- Construction 1.5% Commercial.Financird andAgricultural ~mi — AllOthers .1% 12!.6% / RealEstate- Residential 37.3% RealEstate- Commercial 27.9% Loan Portfolio The loan portfolio is diversified among loan types and indust~ segments as well as geography. Commer- cial and commercial real estate loans represent 40.5% real of the total portfolio. During 1998, residential loans estate loans increased as a percentage of total and now comprise 37.3 Yoof the portfolio. Decreases in portfolio sectors were noted in commercial and commercial real estate, which declined by $37.2 mil- 17 consumer lion or 13.0% in 1998. Additionally, loans declined by $23.0 million or 15.5% from $148.5 mil- lion at December 31, 1997 to $125.5 million at the close of 1998 and include the reduction due to the aforementioned sale of credit card loans. Consumer loans re~resent 20.6% and 22.0% of the portfolio at the close of 1998 and 1997, respectively .- . 800 700 600 I500 400 300 200 100- 0 1994 1995 1996 1997 1998 Loans, net of unearned income, were $611.5 mil- lion at year-end 1998. This represents a $60.3 mil- lion decline or 9.0% from the $671.8 million level at December 31, 1997. During 1998, increased competi- tion for commercial loans by other banks and capital market groups impacted minimum underwriting stan- dards within the industry leading to sub-prime interest emphasis on owner guarantees. The Company resisted this easing of price and quality standards and sacrificed some existing and new loan business in the process. This shift in underwriting standards coupled with the declining interest resulted in above average principal prepayments and contrib- uted to the decline in the loan portfolio. rate environment ratios, and less loan-to-value rates, higher In addition to loan prepayments, the sale of substantially all credit card loans in the third and fourth quarters of 1998 resulted in an additional $14 million reduction in the loan portfolio. The loan-to-deposit ratio decreased to 70% at December 31, 1998 from 79% at December 31, 1997. The reduction in the loan-to-deposit ratio is a result a . Com%;kity Bancshares, Inc. of the decline noted in the loan portfolio and a $22.5 million increase in total deposits. Reserve for Loan Losses to extend 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 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, management’s judgment, absorb potential in the loan portfolio. Management performs monthly assessments to deter- mine the appropriate level of the reserve. The factors considered in this evaluation include, but are not necessarily limited to, estimated losses from loan and other credit arrangements, general economic condi- tions, changes in credit concentrations collateral, historical in portfolio volume, maturity, composition, delin- quencies, and non-accruals. While management has the attributed reserves to various portfolio segments, allowance is general entire portfolio. in is considered adequate to loan loss experience, and trends in nature and is available for the losses inherent or pledged The reserve for loan losses represents 140% of non-performing loans at year-end 1998 versus 79% and 144% at December 1997 and 1996, respectively. When other real estate is combined with non- performing loans, reserves equal 98% of non-perform- ing assets at the end of 1998 versus 72% and 106% at December 31, 1997 and 1996, respectively. Net charge-offs were $6.3 million in 1998, as compared with $4.5 million in 1997 and $1.6 million in 1996, respectively. The $1.8 million increase in net charge-offs for 1998 is principally related to the commercial in relationship to a failed furniture assembly plant Princeton, West Virginia in the second quarter of 1998. loan charge-off of $2.9 million on a loan Net charge-offs for 1997 were elevated, due in to retail loan losses of $955,000 and $468,000 part, in the credit card and indirect auto loan areas, respectively, as well as a large single commercial charge-off of $800,000 on a car dealer floor plan arrangement. loan Non-Performing Assets Non-performing assets include loans on which interest accruals have ceased, loans contractually past due 90 days or more and still accruing interest, and other real estate owned (OREO) pursuant to foreclo- sure proceedings. Total non-performing assets were $11.7 million at December31, 1998. The levels of non-performing assets for the last five years are presented in the table below. 1 December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-accruing Loans Loans 90 Days Past Due . . . . . . . . . . . . . . . . . . . . . . . . Other Real Estate Owned . . . . . . . . . . . . . . . . . . . . . . . .! I Non-performing Non-performing andother loans as a percentage of total assets as a percentage of total l~ans loans real estate owned... Reserve for loan losses as a percentage of non- . . . . . . . . . . . . . . . . 1998 1997 $7,763 $9,988 37’7 3,547 4,391 1,472 $11,687 $15,851 1996 . $5,476 780 2,225 $8,481 1995 — $4,371 673 929 $5,973 1994 —, $6,909 968 919 $8,796 1.3% 1.9% 2.1% 1.1% 1.0% 1.9% 2.4% 1.6% 1.2% 2.l% performing loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140.l% 79.3% 143.7% 165.0% 107.6% Reserve for loan losses as a percentage of non- performing assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Non-performing assets decreased $4.2 million between 1997 and 1998 with decreases in both loans. An ninety days past due and non-accrual real estate owned increase was reflected in other during 1998 as a result of the acquisitions of a furniture manufacturing facility in southern West Virginia and a townhouse project Virginia. These acquisitions resulted in additional other real estate owned in the amounts of $1.5 mil- lion and $500,000, respectively. The manufacturing to sell and the property is presently under contract income until townhouse project the units are sold. No losses are anticipated from the sale of these properties. is providing rental in northern West Deposits Toval deposits at December 31, 1998 increased $22.5 million or 2.6% when compared to Decem- ber 31, 1997. The increase in deposits is the result of $20.1 million and $9.6 million increases in demand and interest bearing demand deposits, respectively. Slight decreases were realized in other savings deposit categories. In 1998, the average rate paid on interest bearing liabilities was 4.57%, up from 4.4% in 1997. The increase in the Company’s cost of funds is the result of competition for deposits among both finan- and non-bank financial service prov- cial institutions iders and the addition of new branches in late 1997 with relatively higher costs of funds. These factors lead to an increase in the overall cost of funds despite a general decline in market during the year. interest rates 97.6% 72.0% 106.0% 139.3% 96.4% Average deposits totaled $870.8 million for 1998 versus $759.4 million in 1997. The largest increase in average deposits was experienced in interest-bearing demand deposits, which increased 20.7% versus an overall bearing increase of 14.7Y0.Non-interest demand deposits increased 11.590 with a 16.8% increase experienced on average time deposits. Aver- age savings deposit accounts also increased 6.3Y0. Short-Term Borrowings The Company’s short-term borrowings consist pri- marily of Federal Funds purchased and securities sold under agreements to repurchase. This category of funding is a source of moderately priced short-term funds. Short-term borrowings decreased on average $8.0 million or 13.5% from 1997 following a 8.4% decrease between 1997 and 1996. The decrease in average balances in 1998 is the result of the increased liquidity in 1998. Strong liquidity in 1998 eliminated the need to purchase federal funds and reduced the emphasis on short-term finding through customer repurchase agreements. Other Indebtedness Other indebtedness, which represents long-term advances from the Federal Home Loan Bank (FHLB) and acquisition debt bank decreased by $6.3 million in 1998. The decrease is attributable lion of FHLB debt and principal acquisition debt. to a correspondent repayments on to the maturity of $5.o roil. 19 Stockholders’ Equity Risk-based capital ratios are a measure of the Company’s capital adequacy. At December 31, 1998, the Company’s Tier I capital ratio was 12.0% compared with 10.70% in 1997. Risk-based capital ratios and the leverage ratio are used by banking regulators to measure the capital adequacy of banking institutions. Risk-based capital guidelines risk weight balance sheet assets and off-balance sheet commit- ments in determining capital adequacy. The Com- pany’s total risk-based capital-to-asset 13.25% at the close of 1998 compared with 11.96% in 1997. Both of these ratios are well above the current minimum level of 870 prescribed for bank holding companies. ratio was H I 20 — I 15 -— -—8.M% I 101 1995 1996 1997 19 0 5 . = RegulatoVMinimum W Risk-AdjustedAssets The leverage ratio is the measurement of total tangible equity to total assets. The Company’s leverage ratio at December 31, 1998 was 7.37%, compared to 6.96% at December 31, 1997, both of which are well above the minimum 3% and the recommended 4% to 5% range prescribed by the Federal Reserve. Liquidity Liquidity represents the Company’s ability to respond to demands for funds and is usually derived from maturing investment investments, periodic repayment of loan principal, and from the Company’s ability to generate new deposits. The Company also has the ability to attmct securities, overnight a . ~omktikty Bancshares, Inc. short-term sources of finds and draw on credit which have been established at financial to meet cash needs. lines institutions Total liquidity of $462.7 million at December 31, 1998 is comprised of the following: cash on hand and deposits with other financial institutions of $91.5 miIIion; securities available for sale of investment $193.2 million; due within one year of $3.9 milliow federal finds sold of $25.6 millio~ and Federal Home Loan Bank credit availability of $148.5 million. securities held to maturity Interest Rate Sensitivity Net income, revenue, is subject rate environments rate risk has four primary components the Company’s primary com- to variation interest ponent of operational as a result of changes in interest in conjunction with unbalanced repricing opportuni- ties in earning assets and interest bearing liabilities. Interest 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 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. rates change. Basis risk occurs when the rate level of interest to measure interest rates, the Company manages its interest and thus, general repricing opportunities sensitivity. The Company uses an earnings simulation model rate sensitivityy. The model captures all earning assets, interest bearing liabilities and all off balance sheet financial combines the various factors affecting rate sensitivity into an earnings outlook and based upon the latest simulation, it is currently the Company believes that asset sensitive. Asset sensitive positions can positively impact net ment or, alternatively, income in a falling rate environment. income in a rising rate environ- interest adversely impact net instruments and interest The Company has established policy limits for rate risk which allows for no tolerance of interest more than a ten percent interest tions. Based on the most recent simulation, reduction in projected net income based on quarterly income simula- the 1998 13 In order to mitigate the effect of changes in the its current exposure to rate risk does not exceed this policy limit. In Company believes that interest the simulation’s most likely scenario which incorpo- rates relatively little change in the treasury yield curve and a 25 basis point drop in the prime lending rate in the second quarter of 1999, net income could potentially increase by as much as 4°A over 1998 with effective management of key deposit interest interest rates. Year 2000 Preparedness The arrival of January 1, 2000 is expected to cause issues involv- the is ongoing and is nearing the completion of disruption in computer systems (hardware, software and imbedded chips) with two-digit year fields, which cannot distinguish between the years 1900 and 2000. First Community Bancshares, Inc. and affiliates have established an oversight committee to direct and monitor its Year 2000 readiness project. As of December 31, 1998 and the date of this report, project the testing phase. The principal purpose of the project is to address issues or potential ing computer programs and imbedded computer chips which may be unable to distinguish between the Year is 1900 and the Year 2000. The Project Committee comprised of key management and operational per- sonnel from throughout the Company. This Commit- tee, appointed by the Company’s Board of Directors, has full authority to direct resources as necessary to ensure that project objectives are achieved and completed within prescribed time frames and well in advance of the millennium date change. The Com- mittee has completed its work in the awareness and assessment phases by identifying those computer systems which the Company uses to process impor- tant have embedded computer chips which are subject Year 2000 problems. The Committee prioritized all such systems and identified a group of ‘(mission critical” systems. information, and those other systems which may to the loan relationships and suppliers to In order to determine the Company’s exposure due third-party Year 2000 problems, to potential oversight committee coordinated the risk assessment of significant evaluate the state of readiness of these entities and their ability to deal with Year 2000 problems. The remediation phase involves upgrading or replacing of hardware, software and other systems which could be affected by Year 2000 problems. This phase is complete for all mission critical systems and the testing process is underway on these renovated systems and mission critical systems provided by third parties which are certified as Year 2000 compliant. Testing for mission critical systems, including the items the Federal Reserve On-Line Exchange, Company’s Comprehensive Banking System, processing, the Trust accounting system, and the ATM Manage- ment system has been completed. Testing for other mission critical systems including loan and deposit origination platform systems is underway and is scheduled to be complete by March 31, 1999. Additional testing for vendor-provided releases on these systems will be necessary throughout 1999 as these releases are made available. Other systems which are not considered mission critical remain in the remediation phase with com- pletion of remediation and testing planned for the second quarter of 1999. Risks The failure to correct a material Year 2000 if in loan in, or a in an interruption their ability to repay their loan customers experience severe problem could result failure of, certain normal business activities or operations. Such failures could materially and adversely effect the Company’s results of operations, liquidity and financial condition. For example, significant Year 2000 problems, obligations in a timely manner would be adversely affected. Due to the general uncertainty inherent the Year 2000 problem, resulting in part from the uncertainty of the Year 2000 readiness of certain third party suppliers and customers, unable to determine at this time whether consequences of Year 2000 failures will have a material tions, the Year 2000 project is expected to significantly reduce the Company’s level of uncertainty about the Year 2000 problem and, Year 2000 compliance and readiness of its material external agents and customers. The Company believes that with the remediation of existing systems of new business systems and with the implementation and completion of the project as scheduled, possibility of significant operations should be reduced. impact on the Company’s results of opera- liquidity or financial condition. Completion of the interruptions of normal the Company is the in particular, about the costs The Company’s budgeted total cost of the is approximately $150,000. The through the is Year 2000 project total amount expended on the project date of this report, exclusive of administration, approximately $47,000 and includes the cost of salary and overtime for existing operations and Information testing, and verifica- Systems staff in the assessment, 21 costs of $30,000 are is estimated at $103,000. Approximately tion of systems. Additional estimated to have been incurred to date in adminis- tration and committee meeting bringing total costs to $77,000. The total remaining cost of the Year 2000 project $75,000 is for new software and hardware purchases. As of the date of this report, only 31 ‘A of its direct budget for the project despite the fact that mission critical systems. Hardware replacement minor software replacement will bring expenditures more closely in line with the overall project percentage of completion. it is nearing completion of all phases for the Company has spent in the second quarter and The cost of the project, the dates on which the Company plans to complete Year 2000 modifications, and the impact of third party compliance are based on management’s best estimates which were derived utilizing certain assumptions as to future events including the availability of outside resources, cooper- ation from third parties and external agents of the Company as well as the level of Year 2000 readiness by various vendors and customers. Some of these assumptions involve contingencies which are beyond the actual the control of the Company. Accordingly, cost and impact of Year 2000 problems which the company may experience, particularly those caused by third-party difficulties, can only be estimated at this time. Contingency Planning The Company has developed a contingency plan remediation, for mission critical systems designed to allow it to avoid significant business interruption in the event current systems are affected by Year 2000 issues. This Contingency Plan involves the maintenance of alter- nate processing sites, acquisition and development of additional human resources which will be prepared for additional if necessary, throughout 1999 and in January 2000, as well as the develop- ment of alternate manual procedures which can be employed as back-up processes for existing automated business processes. The Contingency Plan was com- pleted and approved by the Board of Directors in February 1999. Testing of the Plan will be completed early in the second quarter of 1999 and the Plan will be revised as necessary throughout 1999. Consolidated Financial Statements Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Statements of Income and Comprehensive Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Statements of Cash Flow. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..O .O .”.”””” Consolidated Statements of Stockholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Independent Auditors’ Report.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...”.””.””.””””.””” ““”” Report on Management’s Responsibilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 25 26 27 28 47 48 23 Consolidated Balance Sheets (Amounts in Thousands, Except Share Data) ASSETS Cash andduefiom banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest bearing balances—FHLB. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Federal funds sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (amortized cost of$l9l,l3l, Securities available forsale 1998; $159,711, 1997) . . . . . ..."".".".".""..."."..".""""...."."."".."...""" Investment securities held to maturiW. U.S. Treasury securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . agencies and corporations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . U.S. Government States and political subdivisions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other securities Total securities (market value, $88,256, 1998; investment $112,263, 1997) . . . . . . .. O.". "" O"O"O.--- o-o"o -o"""""""""""" Total loans, net ofuneamed Less reserve for loan losses.. income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . loans.............””””” ““” .” ”” ”” .- DO-”””””””””””””” Net Premises and equipment Other Interest Other assets . . . . . . . . . . . . . . . . .............”..”..”o”””” Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . real estate owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ““”””””””:::: . “””..”:::::: Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deposits: LIABILITIES Total deposits . . . . . . . . . . . ..-. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Demand Interest-bearing Savings . . . . .. o. 4. . . . ..”.”..”” Time . . . . . . . . . . . . . . . ..””””.”” .“--. O-””””””””””””””””””””””” .“ . . .. ” O”””””””””””””””””””””” demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . “:::::: “ ““””””” Interest, taxes and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Federal funds purchased . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Securities sold under agreements to repurchase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . indebtedness Total Liabilities ““. ”. ”” ”. ”” .” .” O-””””””””””” Common stock, $l par value in 1998 and 1997, 10,000,000 shares authorized; STOCKHOLDERS’ EQUITY 1997, respectively; 7,014,042 and 7,193,909 shares issued in1998and 7.063,665 shares outstanding in1998 and 1997, respectively . . . . . . . . . . . . . . . Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Treasury stock, ac cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unallocated ESOP shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated other comprehensive Total Stockholders’ Equity... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Liabilities and Stockholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . See Notes to Consolidated Financial Statements. CoR$ihty Bancshares,lnCo December 31 1998 1997 $ 33,961 57,523 25,630 193,194 100 7,546 75,009 1,361 84,016 611,493 11,404 600,089 17,986 3,547 7,030 6,684 24,346 $ 34,;; 12,406 161,795 4,098 26,377 77,641 1,058 109,174 671,817 11,406 660,411 19,133 1,472 7,688 9,734 25,774 $1,054,006 $1,042,322 $ 123,992 137,169 148,461 466,374 875,996 10,417 — 47,680 18,176 952,269 $ ;:;,:fi 149:407 472,713 853,507 11,455 2,705 52,351 24,444 944,462 7,194 36,122 60,250 (1,403) (1,664) 1,238 101,737 $1,054,006 7,194 36,122 54,564 (1,271) – 1,251 97,860 $1,042,322 Consolidated Statements of Income and Comprehensive Income (Amounts in Thousands, Except Share and Per Share Data) YearsEnded December 31 1998 1997 1996 $62,323 9,060 $59,753 9,128 $50,553 7,556 Income Interest Interest and fees on loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest available for sale . . . . . . . . . . . . . . . . . . . . . Interest on investment insecurities securities: U. S. Treasury securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . agencies and corporations U.S. Government States and political subdivisions, . . . . . . . . . . . . . . tax exempt Other securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...”. Interest on federal funds sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest ondeposits in banks .,....... Total interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest Expense Interest on deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...”””.”” Interest onshort-term bomowings . . . . . . . . . . . . . . . . . . . . . . . . . indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest on other Total interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Netinterest income after provision for loan losses . . . . Non.lnterestlncome Fiduciary income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Service charges on deposit accounts . . . . . . . . . . . . . . . . . . . . . . . Other service charges, commissions and fees . . . . . . . . . . . . . . . . Net securities (losses) gains ..,... . . . . . . . . . . . . . . . . . . . . . . . . Other operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pension termination gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total non-interest income... . . . . . . . . . . . . . . . . . . . . . . Expense Non-Interest Salaries and employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . Occupancy expense ofbank premises . . . . . . . . . . . . . . . . . . . . . . Furniture and equipment expense . . . . . . . . . . . . . . . . . . . . . . . . . Check collection losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill and core deposit amortization . . . . . . . . . . . . . . . . . . . . Other operating expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total non”interest expense . . . . . . . . . . . . . . . . . . . . . . . . Income before income taxes... Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...”.. 117 1,034 3,989 90 1,594 3,006 81,213 34,374 2,295 1,459 38,128 43,085 6,250 36,835 1,682 3,’746 2,935 25 1,732 1,062 11,182 12,242 1,943 1,965 — 2,061 10;541 28,752 19,265 6,164 337 2,333 3,205 85 949 44 75,834 28,773 2,623 1,494 32,890 42,944 4,963 37,981 1,678 3,289 2,979 70; — 8,661 11,336 1,679 1,642 — 1,379 8,636 24,672 21,970 6,876 Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...”.””” Other comprehensive (loss) income, net of tax . . . . . . . . . . . . . . Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . ...””.. Weighted average basic and diluted shares outstanding . . . . . . . Basic and diluted earnings per common share . . . . . . . . . . . . . . $13,101 (13) $13,088 7,040,437 $1.86 $15,094 818 $15,912 7,063,033 $2.14 See Notes to Consoli&ted Fiwncial Statements I 778 3,307 2,520 82 117 28 64,941 23,158 2,898 877 26,933 38,008 2,273 35,735 1,731 2,976 2,283 (;;:) 1,450 9,070 9,580 1,596 1,212 3,365 315 8,290 24,358 20,447 6,530 $13,917 41 $13,958 7,028,349 $1.98 25 Consolidated Statements of Cash Flow (Amounts in Thousands) Operating Activities Cash flows from operating activities: Net Adjustments to reconcile net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . income to net cash provided by Years Ended December 31 1998 1997 1996 $ 13,101 $ 15,094 $ 13,917 operating activities: Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation ofpremises and equipment. . . . . . . . . . . . . . . . Amortization of intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . investment amorti~ation and accretion . . . . . . . . . . . . . Net saleof assets . . . . . . . . . . . . . . . . . . . (gain) loss onthe Net in interest receivable . . . . . . . . . . . . . . . Decrease (increase) in other assets . . . . . . . . . . . . . . . . . . . . Decrease (increase) Decrease in other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other, net Net cash provided by operating activities . . . . . . . . . . . . . . . . . . Investing Activities Cash flows from investing activities: Proceeds from sales of securities available for sale . . . . . . . . . . . . Proceeds from maturities and calls of securities available for sale Proceeds from maturities and calls of investment . . . . Proceeds from sale ofcredit card loans . . . . . . . . . . . . . . . . . . . . . Purchase of securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Purchase of investment . . . . . . . . . . Net decrease (increase) Cash provided by branch acquisitions, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Purchase ofpremises and equipment.. . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from sale of equipment. securities. in loans made to customers securities 6,250 1,514 1,915 (1,3;:) 658 2,958 (1,033) 88 24,108 — 100,920 25,488 15,590 (132,381) (300) 37,664 (7=) 287 Net cash provided by (used in) investing activities . . . . . . . . . . 46,542 Financing Activities Cash flows from financing activities: increase (decrease) in demand and savings deposits . . . . . . . Net (decrease) increase in time deposits . . . . . . . . . . . . . . . . . . . . Net Net . . . . . . . . . . . . . . . . . (decrease) increase in short-term debt. Repayment oflong-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from long-term borrowings . . . . . . . . . . . . . . . . . . . . . . . Acquisition oftreasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reissuance oftreasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . fractional shares . . . . . . . . . . . . . . . . . . . . . . Cash paid inlieuof Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash (used in) provided by financing activities . . . . . . . . . . Cash and Cash Equivalents Netincrease Cash and cash equivalents at beginning of year. cash equivalents incashand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,556 (6,351) (7,376) (7,768) 1,500 (1,796) (;) (7,415) (677) 69,973 47;141 4,963 1,192 647 (332) (103) (358) 1,046 (2,857) (51) 19,241 18 24,762 26,509 (35,0;) (26,447) (27,014) 39,658 (2,018) 16 394 (8,507) 30,398 (23,443) (2,412) 11,500 — (;;) (7,345) 186 19,821 27,320 2,273 856 625 271 12 285 (3,323) (887) (274) 13,755 15,868 14,771 27,723 (45,6;) (2,915) (64,044) 18,735 (439) 159 (35,783) (10,328) 10,263 28,294 (lo) (1;) 1,499 — (6,422) 23,126 1,098 26,222 Cash andcash equivalents at end of year . . . . . . . . . . . . . . . . . . $ 117,114 $ 47,141 $ 27,320 See Notes to Consolidated Financial Statements. ~:g$:~ity Bancshares, Inc. Consolidated Statements of Stockholders’ Equity (Amounts in Thousands, Except Share and Per Share Information) Balance, December 31, 1995 . . . . . . . . Net Common dividends declared income . . . . . . . . . . . . . . . . . . . ---- ($.91 pershare) . . . . . . . . . . . . . . . . . . Purchase of 6,375 treasury shares at $26.80 per share . . . . . . . . . . . . . . . . . Reissuance of 62,286 treasury shares at $24.06 per share . . . . . . . . . . . . . . . . . Comprehensive income, net of tax . . . . Balance, December 31, 1996 . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . Common dividends declared ($1.04 per . . . . . . . . share) . . . . . . . . . . . . .. ---- Change from $5.00 par value to $1.00 par value . . . . . . . . . . . . .. ---- Reissuanceof 727 treasury sharesat $23.70 per share . . . . . . . . . . . . . . . . . Comprehensive income, net of taX . . . . Balance, December 31, 1997 . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . Common dividends declared ($1 .05 per share) . . . . . . . . . . . . . . . . . . . . . . . . . . Purchase 44,731 ESOP shares at a weighted cost of $37,20 per share . . . Purchase 4,125 treasury sharesat $31.87 pershare . . . . . . . . . . . . . . . . . Comprehensive income, net of tax . . . . Common Stock $ 30,~17 — Additional Paid-in Capital $13,128 — — — — — — — (29) — Retained Earnings $39,320 13,917 Treasury Stock $(2,646) — (6,422) – — – — — — — (170) 1,528 — (1,288) — – — 17 — 30,217 — 13,099 — 46,815 15,094 — — (7,345) (23,023) 23,023 — — 7,194 — — — — — — — 36,122 — 54,564 13,101 (1,271) — — — — — (7,415) — — — – — (132) — Unallocated ESOP Shares $ — — Accumulated Other Comprehensive Income $ 392 — 1 – – — — — — – — — — — — – (1,664) – — – – — 41 433 — – — — 818 1,251 — – – (;) Balance, December 31, 1998 . . . . . . . . $ 7,194 $36,122 $60,250 $(1,403) $(1,664) $1,238 See Notes to Consolidated Financial Statements. 27 Notes to Consolidated Financial Statements Notel. Summary of Significant Accounting Policies Basis of Presentation andreporting ~eaccounting policies of First Community Bancshares, Inc. and subsidiaries (First Community or the Company) conform to generally accepted accounting principles and to predominant practices within the banking industry. In preparing financial statements, management estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ from those estimates. Assets held in an agency or fiduciary capacity are not assets of the Company and are not consolidated balance sheets. included in the accompanying is required to make Principles of Consolidation The consolidated financial statements of First Community include the accounts of all wholl~owned subsidiaries. All significant the Parent Company financial statements, such subsidiary increased by the unamortized portion of the excess of fair value over the cost of net assets acquired, where applicable. intercompany balances and transactions have been eliminated in consolidation. in subsidiaries is stated at equity in the net assets of the investment In Securities Available for Sale Securities to be held for indefinite periods of time including securities that management intends to use as strategy, and that may be sold in response to changes in interest part of its asset/liability management 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 Income.” included in stockholders’ equity net of income taxes which is entitled “Other Comprehensive Premiums and discounts are amortized to expense or accreted to income over the lives of the securities. Gain or loss on sale is based on the specific identification method. rates, Investment Securities Investments in debt securities which management has the ability and intent to hold to maturity or on a lon~term basis are carried at cost. Premiums and discounts are amortized to expense and accrued to income if any, is on the over the lives of the securities. Gain or loss on the call or maturity of investment specific identification method. At December 31, 1998 and 1997, no securities were held for trading purposes and no trading account was maintained. securities, Reserve for Loan Losses (1) analytical The reserve for loan losses is available to absorb future loan charge-offs. The allowance is increased by provisions charged to operations and reduced by losses, net of recoveries. The amount charged to operations based on several factors including reviews of significant commercial and commercial mortgage loans and loan loss experience in relationship to outstanding loans to determine an adequate reserve for loan losses required for outstanding loans; (2) a continuing review of loans evaluated by the loan review process as less than satisfactory, all non-performing loans and overall portfolio quality (3) regular examinations appraisals of the loan portfolio conducted by federal and state supervisory authorities; and (4) management’s judgment with respect accrual procedures, changes in lending management, geographic areas. loans, trends in the volume and term of loans, anticipated impact from changes in lending policies and to current and expected economic conditions, the level of delinquencies and non- in certain industries or and any concentration of credit and is In 1995, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 114, “Accounting by Creditors for Impairment of a Loan,” which requires an allowance to be established as a component of the reserve for loan losses for certain loans (using the discounted cash flows or fair value of collateral) when it is probable that all amounts due pursuant terms of the loan will not be collected and the recorded investment status of all loans designated as non-accrual or which have been classified as “substandard” or “doubtfu~’ by the Company’s loan review process. Management does not homogeneous loans are evaluated on an aggregate basis using a formula-based approach in accordance with the Company’s policy. All of the loans deemed to be impaired were evaluated using the fair value of the collateral as the measurement loans and residential mortgage loans for impairment. These in the loan exceeds the fair value. Management individually evaluate certain smaller balance, loans, such as consumer reviews the impairment to contractual installment standard. I Premises and Equipment premises and equipment are stated at cost less accumulated depreciation. Depreciation of both buildings and improvements as well as for equipment lives. Maintenance gains and losses are reflected in current operations. and repairs are charged to current operations while betterments are capitalized. Disposition is computed on the straight-line method over estimated useful Long-lived assets to be held and those to be disposed of and certain intangibles are evaluated for impairment for the Impairment of Long-Lived Assets or for Lon&Lived Assets to be Disposed of”. in accordance with Statement of Financial Accounting Standards (SFAS) No. 121 “Accounting Income on Loans Accrual of interest on loans is based generally on the daily amount of principal outstanding. It is the Company’s policy to discontinue the accrual of interest on loans based on their payment status and evaluation of the related collateral and the financial strength of the borrower. The accrual of interest income is normally discontinued when a loan becomes 90 days past due as to principal or interest. Management may elect to continue the accrual of interest when the loan is well secured and in process of collection. When interest accruals are discontinued, accrued and not collected horn prior years is charged to the reserve for possible loan losses. Credit card loans which become 180 days past due are automatically charged to the reserve for possible loan losses. interest accrued and not collected in the current year is reversed and interest Loan Fee Income Loan origination fees are recorded as a reduction of direct costs associated with loan processing, 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 and amortized over the related commitment period. fees are deferred including Other Real Estate Owned Other real estate owned and acquired through foreclosure is stated at the lower of cost or fair market value less estimated costs to sell. Loan losses arising from the acquisition of such properties are charged against the reserve for possible loan losses. Expenses incurred in connection witi operating the properties, subsequent write-downs and gains or losses upon sale are included in other non-interest reserves for loss on the disposition of other real estate are established through charges against current operations. income and expense. General Unallocated ESOP Shares The cost of unallocated employee stock ownership plan shares are included as a component of stockholders’ equity. The plan shares will be allocated to participant seven years based upon relative employee compensation. accounts over a period not to exceed 29 Intangible Assets The investment in subsidiaries and branches in excess of amounts attributable to vangible and identified intangible assets at dates of acquisition is recorded as goodwill and is being amortized to operations over a period of fifteen years using the straight-line method. The unamortized balance of goodwill was $23,684,000 and $24,986,000 at December 31, 1998 and 1997, respectively. A portion of the cost of purchased subsidiaries has been allocated to values associated with the fiture earnings potential of acquired deposits and is being amortized over the estimated lives of the deposits which range from seven to ten years. The unamortized balance of identified intangibles associated with acquired deposits was $662,000 and $788,000 at December 31, 1998 and 1997, respectively. Income Taxes The Company accounts for taxes using the provisions of SFAS No. 109, “Accounting for Income Taxes,” which, under the asset and liability method, provides deferred income taxes which are recognized for the Pax consequences of “temporary differences” by applying enacted statutory tax rates to the differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. Under SFAS No. 109, the effect on deferred taxes of a change in tax rates is recognized in income in the period that enactment date. includes the Reclassifications Certain amounts included in the 1997 and 1996 financial statements have been reclassified to conform with the presentation used in preparation of the 1998 financial statements. Recent Accounting Pronouncements Statement of Financial Accounting Standard (SFAS) No. 131 was issued in June 1997. SFAS No. 131 information about different operating established standards for the way that public business enterprises report segments. This Statement applied to interim financial statements currently operates only one segment which represents bank financial services. is effective for fiscal years beginning after December 15, 1997 and need not be in the initial year of application. First Community Bancshares, Inc. Statement of Financial Accounting Standard (SFAS) No. 132 was issued in February 1998. SFAS No. 132 for pensions and other postretirement and concise. This statement benefits in order to provide supersedes the disclosure in several other Financial Accounting Standards Board statements. The Statement is effective for standardizes the disclosure requirements information that requirements fiscaI years beginning after December 15, 1997. is more comparable, understandable Statement of Financial Accounting Standard (SFAS) No. 133 was issued in June 1998. SFAS No. 133 sets forth a comprehensive approach to addressing the accounting for derivative instruments, derivative instruments embedded in other contracts, and hedging activities. This standard addresses the type of activities which are included within the definition of derivatives and imbedded derivatives and identifies the methods to be used for valuation and income recognition. addressed, the standard also allows a one time transfer of securities horn the held-to-maturity for-sale or the trading category which can only be applied at the date of initial application of the Statement. This Statement application of the provisions of this Statement fiscal quarter the impact of this Statement. In addition to the derivative and hedging activities to the available- is permitted only as of the beginning of any is currently in the process of evaluating is effective for all fiscal quarters of all fiscal years beginning after June 15, 1999. Earlier that begins after issuance of this Statement. Management is encouraged but including certain In October 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 134. This Statement Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise. This Statement amends FASB Statements No. 65 and No. 115. This Statement addresses the Accounting for Mortgage-Backed is effective for the first fiscal ~o~~;;ity Bancshares, Inc. quarter beginning after December 15, 1998. The provisions of this Statement the business or operations of the bank. are not currently applicable to Cash Flows In 1998, 1997 and 1996 for purposes of reporting cash flows, cash and cash equivalents due from banks, federal funds sold, and interest bearing balances available for immediate withdrawal. and income taxes paid in 1998, 1997 and 1996 were as follows: include cash and Interest 1998 1997 1996 (Amounts in fiousands) Interest Income tree . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $38,267 6,744 $32,726 6,433 $26,615 7,911 Supplemental Schedule of Non-Cash Transactions Transfers of loans to other real estate owned . . . . . . . . . . . Unrealized loss (gain) on securities available for sale. $ 3,588 21 $ 862 (1,375) $2,190 (69) Note 2. Merger and Acquisitions On July 3, 1996, First Community acquired Citizens Bank of Tazewell (Citizens), headquartered in Tazewell, Virginia. As of the merger date, Citizens had approximately $52.2 million in total assets and $46.2 million in total deposits. Pursuant 3.51 shares of its common stock for each share of Citizens’ common stock, which totaled 263,159 shares upon consummation. to the Agreement and Plan of Merger, First Community exchanged This transaction was accounted for as a pooling of interests. The pooling of interests method requires the combining of the financial Consequently, reflect this combination. information of the merging companies as though they had always been combined. the results of operations of First Community and Citizens for 1996 has been restated to properly On April 9, 1997, the Company acquired 100% of the common stock of Blue Ridge Bank (Blue Ridge), the Company exchanged cash of $19.50 for each of Blue Ridge’s 1,212,148 common shares. In headquartered in Sparta, North Carolina. Blue Ridge was a $105 million state-chartered located in Sparra, Elkin, Hays and Taylorsville, North Carolina. Pursuant Merger, conjunction with the acquisition, Blue Ridge canceled outstanding stock options through the payment of $72’7,948 representing the difference between $19.50 and the respective option prices. Total consideration, including the payment approximately $14.1 million which is being amortized over a 15-year period. The acquisition was partially funded with loan proceeds of $11.5 million which the Company borrowed from an outside source. The acquisition was accounted for under the purchase method of accounting. Accordingly, Blue Ridge are included in consolidated results from the date of acquisition. Subsequent Ridge operates as a wholly-owned subsidiary of First Community. to the Agreement and Plan of for cancellation of the options, was $24.4 million and resulted in an intangible asset of results of operations of to the merger, Blue bank with offices On July 24, 1997, the Company expanded its Virginia operations through the acquisition of three bank branches located in Fort Chiswell, Pound, and Clintwood. The acquisition of these branches added $44 million in new deposits and assets to the existing Virginia subsidiary. The branch acquisitions were accounted for under the purchase method of accounting. Accordingly, the results of operations of the branches are included in consolidated results only from the date of acquisition. The excess purchase price of the branches, over the fair value of tangible assets acquired, totaled $4.6 million and is being amortized over a 15-year period. At the close of business on September 26, 1997, First Community Bank, Inc., a subsidiary of the Company, acquired the Man, West Virginia branch of Huntington National Bank, West Virginia. The acquisition of this branch added approximately $51 million in deposits. The intangible value of this transaction to~aled approximately $4.9 million which is being amortized over a 15-year period. This acquisition was accounted for under the purchase method of accounting; included in consolidated results of operations only from the date of acquisition. the operations of the Man branch are therefore, 31 The following unaudited proforma financial information shows the effect of the Blue Ridge acquisition as if the transaction were consummated on January 1, 1996. First Community Bancshares, Inc. Proforma Unaudited Supplemental (Amounts in thousands Financial except per share data) Information Net Interest Net Income Basic and diluted Earnings Per Common Share . . . . . . . . . . . . . . . . Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...”.””.” $43,665. 15,078 2.14 $41,709 13,958 1.98 1997 1996 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: 1998 Amortized cost Unrealized Gains Unrealized Losses Market Value (Amounts in Thousands) U.S. Government agency securities . . . . . . . . . . . . . . . . . . . . . . . . securities . . . . . . . . . . . . . . . . . States and political subdivisions. Other Total . . . . . . . . . . . . . . . . . . . . . . $119,236 36,458 35,437 $191,131 $ 713 1,470 915 $3,098 $ (441) (585) (9) $(1,035) $119,508 37,343 36,343 $193,194 .,, , \ 1997 Amortized cost Unrealized Gains Unrealized Losses Market Value (Amounts in Thousands) U.S. Government and agency securities . . . . . . . . . . . . . . . . . . . . . States and political . . . Other securities . . . . . . . . . . . . . . . . . subdivisions. Total . . . . . . . . . . . . . . . . . . . . . . $131,892 21,668 6,151 $159,711 $1,127 926 322 $2,375 $ (273) (18) — $ (291) $132,746 22,576 6,473 $161,795 Securities available for sale with market values of $65,421,000 and $64,454,000 at December 31, 1998 and 1997, respectively, were pledged to secure public deposits, securities sold under agreements to repurchase and other short-term borrowings and for other purposes. The amortized cost and market value of securities available for sale at December 31, 1998, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have to call or prepay obligations with or without call or prepayment penalties. During 1997, sales of the right securities available for sale resulted in gains of $6,000. During 1996, the sale of securities available for sale resulted in gains of $90,000 and losses of $225,000. There were no sales of securities available for sale during 1998. During 1998, calls of securities available for sale resulted in a gain of approximately $4,000. The proceeds from sales of securities available for sale were $18,000 and $15,868,000 for 1997 and 1996, respectively. The basis for evaluating the gain or loss realized is the amortized cost. The following table m. ComX;kity Banahares,Inc. presents maturities of investments value basis at December 31, 1998: securities available for sale by type on both an amortized cost and market Us. Government Agencies & Corporations States and Political Other Subdivisions Securities _ Total (Amounts in Thousands) Tax Equivalent Purchase Yield Amortized Cost Maturi~. . . . . . . . . . . . . . . . . . . . . . . . . Within one year After one year through five years After five years through ten years . . . . . . . . . . After ten years.............”.”””” . . . . . ...1. . ..”””” Total book value . . . . . . . . . . . . . . . . . . . . . . Tax equivalent purchase yield . . . . . . . . . . . . . . . Average maturity (in years) . . . . . . . . . . . . . . . . . Market Value Maturity . . . . . . . . . . . . . . . . . . . . . . . . Within one year After one year through five years . . . . . . . . . . After five years through ten years . . . . . . . . . . ten years . . . . . . . . . . . . . . . . . . . . . . . . . . After Total market value . . . . . . . . . . . . . . . . . . . . Note 4. Investment Securities $ 2,000 10,416 26,343 80,477 — $119,236 $ 280 1,616 9,931 24,631 $36,458 $ – — 29,073 6,364 $ 2,280 12,032 65,347 111,472 $35,437 $191>131 6.42% 6.06% 6.79% 6.49% 6.30% 17.21 8.05% 13.25 5.94% 12.52 6.56% 15.59 $ 2,012 10,402 26,813 80,281 $119,508 $ 284 1,663 10,622 24,774 $37,343 $ — $ — 29,360 6,983 2,296 12,065 66,795 112,038 $36,343 $193,194 The amortized cost and approximate market values of investment securities as of December 31 are as follows: U. S. Treasury securities . . . . . . . . . . . . . . . . U.S. Government corporations . . . . . . . . . . . . . . . . . . ...”” agencies and States and political Other securities subdivisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1998 Amortized cost Unrealized Gains Unrealized Losses Market Value (Amounts in Thousands) $ 100 $ 1 $– 7,546 75,009 1,361 50 4,191 14 (16) — — $ 101 7,580 79,200 1,375 Total . . . . . . . . . . . . . . . . . . . . . . . ...” $84,016 $4,256 $ (16) $88,256 U.S. Treasury securities . . . . . . . . . . . . . . . . U.S. Government colorations agencies and States and political Other securities . . . . . . . . . . . . . . . . . . . . . . . subdivisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . ...””” 1997 Amortized cost Unrealized Gains Unrealized Losses Market Value (Amounts in Thousands) $ 4,098 $ 1 26,377 77,641 1,058 _ $109,174 115 3,081 18 _ $3,215 $ (8) $ 4,091 (114) (2) (2) _ $ (126) 26,378 80,720 1,074 $112,263 33 Various investment securities with an amortized cost of approximately $27,875,000 and $34,871,000, respectively, were pledged at December 31, 1998 and 1997 to secure public deposits and for other purposes required by law. During 1998, calls of held-to-maturity were no gains from calls of investment to-maturity investment following table presents maturities of investments by type on both an amortized cost and market value basis at December 31, 1998: securities resulted in gains of $21,000. There during 1997. Proceeds from the calls of held- securities were $1,020,700 and $1,950,000 during 1998 and 1997, respectively. The securities held-to-maturity investment Us. Government Agencies & Corporations Us. Treasury States & Political Subdivisions Other Securities Total (Amounts in Thousands) Tax Equivalent —, Purchase Yield Amortized Cost Maturity: Within one year . . . . . . . . . . . . . . . . . . After one year through five years . . . . . . . After five years through ten years. After ten years . . . . . . . . . . . . . . . . . . . Total amortized cost. . . . . . . . . . . . . $– 100 — — $100 $2,524 3,151 1,417 454 $7,546 $1,377 $ — $3,901 2,516 25,538 45,578 1,061 300 — 6,828 27,255 46,032 $75,009 $1,361 $84,016 7.43% 6.79% 8.22% 8.79% Tax equivalent purchase yield . . . . . . . . . . . . . . . . . . . Average maturity (in years). 6.01% 1.5 6.00% 3.00 8.63% 10.86 7.76% 5.02 8.38% 10.05 Market Value Maturity: Within one year . . . . . . . . . . . . . . . . . . After one year through five years . . . . After five years through ten years. . . . After ten years . . . . . . . . . . . . . . . . . . . Total market value . . . . . . . . . . . . . . $– 101 — — $101 $2,530 3,157 1,427 466 $7,580 $1,399 2,567 26,970 48,264 $79,200 $ — $3,929 1,075 300 — $1,375 6,900 28,697 48,730 $88,256 I Note 5. Loans Loans consist of the following at December 31: . . . . . . . . . . . . . Real estate — commercial Real estate —construction Real estate -residential Commercial, Loans to individuals for household and other consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . financial and agricultural expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . All other 1998 1997 (Amounts in Thousands] $170,669 8,988 228,218 77,233 125,491 894 $611,493 $202,625 9,612 227,465 82,445 148,485 1,185 $671,817 Banking subsidiaries of the Company are parties to financial instruments with off-balance sheet risk in the normal course of business to meet commitments varying degrees, elements of credit and interest sheet. The contractual particular classes of financial instruments. to extend credit, standby letters of credit and financial guarantees. These instruments the financing needs of their customers. These financial instruments include amounts of those instmments reflect the extent of involvement rate risk in excess of the amount involve, recognized on the balance the Company has in to CoRE~kity Bartcsharm, Inc. The Company’s exposure to credit loss in the event of non-performance by the other party to the instrument financial written is represented by the contractual policies in making commitments for commitments to extend credit and standby letters of credit and financial guarantees amount of those instruments. The Company uses the same credit 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 expire without being drawn upon, requirements. The Company evaluates each customer’s creditworthiness on a case-by.case basis. The amount of collateral obtained, credit evaluation of the counterparts. Collateral held varies but may include accounts receivable, property, plant and equipment, and income-producing if deemed necessary by the Company, upon extension of credit amounts do not necessarily represent is based on management’s commercial properties. the total commitment are expected to future cash inventory, Standby letters of credit and financial guarantees written are conditional Company to guarantee the performance of a customer involved in extending loan facilities to customers. To the extent letters of credit deemed necessary, collateral of varying types and amounts is held to secure customer performance under certain of those letters of credit outstanding at December 31, 1998. is essentially the same as that issued by the to a third party. The credit risk involved in issuing commitments instruments whose contract amounts represent credit risk at December 31, 1998 are to extend credit Financial commitments $85.9 million, and standby letters of credit and financial guarantees written — $2.8 million. At December31, 1998, neither exchange contracts or interest swaps. the Company nor its subsidiaries have any amounts outstanding representing futures, forward (including availability of lines of credit and undrawn credit card availability) — In the normal course of business, the Company originates loan commitments. Loan commitments generally expiration dates or other have bed evaluates each customer’s creditworthiness on a case-b~case basis. The amount of collateral deemed necessary by the Company is based on management’s credit evaluation and underwriting guidelines for the particular loan. The total commitments outstanding at December 31, 1998 are summarized as follows: 1998 termination clauses and may require payment of a fee. The Company Real estate —commercial Real estate — commercial Real estate —construction Real estate — construction Real estate presidential Real estate — residential Commercial, Commercial, Loans to individuals (fixed) (variable) financial, agricultural financial, agricultural . . . . . . . . . . . . . . . . . . . . . . (fixed) (variable) . . . . . . . . . . . . . . . . . . . . (fixed) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (variable) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (fixed) . . . . . . . . . . . . . (variable) for household and other consumer (fixed) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . expenditures Notional Amount Rate (Amounts in Thousands) $3,159 15,986 2,145 2,327 2,241 6,611 6,660 18,632 7.50- 10.50% 5.75- 12.00% 9.50% 8.49- 9.75% 7.75- 12.50% 7.00- 12.75% 7.75- 16.00% 6.05- 13.00% 5.75- 29,584 6.30- 18.00% Loans to individuals for household and other consumer expenditures (fixed) Other (variable) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,326 30 7.41- 7.11- 14.50% 9.50% Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $88,701 Presently, the Company has no significant concentrations of credit risk other than geographic concentrations. Most loans in the current portfolio are made and collateralized in West Virginia and the surrounding Mid Atlantic area. Although portions of the West Virginia economy are closely related to coal and timber, they are supplemented by service industries. The current economies of the Company’s markets are seen as relatively stable and are not seen as highly subject to volatile economic change. The Company’s wholly 35 owned subsidiaries, Blue Ridge Bank in North Carolina and First Community Bank of Southwest Virginia, provide additional geographic diversification against concentrations of credit risk. In the normal course of business, the banking subsidiaries of the Company have made loans to directors loans and commitments made to such officers and executive officers of the Company and its subsidiaries. All and directors and to companies in which they are officers or have significant ownership interest have been made on substantially the same terms, comparable transactions with other persons. The aggregate dollar amount of such loans was $9.8 million and $11.3 million at December 31, 1998 and 1997, respectively. New loans and payments attributable change from 1997 to 1998 total $3.0 million and $4.5 million, rates and collateral, as those prevailing at the time for including interest respectively. to the Note 6. Reserve for Loan Losses Activity in the reserve for loan losses was as follows: 1998 1997 1996 (Amounts in Thousands) Balance, January l . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Recoveries credited to reserve Provision for the year charged to operations. . . . . . . . . . . . . . . . . . . . . Reserve acquired in acquisitions. Loans charged-off . . . . . . . . . . . . . . . . . . . . . . . . . . . . $11>406 736 6,250 — 18,392 6,988 Balance, December 31 . . . . . . . . . . . . . . . . . . . . . . . . $11,404 $8,987 673 4,963 1,981 16,604 5,198 $11,406 $8,321 574 2,273 — 11,168 2,181 $8,987 The following table presents the Company’s investment in loans considered to be impaired and related information on those impaired loans (in thousands): Recorded investment Loans considered to be impaired that were on a in loans considered to impaired . . . . . . . . . . . 1998 $5,266 non-accrual basis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...” Allowance for loan losses related to loans considered to be . ..””- 5,266 impaired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ” ” ” .”””.”-”” ““ . . . . . . . . . . . . . . . . income recognized on impaired loans . . . . . . . . . . . . . income on impaired loans recognized on a cash basis . . . . . Average recorded investment Total Interest in impaired loans interest 1,019 5,023 148 — 1997 $7,508 7,321 1,575 5,226 115 — Note 7. Premises and Equipment Premises and equipment are comprised of the following as of December 31: Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...”.”””.”-””””. Bank premises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...-””-”. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ” . . ” . ””.”.”.”” Equipment Less: accumulated depreciation and amortization . . . . . . . . . . . . . 1998 1997 (Amounts in Thousands) $4,624 $4,552 20,124 13,906 38,582 20,596 20,197 14,705 39,526 20,393 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...”””.”” $17,986 $19,133 v @ . Com%;kity Bancshares,Inc. I Note 8. Long-Term Debt Lon~term debt consists of a $7.9 million note to a commercial bank with principal repayments of I through April 1, 2007. The note accrues interest at a fluctuating rate of interest equal to $300,000 per quarter, one hundred thirty basis points in excess of the LIBOR Rate. The loan agreement contains certain covenants that may restrict in the event of default along with other customary borrowing provisions. the payment of dividends to stockholders Two of the Company’s subsidiaries are members of the Federal Home Loan Bank (“FHLB”) of Pittsburgh, Pennsylvania. Long-term advances from the FHLB and principal payments on lon~term debt as of December 31, 1998 and 1997 mature as follows: 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...4 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1998 1997 Amount Weighted Average Rate Amount Weighted Average Rate $–– 1,200 1,200 1,200 1,200 9,200 1,200 700 2,000 $17,900 (Amounts in Thousands) $6,200 6.61% 6.61% 6.61% 6.61% 6.04% 6.61% 6.61% 6.27% =% . 1,200 1,200 1,200 1,200 9,200 1,200 700 2,000 $24,100 5.74% 6.90% 6.90% 6.90% 6.90% 6.07% 6.90% 6.90% 6.27% G% The acquisition loan used to acquire Blue Ridge Bank is secured by 1.2 million outstanding shares of common stock of Blue Ridge Bank. Advances from the FHLB are securedby stock in the FHLB of Pittsburgh, qualifying first mortgage loans, mortgage-backed securities mdcertain advances are subject to restrictions or penalties the Company totaled $276,000 at December 31, 1998 and $344,000 at December 31, 1997. in the event of prepayment. Other various debt obligations of securities. Certain of these investment Note9. Deposits At December 31, 1998, thescheduled maturities ofcertificates ofdeposits areas follows: 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . ........$........ 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2003 and thereafter (Amounfsin Thousands) $336,937 77,498 24,900 12,771 14,268 $466,374 Time deposits include Certificates of Deposit issued in denominations of $100,000 or more which amounted to $113.4 million and $117.4 million at December 31, 1998 and 1997, respectively. on these certificates was $6.5 million, $5.5 million, and $3.1 million for 1998, 1997, and 1996, respectively. Interest expense Note lO. Per Share Amounts Basic earnings per share is based upon the weighted average number ofshares ofcommon stock outstanding during the year. In February 1997, the FASB issued Statement No. 128, “Earnings Per Share.” Statement No. 128requires hasnodilutive December 31, 1997, mdallprior No. 128. The Company’s common stock was split five shares for four on March 31, 1997 and five shares for securities or stock arrangements. First Community adopted Statement No. 128 effective period amounts presented have been restated tocomply with Statement earnings pershare. The Company currently of basic anddiluted thepresentation 37 four again on March 31, 1998. All share and per share data have been retroactively adjusted to reflect these stock splits. The following rable sets forth the net the applicable years: income used to determine net income per common share for income Net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Basic and diluted earnings per common share . . . . . . . . . $13,101 1.86 $15,094 2.14 $13,917 1.98 Note 11. Employee Benefits 1998 1997 1996 (Amountsin Thousands, Except Per Share Data) Through 1995, the Company and its subsidiaries maintained three qualified employee benefit plans. On January 1, 1996, the 401(k) and ESOP plans were merged into a single plan. In October 1996, the third of these three plans, a noncontributory curtailment gain for the pending termination in the first quarter of 1998, after distributing all participant on the dissolution of the defined benefit plan, an additional $1,062,000 termination Benefits under the plan were based on length of service and qualifying compensation. The Company’s funding policy was to contribute pension costs accrued. There was no pension cost for the 1998 year. Net periodic pension expense in 1997 and 1996 is as follows: of the defined benefit pension plan of $1,450,000. Additionally, accrued benefits and paying required excise taxes defined benefit pension plan was terminated and the Company recorded a gain was recognized. . . . . . . . . . . . . . . . . Service cost — benefits earned during the year. Interest expense on projected benefit obligation. . . . . . . . . . . . . . . . Expected return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . and deferral . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Netamortization Net periodic pension (income) expense . . . . . . . . . . . . . . . . . . . . . . $ — 496 (879) (56) $(439) $ 326 607 (1,390) 622 $ 165 1997 1996 (Amounts in Thousands) The following table sets forth the plan’s funded status and amounts recognized in the Company’s consolidated balance sheets at December 31, 1997, based upon a measurement date of December 31. The plan was fully liquidated at December 31, 1998. 1997 (Amounts in Thousands) Accumulated benefit obligation.. . . . . . . . . . . . . . . . . . . . . . . . . . . . $7,038 Vested benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Projected benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Plan assets at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Plan assets in excess of projected benefit obligation . . . . . . . . . . . . Unrecognized net gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unrecognized prior service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,038 7,038 12,854 5,816 (2,638) — Prepaid pension expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,178 The weighted average discount rate and the rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligation was 7.25% and 6.0% respectively. Employee Stock ownership Plan The Company maintains an Employee Stock Ownership Plan. Coverage under the plan is provided to all employees meeting minimum eligibility requirements. Annual contributions 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 to the plan are made at the &*&. ComK;kity Bancshar=,Inc. recognized by the Company related to the Employee Stock Ownership Plan was $947,000, $767,000 and $454,000 in 1998, 1997 and 1996, respectively. Employee Savings Plan The Company provides a 401(k) Savings Plan available to substantially all employees meeting minimum eligibility requirements. This plan was merged with the Employee Stock Ownership Plan on January 1, 1996 creating a KSOP. The cost of Company contributions under the Savings Plan was $99,000, $116,000, and $59,000 in 1998, 1997 and 1996, respectively. The Company’s matching contributions are at the discretion of the Board up to 50% of elective deferrals of no more than 6% of compensation. The Company matching rate was 25% for 1998, 1997 and 1996. Employee Welfare Plan The Company provides various medical, dental, life, accidental death and dismemberment and lon~term disability insurance benefits to all full-time employees who elect coverage under accidental death and dismemberment, and long-term disability coverage is automatic). this program (basic life, During 1998, the Company adopted the First Community Bancshares Employee Insurance Plan and Trust, (TPA). Monthly employer and employee contributions a partially self-funded medical, dental and prescription welfare plan. The health plan is managed by a third party administrator employee welfare trust, against which, the Company’s funding requirements and risk of loss to $50,000 and $863,000 for individual and aggregate claims, respectively. the Company is funding additional contributions are made to the newly established the TPA processes and pays claims. Stop loss insurance coverage limits In order to establish a reserve for run-off claims, in the event of plan termination, to 25% of expected annual claims. to the trust equivalent The Company adopted Financial Accounting Standards Board Statement Postretirement Benefits Other Than Pensions” as of January 1, 1993. The adoption of Statement benefit obligation at the date of adoption (transition obligation). The in the recognition of a postretirement Company elected to recognize the obligation over the average remaining life expectancy of the participants. The transition obligation totaled $634,000 and will be recognized over 17 years. This obligation only applies to a selected group of retirees as retiree benefits were phased out through 1993. 106 “Employers Accounting for 106 resulted Deferred Compensation Plan liability at December 31, 1998 was approximately $858,000. The expenses associated with this plan for A subsidiary of the Company has deferred compensation agreements with certain current and former officers providing for benefit payments over various periods commencing upon retirement or death. The balance sheet 1998, 1997 and 1996 were $(11,000), $58,000 and $32,000, respectively. As a result of an actuarial adjustment to the life expectancies and the discount current period reflected a reduction in total benefit cost. rate used in computing the present value of the future benefits, the Note 12. Compensating Balances Pursuant to agreements with the Federal Reserve Bank, the Company is required to maintain cash balances of approximately $1.3 million in lieu of charges for check clearing and other services. Note 13. Litigation In the normal course of business, there are various outstanding commitments and contingent liabilities such as threatened legal action and legal proceedings in which the Company and its subsidiaries are defendants. The most significant matter of litigation which is currently active involves a civil suit filed by heirs of one of the Company’s trust customers which seeks to overturn the establishment of a private foundation for which the Company’s trust and financial services division serves as Tmstee. This suit seeks a total of $6 million in compensatory and punitive damages as well as the termination of the foundation. The Company and the Trustee believe the creation and operation of the foundation represent the intent and will of the donor, 39 the Court requested that the Company has entered a vigorous defense of this suit and the continuation accordingly, of the foundation’s purpose. On October 15, 1998, the plaintiffs in the matter In a hearing file a motion for summary dismissal and the Company, as defendant, on this motion, firther ordered that discovery in this case be halted pending receipt of the motion for summary dismissal. The motion for summary dismissal was filed with the Court on January 14, 1999, and in a subsequent Court partially granted the bank’s motion for summary judgment discretionary use of principal opinion that adverse impact on the Company’s financial condition or results of operations. the finding no wrongdoing by the bank in its in this matter. Both management and the Company’s legal counsel are of the the remainder of this suit is without merit and will be successfully defended with no material filed a motion for summary judgment. ruling, Other legal actions have arisen primarily out of commercial lending transactions and collection activities. Each of these actions involving significant damage allegations or material disputes of issues are detailed in Item 3, Legal Proceedings, in the Company’s 1998 Report on Form 1O-K. Additionally, the Company is also subject to certain asserted and unassorted potential claims encountered in the normal course of business. In the opinion of management, neither funding of credit commitments will have a material effect on the Company’s financial position or results of operations. the resolution of these claims nor the Note 14. Dividends The primary source of funds for dividends paid by First Community is dividends received from its to restrictions by banking regulations and a loan subsidiary banks. Dividends paid by the banks are subject agreement with a commercial bank. The loan agreement with the bank restricts dividends in the event of default on the note. The most restrictive provision requires approval by regulatory bodies if dividends declared in any year exceed the year’s net income, as defined, plus retained net profit of the two preceding years. At December 31, 1998, subsidiary earnings available for distribution as dividends to the Company without prior approval were $1.5 million. Note 15. Regulatory Capital Requirements and Restrictions First Community Bancshares, to various regulatory capital requirements administered by the federal banking agencies. Inc., First Community Bank, Inc., First Community Bank of Mercer County, Inc., First Community Bank of Southwest Virginia, Inc., and Blue Ridge Bank (collectively referred to as “the Banks”) are subject Failure to meet minimum capital requirements can initiate certain mandatory-and discretionary—actions financial statements. Under action, which applies only to the Banks, the banks must meet specific capital guidelines that quantitative measures of the entities’ assets, liabilities, and certain off-balance sheet regulatory accounting practices. The entities’ capital amounts and classifications are also subject judgments by the regulators about components, involve items as calculated under to qualitative the capital adequacy guidelines and the regulatory framework for prompt corrective could have a direct material effect on the Company’s possibly additional by regulators that, and other factors. risk weighings, if undertaken, Quantitative measures established by regulation to ensure capital adequacy require First Community Bancshares, Inc. and the Banks to maintain minimum amounts and ratios (set forth in the table on page 41 ) for total and Tier I capital capital Company meets all capital adequacy requirements to risk-weighted assets (as defined), and of Tier I the (as defined) to average assets (as defined). Management believes, as of December 31, 1998, that (as defined in the regulations) to which it is subject. As of December 31, 1998 and 1997, the most recent notifications from the Federal Reserve Board categorized the Banks as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, leverage ratios as set forth in the table. There are no conditions or events since those notifications management believes have changed the institutions category. the Banks must maintain minimum total risk-based, Tier I risk-based, and Tier I that COg$;;iti Bancshares,Inc. to Risk-Weighted Assets: Total Capital . . . . . . . . . . . . . . . First Community Bancshares, Inc. First Community Bank, Inc . . . . . . . . . . . . . . . . . . . . . First Community Bank of Mercer County, . . . . First Community Bank of Southwest Virginia, Inc. Blue Ridge Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inc. to Risk-Weighted Assets: Tier 1 Capital First Community Bancshares, Inc. . . . . . . . . . . . . . . . First Community Bank, Inc . . . . . . . . . . . . . . . . . . . . . . . . . First Community Bank of Mercer County, First Community Bank of Southwest Virginia, Inc. Blue Ridge Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inc. to Average Assets (Leverage): Tier 1 Capital First Community Bancshares, Inc. . . . . . . . . . . . . . . . First Community Bank, Inc . . . . . . . . . . . . . . . . . . . . . First Community Bank of Mercer County, . . . . First Community Bank of Southwest Virginia, Inc. Blue Ridge Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inc. to Risk-Weighted Assets: Total Capital First Community Bancshares, Inc. . . . . . . . . . . . . . . . First Community Bank, Inc . . . . . . . . . . . . . . . . . . . . . First Community Bank of Mercer County, . . . . First Community Bank of Southwest Virginia, Inc. Blue Ridge Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inc. to Risk.Weighted Assets: Tier 1 Capital . . . . . . . . . . . . . . . First Community Bancshares, Inc. First Community Bankj Inc . . . . . . . . . . . . . . . . . . . . . First Community Bank of Mercer County, . . . . First Community Bank of Southwest Virginia, Inc. Blue Ridge Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inc. to Average Assets (Leverage): Tier 1 Capital First Community Bancshares, Inc. . . . . . . ~. . . . . . . . First Community Bank, Inc . . . . . . . . . . . . . . . . . . . . . . . . . First Community Bank of Mercer County, First Community Bank of Southwest Virginia, Inc. Blue Ridge Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inc. December 31, 1998 Actual For Capital Adequaq Purposes To Be Well Capitalized Under Prompt Corrective Action Provisions Amount Ratio Amount Ratio Amount Ratio $84,130 27,985 45,279 6,777 11,705 13.25% $50,782 12.62% 17,741 23,447 15.45% 12.39% 4,377 16.10% 5,817 8.00% $ N/A 22,177 8.00% 29,309 8.00% 5,471 8.00% 8.00% 7,272 N/A 10.00% 10.00% 10.00% 10.00% $76,153 25,196 41,592 6,093 10,795 12.00% $25,391 11.36% 8,871 11,724 14.19% 11.14% 2,188 14.85% 2,909 4.00% $ N/A 13,306 4.00% 17,585 4.00% 4.00% 3,283 4.00% 4,363 $76,153 25,196 41,592 6,093 10,795 7.37% $30,998 11,770 6.42% 13,981 8.92% 3,988 6.11% 9.69% 4,454 3.00% $ N/A 3.00% 19,616 23,302 3.00% 4.00% 4,985 5,567 4.00% December 31, 1997 N/A 6.00% 6.00% 6.00% 6.00% N/A 5.00% 5.00% 5.00% 5.00% Actual For Capital Adequacy Purposes To Be Well Capitalized Under Prompt Corrective Action Provisions Amount Ratio Amount Ratio Amount Ratio $79,178 22,911 43,541 6,793 11,167 11.96% $52,975 10.78% 17,009 25,399 13.71% 12.11% 4,486 12.22% 7,308 8.00% $ N/A 8.00% 21,262 8.00% 31,748 5,608 8.00% 9,135 8.00% NJA 10.00% 10.00% 10.00% 10.00% $70,862 20,232 39,557 6,093 10,068 10.70% $26,488 8,505 9.52% 12.46% 12,699 10.86% 2,243 11.02% 3,654 4.00% $ N/A 12,757 4.00% 4.00% 19,049 3,365 4.00% 4.00% 5,481 $70,862 20,232 39,557 6,093 10,068 6.96% $30,549 5.26% 11,542 13,481 8.80% 5.97% 4,084 9.15% 4,042 3.00% $ NIA 3.00% 19,237 22,468 3.00% 5,105 4.00% 5,503 4.00% N/A 6.00% 6.00% 6.00% 6.00% N/A 5.00% 5.00% 5+00% 5.00% 41 Note 16. Income Taxes Income taxes are as follows: Income exclusive of securities gains (losses). Netsecurities gains (losses)........,.. . . . . . . . . . . . . . . . . . . . . . . . . . Income tax provisions consists of: Current Deferred tax(benefit) tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . expense . . . . . . . . . . . . . . . . . . . . . . . Years Ended December 31 1998 1997 1996 (Amounts in Thousands) $6,154 10 $6,874 2 $6,581 (51) $6,164 $6,876 $6,530 Years Ended December31 1998 1997 1996 (Amounts in Thousands) $6,605 (441) $6,164 $6,520 356 $6,876 $6,143 387 =. Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts deducted for income tax purposes. The tax effects of significant are as follows: items comprising the Company’s net deferred tax asset of December 31, 1998 and 1997 1998 1997 (Amounts in Thousands) Deferred tax assets: Reserve for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unrealized asset losses . . . . . . . . . . . . . . . . . . . . . . . . . . ...”””””” Deferred compensation Deferred insurance premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax liabilities: Purchase accounting adjustmen~. Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . ..”” ”” s.”””””””””. Gain on pension termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unrealized gain on securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .-.....””””.”-””””-”.” Other . . . . . . . . . . . . . . . . . . . . . . . . . Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4,463 248 956 344 $6,011 2,306 331 497 825 592 4,551 $4,448 229 892 399 $5,968 2,072 374 565 833 347 4,191 Netdeferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,460 $1,777 ~ereconciliation be~eenthe federal statuto~t= rate and the effective income taxrate is as follows: Taxat statutory rate Increases (reductions) . . . . . . . . . . . . . . . . . . . . . . . . . . . ..””””.”” resulting from. interest on investment Tax-exempt State income taxes, net of federal benefit. Amortization of purchase accounting adjustments Other, net securities and loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...-””””””.”””””” Effective t= rate . . . . . . . . . . . . . . . . . . “.””””””.”.”””””””””. BancsharesZInc. Years Ended December31 1998 35.0% 1997 1996 35.0% 35.0% (9.6%) 1.3% 2.3% 3.0% — 32.0% = (6.7%) 1.1% 1.6% .3% — 31.3% = (6.7%) 1.0% .5% 2.1% G% = Note 17. Other Comprehensive Income In June 1997, the Financial Accounting Standards Board (“FASB”) Income,” which requires businesses to disclose comprehensive Comprehensive their general purpose financial statements. This statement income in a financial statement statement financial statements and is applicable to interim periods. The Company currently has one component of other comprehensive income which includes unrealized gains or losses on securities available for sale-and is detailed as follows: in requires the reporting of all items of comprehensive is effective for fiscal years beginning after December 15, 1997, with reclassification of comparative is displayed with the same prominence as other financial statements. This that issued SFAS No. 130, “Reporting income and its components 1998 1997 — 1996 — (Amounts in Thousands) Other Comprehensive Holding (losses) gains arising during the period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax benefit or (expense) Income: $ Holding (losses) gains arising during the period, net of tax . . . Reclassification adjustment for (gains) losses realized in net income, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax expense (benefit) of reclassifications Other comprehensive Beginning accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . income . . . . . . . . Ending accumulated other comprehensive income . . . . . . . . . . $1,381 (559) $(66) ~ 822 (40) (17) 6 (11) (4) 2 (6) 2 135 ~) 41 392 — $433 — (13) 1,251 $1,238 818 433 — $1,251 — Note 18. Other Operating Expenses Included in other operating expenses are certain functional costs, the total of which exceeds one percent of combined interest income and non-interest income. Following are such costs for the years indicated: Years Ended December 31 1998 1997 — 1996 — Credit card fees paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Supplies cost * Cost did not exceed one percent for the reported period. Note 19. Fair Value of Financial Instruments (Amounts in Thousands) $1,671 * $1,315 959 $1,149 * The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 107, Instruments” (SFAS 107). The pronouncement instruments, whether or not recognized on the balance sheet, for requires disclosure “Disclosures About Fair Value of Financial of fair value information about financial which it is practical ownership in an entity, or a contract hat to either receive or deliver cash for another a financial forced sale or liquidation, and is best evidenced by a quoted market price if one exists. to estimate the value. SFAS 107 defines a financial instrument could be exchanged in a current financial conveys or imposes on an entity that contractual right or obligation instrument. Fair value is defined as the amount at which transaction between willing parties, other than in a instrument as cash, evidence of The following summary presents the methodologies and assumptions used to estimate the fair value of the instruments presented below. The information used to determine fair value is highly Company’s financial subjective and judgmental therefore, among other things, estimates of cash flows, risk characteristics, credit quality, and interest are subject the results may not be precise. Subjective factors include, rates all of which the amounts which will to change. Since the fair value is estimated as of the balance sheet date, in nature and, 43 actually be realized or paid upon settlement or maturity on these various instruments could be significantly different. Assets: from banks . . . . . . . . . . . . . . . . . . . . . . . . . . Cash anddue Securities available for sake . . . . . . . . . . . . . . . . . . . . . . . . . Investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Federal funds sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans (net ofreserve receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest for loan losses).. Liabilities: Demand deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest-bearing demand deposits . . . . . . . . . . . . . . . . . . . . Savings deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Securities sold under agreements to repurchase . . . . . . . . . . . . . . . . . . . . . . . . . . Interest, . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other taxesando therobligations indebtedness 1998 1997 Carrying Amount Fair Value Carrying Amount Fair Value (Amountsin Thousands) $91,484 $91,484 $34,762 $34,762 193,194 84,016 25,630 600,089 7,030 123,992 137,169 148,461 466,374 47,680 10,417 18,176 193,194 88,256 25,630 601,205 7,030 123,992 137,169 148,461 467,054 47,680 10,417 18,179 161,795 109,174 12,406 660,441 7,688 103,846 127,541 149,407 472,713 52,351 11,455 24,444 161,795 112)263 12,406 661,396 7,688 103,846 127,541 149,407 472,589 52,351 11,455 24,517 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, to fair value as a result of the short-term nature of these items. receivable, and”interest, interest taxes and othe~ liabilities are considered to be equal 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&e quoted price ofsimilar instmments. Loans For all categories of loans, such as some residential mortgages, fair value is estimated by discounting the future cash flows using the current rates for similar loans. Deposits Deposits without a stated maturity, including demand, interest-bearing demand, and savings accounts, are reported at their carrying value in accordance with SFAS 107. No value has been assigned to the franchise value of these deposits. For other types of deposits with fixed maturities, discounting fiture cash flows based on interest characteristics and maturities. rates currently being offered on deposits with similar fair value has been estimated by Other Indebtedness Fair value has been estimated based on interest rates currently available to the Company for borrowings with similar characteristics and maturities. xv .wC~m&hhity Bancshares, inc. Commitments to Extend Credit, Stand-by Letters of Credit, and Financial Guarantees I The amount of off-balance sheet commitments to extend credit, stand-by letters of credit, and financial is considered equal to fair value. Because of the uncertainty involved in attempting to assess the guarantees, likelihood and timing of commitments being drawn upon, coupled with the lack of an established market and the wide diversity of fee structures, to provide an estimate of fair value that differs from the given value of the commitment. the Company does not believe it is meanin~l Note 20. Parent Company Financial Information Condensed financial information related to First Community Bancshares, Inc. as of December 31, 1998 and 1997, and for the years ended December 31, 1998, 1997 and 1996 are as follows: Condensed Balance Sheets (Amounts in Thousands) December 31 1998 1997 ASSETS Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ... Investment Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ......... in subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 832 108,889 1,506 $111,227 Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9~490 LIABILITIES STOCKHOLDERS’ EQUITY Common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...”.... . . . . . . . . . Unallocated ESOP shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Stockholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Liabilities and Stockholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,194 36,122 61,488 (1,403) (1,664) 101,737 $111,227 $ 1,353 102,781 3,260 $107,394 $ 9,534 7,194 36,122 55,815 (1,271) — 97,860 $107,394 Condensed Statements of Income (Amounts in Thousands, Except Per Share Data) Cash dividends received from subsidiary banks . . . . . . . . . . . . . . . . . . . . Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income tax benefit (expense) Equity in undistributed earnings (loss) of subsidiaries (Dividends in excess of earnings of subsidiaries). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ... Basic and Diluted Earnings Per Share . . . . . . . . . . . . . . . . . . . . . . . . . . . 1998 $7,500 112 (1,143) 6,469 331 6,301 $13,101 $ 1.86 December 31 1997 1996 $25,050 148 (779) 24,419 210 (9,535) $15,094 $ 2.14 $9,825 123 (267) 9,681 51 4,185 $13,917 $ 1.98 45 Condensed Statements of Cash Flows (Amounts in Thousands) Cash flows from operating activities Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...””- income to net cash provided by to reconcile net Adjustments operating activities: Equity inundistributed earnings of subsidiaries (Dividendsin Increase (decrease) (Decrease) excess of earnings ofsubsidiaries) . . . . . . . . . . . . . . . . . . . . . . in other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . increase in other liabilities. Other, net Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . Cash flows from investing activities: Purchase ofother Proceeds fi-omsale ofsecurities Payments for investments investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . available for sale . . . . . . . . . . . . . . . to subsidiaries . . . . . . . . inandadvances Netcash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . Cash flows from financing activities Proceeds from issuance oflong-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Repayment oflongterm debt Acquisition oftreasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other, net Net cash (used in) provided by financing activities . . . . . . . . . . . (decrease) Net Cash and cash equivalents at beginning ofyear increase in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash and cash equivalents atendof year . . . . . . . . . . . . . . . . . . . . . Note 21. Subsequent Events Years Ending December 31 1998 IYY7 1 YYO $13,101 $15,094 $13,917 (6,301) 271 (194) — 6,877 — — — 3,000 (2,851) (132) (7,415) — (7,398) (521) 1,353 832 $ 9,535 (136) 98 — 24,591 — (27,6;;) (27,683) 11,730 (2,400) (7,3Z) (6) 1,979 (1,113) 2,466 $ 1,353 $ (4,185) (890) (54) 49 8,837 (1,745) — — (1,745) — (1;) (6,422) 1,499 (5,093) 1,999 467 2,466 EarlYin 1999, the Company anditsfour affiliate banks entered into aMerger and Reorganization Agreement which provides for the merger of the four affiliate banks into a single national bank under the charter of First Community Bank, Inc. which was converted to a national association as part of the reorganization. From the effective date of the merger (expected completion on April 30, 1999), all banking operations will be conducted under the charter and title of First Community Bank, N .A., a national association supervised by the Comptroller of the Currency. * *a First. Community Bancshares,Inc. r Independent Auditors’ Report Deloitte& ToucheLLp 2500OnePPG Place Pittsburgh,Pennsylvania 15Z22-5401 & To the Board of Directors and Stockholders of First Community Bancshares, Inc. We have audited the accompanying consolidated balance sheets of First Community Bancshares, Inc. and income, changes in stockholders’ equity and cash flows for each of the three years in the period subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of income and comprehensive ended December 31, 1998. These financial statements are the responsibility of First Community Bancshares Inc.’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit financial statements are free of material misstatement. An audit supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. to obtain reasonable assurance about whether includes examining, on a test basis, evidence as well as evaluating the overall the consolidated In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of First Community Bancshares, Inc. and subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. )/;L,-k’.A:A Pittsburgh, Pennsylvania January 29, 1999 47 ! I Report on Management’s Responsibilities The management of First Community Bancshares, Inc. is responsible for the integrity of its financial statements and their preparation in accordance with generally accepted accounting principles. To fulfill this of a sound accounting system supported by strong internal controls. responsibility requires the maintenance 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, and communication internal audits. accounting and other procedures, and comprehensive the development of Our independent auditors (Deloitte & Touche LLP) are engaged to examine, and render an opinion on, the fairness of our consolidated financial statements principles. Our independent review selected transactions and carry out other auditing procedures before expressing their opinion on our consolidated financial statements. auditors obtain an understanding of our internal accounting control systems, in conformity with generally accepted accounting The Board of Directors has appointed an Audit Committee composed of outside directors which periodically meets with the independent the work of each. The independent access to meet with the Audit Committee without management’s presence. auditors, bank examiners, management auditors, bank examiners and the Company’s internal auditors have free and internal auditors to review James L. Harrison, Sr. President & Chief Executive Officer John M. Mendez Vice President & Chief Financial Officer Board of Directors, First Community Bancshares, inc. A. A. Modena Past Executive Vice President and Secretary, First Community Bancshares, Inc.; Past President & Chief Executive Officer, The Flat Top National Bank of Bluefield; Member Executive Committee Robert E. Perkinson, Jr. Vice President — Operations, MAPCO Coal, Inc. — Virginia Region William P. Stafford President, Princeton Machinery Service, Inc.; Chair- man, First Community Bancshares, Executive Committee and Audit Committee Inc.; Member William P. Stafford, AttorneTat-Law, Brewster, Morhous & Cameron, PLLC II W. W. Tinder, Jr. Chairman of the Board and Chief Executive Officer, Tinder Enterprises, Corporation tive Committee (Real Estate Holdings); Member Execu- Inc.; President, Tlnco Leasing and Audit Committee Sam Clark Agent, State Farm Insurance A[len T. Hamner Professor of Chemistry, West Virginia Wesleyan College; Member Executive Committee James L. Harrison, Sr. President and Chief Executive Officer, First Commu- nity Bancshares, Inc.; Member Executive Committee; President, First Community Bank, Inc., First Commu- nity Bank of Mercer County, Inc., and First Commu- nity Bank of Southwest Virginia, Inc.; Executive Vice President, Blue Ridge Bank B. W. Harvey President, Highlands Real Estate Management, Member Executive Committee Inc.; 1. Norris Kantor Partner, Katz, Kantor & Perkins, Attorneys-at-Law John M. Mendez Vice President, Chief Financial Officer and Secretary, First Community Bancshares, Inc.; Vice President — Finance & Chief Administrative Officer, First Com- munity Bank, Inc., First Community Bank of Mercer County, west Virginia, Inc.; Assistant Corporate Secreeary, Blue Ridge Bank Inc., and First Community Bank of South- Officers, First Community Bancshares, Inc. James L. Harrison, Sr. President and Chief Executive Officer John M. Mendez Vice President, Chief Financial Officer and Secretary Robert L. Buzzo Vice President 49 Directors Nick Ameli, Jr., CLU, ChFC Sales Manager, New York Life Insurance K. A. Ammar, Jr.* President and Chief Executive Officer, Ammar’s Inc. and Magic Mart Dr. James P. Bailey* Veterinarian, Veterinary Associates, Inc. Paul Barkley Self Employed Accountant Jack Bebber Retired Manager, Carolina Tire Clint F. BedsaulZ President, BBC, Inc.; President, Tmline Truss, Inc. Claude Billings Retired North Carolina House of Representatives; Poultry Farmer Bill Blackburn Owner, B & D Auto Supply Claude E. Blankenship Officer, C and R Furniture; Former Mercer County Commissioner Jr.t W. C. Blankenship, Chairman of the Board, First Community Bank of Southwest Virginia, Inc.; Agent, State Farm Insurance F. K. Blizzard Retired, Blizzard’s Inc. G. Ross Boyce Retired Senior Vice President, The Flat Top National Bank of Bluefield D. L. Bowling, Jr.* President, True Energy, Inc. Robert L. BUZZO* Vice President, First Community Bancshares, Inc.; Chief Executive Officer, First Community Bank — Bluefield Juanita G. Bryan* Homemaker Sam Clark** Agent, State Farm Insurance Henry Church Owner, H & N Polled Hereford Farms L. M. Compton President, Compton Enterprises Lillian S. Cooke Private Investor George R. Crouse, Jr.* Farming C. William Davis* Attorney at Law, Richardson & Davis H. R. Davis Auctioneer Mark T. Davis Attorney Thomas E. Douglas* Town Manager, Sparta, NC Frank Ferrante* Retired Owner of Frankie’s LaSalute Lloyd D. Feuchtenberger, Retired Bakery Executive Jr. Chester H. Friedlt Pharmacist H. A. Goodykoontz, Retired Pharmacist Jr. Jr. Owen R. Griffith, Retired President and Chief Executive Officer, First Community Bank, Inc. Anthony A. Gum Professor, Business and Economics, West Virginia Wesleyan College Allen T. Hamner, Ph.D.** Professor of Chemistry, West Virginia Wesleyan College W. T. Hancock Of Counsel, Richardson & Davis . @ Com%J;ity Bancshares,Inc. James L. Harrison, Sr.** i’ $ President and Chief Executive Officer, First Community Bancshares, Inc.; President, First Community Bank, Inc., First Community Bank of Mercer County, Southwest Virginia, Inc.; Executive Vice President, Blue Ridge Bank Inc., and First Community Bank of B. W. Harvey** President, Highlands Real Estate Management, Inc. Steve lcenhour Owner, Trucking Company and Icenhour’s Garage and Tire Service Chapman 1. ]ohnston, Jr. Retired Chairman of the Board, Bluefield Supply Company 1. Norris Kantor** Partner, Katz, Kantor & Perkins, Attorneys-at-Law Walden M. Keenet Retired Coal Operator Dr. John S. Lambert, Jr. Dentist M. Neil Lohr Pharmacist, Princeton Pharmacy Richard L. Lowry President, Murphy Insurance Agency Dr. B. J. Martin, D.M.D. Martin Dental Associates John P. McCabe Retired Vice Chairman of the Board, First Community Bank A. Herbert McClaugherty President, The Dean Company John T. McGlamery Retired Merchant Keith Meadows Plant Manager, Leviton Manufacturing/Southern Devices David Mecimore Owner, Taylorsville Precast Molds t X John M. Mendez”” Vice President, Chief Financial Officer and Secretary, First Community Bancshares, Inc.; Vice President — Finance and Chief Administrative Officer, First Community Bank, Inc., First Community Bank of Mercer County, Inc.; and First Community Bank of Southwest Virginia, Inc.; Assistant Corporate Secre- tary, Blue Ridge Bank Edgar L. Miller, Sr. Owner, Edgar’s Exxon Service Station A. A. Modena** Past Executive Vice President and Secretary, First Community Bancshares, Inc.; Past President and Chief Executive Officer, The Flat Top National Bank of Bluefield Wayne V. Moore* Chief Executive Officer, Blue Ridge Bank Dr. Samuel A. Muscari, Sr. Physician Charles C. Myers Owner, Cash & Carry Wholesale Grocery Avery Neaves CPA, Kemp & Neaves, PLLC Fred Norman Retired Realtor & Businessman Gary B. ParlierX Owner, Custom Wall and Floor Covering Nora Belle Pasley Retired, Peoples Bank of Bluewell Robert E. Perkinson, Jr.** Vice President — Operations, MAPCO Coal, Inc. — Virginia Region Dr. Eduardo D. Plagata+ Physician Claudetta Potts Retired Owner, Radio Station Robert Prevette Poultry Farmer; Contractor Bernie Queen Retirecl, Amherst Coal Company 51 I Clyde B. Ratlifft President, Gasco Drilling, Inc. Jimmie Lee Reavis Rural Carrier, U. S. Postal Service Joe H. RobertsX Farming M. M. Shumate Retired E. T. Smith President, Smith Services, Inc. Jack D. Stafford, P.E. President, Stafford Consultants, Inc. Ron Roseman Partner, Alexvale Furniture Manufacturing William P. Stafford** President, Princeton Machinery Service, Inc. Michael Ross President, Ross and Wharton Gas Co. Richard G. Rundle* Attorney at Law, Rundle and Rundle, LC Larry Schronce Owner, Larry Schronce Ford, Inc. Giles D. Scott Retired Restaurant Owner Guy L. Scott, Jr.$ President and Chairman of the Board, Blue Ridge Bank George L. SheetsX President and Manager, Alleghany Cablevision, Owner, Sheets Jewelry William P. Stafford, Attorney at Law, Brewster, Morhous and Cameron, PLLC II** William D. Starlingf Retired Coal Operator Dr. Theodore S. Stern* Chairman Emeritus, Blue Ridge Bank Robert R. Stuart, Jr. Retired Bakery Executive W. W. Tinder, Jr.** Chairman and Chief Executive Officer, Tinder Enterprises, Inc. Robert J. Wallace Attorney at Law, Coleman & Wallace William C. ShellX President, Shell Brothers Distributors, Inc. Dale F. Woody* President, Woody Lumber Company Herman Shook Retired Furniture Manufacturer * Denotes Members of First Community Bank, Inc. & First Communiry Bank of Mercer County, Inc. Boards ** Denotes Members of First Communiw Bancshares, IIIC., First Community Bank) Inc. and First CommunitY Bank of Mercer County, Inc. Boards t Denotes Members of First Community Bank of Southwest Virginia, Inc. Board ~ Denotes Members of Blue Ridge Bank Board First Community Bank of Mercer County, , Inc. (A WEST VIRGINIA CORPORATION MEMBER FDIC) 1001 Mercer Street Princeton, West Virginia 24740-5939 (304) 487-9000 or (304) 327-5175 Pine Plaza Branch (304) 425-7523 Matoaka Branch (304) 467-8860 211 Federal Street Bluefield, West Virginia 24701-0950 (304) 325-7151 Mercer Mall Branch (304) 327-0431 Blue Prince Road, Green Valley Bluefield, West Virginia 24701-6160 (304) 325-3641 Highway 52 Bluefield, West Virginia 24701-3068 (304) 589-3301 First Community Bank, Inc. (A WEST VIRGINIA CORPORATION — MEMBER FDIC) Corner of Bank and Cedar Streets Pineville, West Virginia 24874-0269 (304) 732.7011 East PineviIle Branch (304) 732-7011 600 Guyandotte Avenue Mullens, West Virginia 25882-1024 (304) 294-0700 Route 10, Cook Parkway Oceana, West Virginia 24870-1680 (304) 682-8244 2 West Main Street Buckhannon, West Virginia 26201-0280 (304) 472.1112 Tennerton Route 20 South Tennerton Buckhannon, West Virginia 26201 (304) 472-1112 100 Market Street Man, West Virginia 25635 (304) 583-6525 77 North Morgan Boulevard Logan, West Virginia 25601 (304) 752-8102 Corner of Main and Latrobe Streets Grafton, West Virginia 26354.0278 (304) 265-1111 216 Lincoln Street Grafton, West Virginia 26354-1442 (304) 265.5111 Main Street Rowlesburg, West Virginia 26425 (304) 454-2431 16 West Main Street Richwood, West Virginia 26261 (304) 846-2641 874 Broad Street Summersville, West Virginia 26651 (304) 872-4402 Route 20 and Williams River Road Cowen, West Virginia 26206 (304) 226-5924 Route 55, Red Oak Plaza Craigsville, West Virginia 26205 (304) 742-5101 I 53 First Community Bank of Southwest Virginia, Inc. (A VIRGINIA CORPORATION — MEMBER FDIC) 643 E. Riverside Drive Tazewell, Virginia 24651 (540) 988.5577 302 Washington Square Richlands, Virginia 24641 (540) 964-7454 Chase Street & Alley 7 Clintwood, Virginia 24228 (540) 926-4671 Blue Ridge Bank Rt. 1, Box 408 Max Meadows, Virginia 24360 (540) 637-3122 8044 Main Street Pound, Virginia 24279 (540) 796-5431 910 East Main Street Wytheville, Virginia 24382 (540) 228-1901 (A NORTH CAROLINA CORPORATION — MEMBER FDIC) 101 Brookfall Dairy Road Elkin, North Carolina 28621 (336) 835-2265 5519 Mountain View Road Hays, North Carolina 28635 (910) 696-2265 Financial Information 57 N. Main Street Sparra, North Carolina 28675 (336) 372.2265 150 N. Center Street Taylorsville, North Carolina 28681 (828) 632-2265 Corporate Headquarters Financial Contact John M. Mendez Vice President & Chief Financial Officer, First Community Bancshares, Inc. P. O. Box 5909 Princeton, West Virginia 24740-5909 (304) 487-9000 Internet Access www.fcbinc.com fcbcorp@aol.com 1001 Mercer Street P. O. Box 5909 Princeton, West Virginia 24740-5909 (304) 487-9000 Stock Registrar and Transfer Agent First Community Bank of Mercer County, Tmst and Financial Services Division P. O. Box 950 Bluefield, West Virginia 24701-0950 (304) 325-7151 Inc. Form 10-K The Annual Report on Form 1O-K, filed with the Securities and Exchange Commission, shareholders upon request to the Vice President & Chief Financial Officer of First Community Banc- shares, Inc. is available to w. # Com%Jhty Bancshares, lnc, 

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