First Community Bankshares, Inc.

Financial Highlights

(Amounts

in Thousands, Except Percent and Per Share Data

—

Earnings and Dividends

income

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net
Ba.sicearnings
per share* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash earnings per share* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends per share* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Return on average equity
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Return on average assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1999

1998

1997

$

16,852

$

1.92
2.12
.88
16.23°k

1.620/0

13,101
1.49
1.69
.84
13.02°A
1.240/.

$ 15,094
1.71
1.85
.83
16.050/0
1.590/o

Balance Sheet Data at Year-End

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earning assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deposits
Securities
to repurchase . . . . . . . . . . . .
sold under agreements
equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stockholders’

1999

$1,088,162
996,366
833,258
41,062
103,488

1998

1997

$1,053,988
971,856
875,996
47,680
101,719

$1,042,304
955,337
853,507
52,351
97,842

* The per share data for 1998 and 1997 have been restated to reflect the five shares for four stock split on

March 31,1999.

1

Table of Contents

Message to StocWolders

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Management’s Discussion

and Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Consolidated Financial Statements

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Board of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3

7

23

52

Message To stockholders

To Our Stockholders:

First Community Bancshares enjoyed record
the

setting financial performance during 1999. At
same time, significant progress was realized on several
of the major initiatives of the Company’s Five-Year
Plan adopted in mid-1998. The Y2K issue which
plagued much of corporate America during 1999 was
a non-issue for your Company as we entered the Year
2000 effortlessly. With all the good news, however,
the market for our stock did not escape the broad
devaluation for stocks in the financial services sector
with values returning to our mid-1997 levels. In the
paragraphs which follow, these items as well as some
additional areas of interest are presented in more
detail. 1999 was a wonderful year and sets the stage
for an even more exciting 2000 and the years to
follow.

Net

interest

loans as compared with

income of $16,852,000 for 1999 represents a
28.6% increase over the $13,101,000 reported for the
prior year. Record setting income was the result of
carefully managed net
interest margins coupled with
reduced provisions for loan losses and our continuing
vigil in the management of operating costs. Net
interest
income when expressed as net
margin for 1999 was 5.03 Yocompared with 4.81 Yoin
1998. The provision for loan losses for 1999 was
$2,893,000 or .41% of total
$6,250,000 for 1998 or .96% of average loans. 1998’s
provision for loan losses included a one-time charge
of $2.9 million related to a single loan relationship
secured by a commercial manufacturing facility which
was foreclosed upon in the second quarter of 1998.
Non-interest
expense represents 2.5% of total assets
as compared with 2.7% for 1998 and, when taken
with total non-interest
efficiency ratio of 44.2% continuing to place First
Community Bancshares in a leadership position as to
operational efficiency. Net
income expressed as
Return on Average Equity, which measures the
effective use of stockholders’ equity to produce
income, was 16.23% for 1999 as compared with
13.02% for 1998. When expressed as Return on
Average Assets, which measures efficiency in the use

income, converts to an

of assets to produce income, net
1.62Y0, a 30.7% increase over Return on Average
Assets of 1.24% for 1998.

income for 1999 was

I

I

10

15

)20

.

I

1995

n,

5

I

2.0

1.5

1.0

0.5

).0

1996

1997

1998

1999

q ReturnonAverageEquity

ReturnonAverageAssetsq

Basic earnings per common share of $1.92 for

1999 represent a 28.9% increase over the $1.49
reported for 1998. Cash earnings per common share
of $2.12 for 1999 represent a $.43 per share increase
over the $1.69 earned for the year 1998. Cash
earnings per share is projected to become a more
important measurement of the true economic finan-
cial performance of the Corporation as alternative
methods of accounting for business combinations
used in the past will be no longer available with the
final implementation
standard expected to be released in the fourth quarter
of 2000. Cash dividends per share of $.88 for 1999
represent a 4.76% increase over dividends paid of
$.84 per share for the 1998 year and a 4.82% cash
on cash return based on ending market values.

of a new business combination

3

2.50–

, “,

1.92

1.50

1

1.00

:

.62

D1.46

1995

1996

=

0.50 ;;=

0.0

L

1997

1998

1999

During 1999, the market for stocks in the
financial services sector experienced one of the worst

in earnings projections by several

rates, concern over the Y2K issue

rates and the ability of banks to respond

‘ performance years in history. The market for finan-
cial industry stocks softened during the last two
quarters of 1998 and then suffered substantial decline
in 1999 and, as of the date of this letter, continued
falling early into 2000. As a result of notable
disappointments
highly visible banking companies, concern with rising
interest
favorably to higher
as we approached the end of 1999, increasing
concern about credit quality and the impact of rising
rates on asset quality, as well as concern
interest
about
in
the new intense competitive environment
which banks must operate, bank stocks appear to be
out of favor with the investor community and many
are trading at their 1995 to 1996 price levels.
Industry price-earnings
ratios in single digits represent
the lowest since the late 1980’s when there were real
asset quality issues directly impacting bank valua-
tions. The banking industry in total continues
records for financial performance,
the industry has
clearly survived both in a rising and a falling rate
environment with only temporary impact on ear-
nings,and preparation of data processing systems for
the Year 2000 was both well understood and well
executed. The impact of increasing interest
credit quality short of a recession should not be a
concern as the industry is better prepared for a
downturn in credit quality with low levels of problem
assets, relatively high reserve levels, and higher pre-
provision profitability than 10 years ago. The industry
has always been able to address competition head-on
demonstrating a high degree of resiliency coupled
income
with substantial capital resources and net
necessary to reposition successfully. Given these facts,

rates on

to set

*.
#

Co$EZkity

Bancshares,

Inc.

in March 1999), and approximately a

however, bank stocks continue to be out of favor
with investors and the stock of your Company has
not escaped their wrath. At December 31, the year-
end market value of First Community Bancshares,
Inc. was $18.25, a 22% reduction from the $23.40 at
the end of 1998 (after giving retroactive impact
the stock split
26% decrease from the $24.36 at the end of 1997.
Our year-end 1999 stock value represents a price
earnings multiple of 9.5 as compared with 15.7 at the
end of 1998. While the performance of FCBC stock
is disappointing,
participate in a broader market for investor dollars
and as goes the financial services sector of that
market, so do we.

it must ‘be recognized that we

to

120,M0

100,000

80,000

60,000I

40,000

20,000

1998

1999

0

I996
1995
q MarketValuePerShare

1997

StockholdersEquityn
(Inthousands)

1

30

25

20

15

I

5

:
n

10

I

Included in net

income for 1999 was $1.1 mil-

lion partial
recovery of the $3.4 million charge-off in
1996 related to a check kiting scheme. The $1.1 mil-
lion recognized in 1999 was net of tax with the total
recovery of $1.8 million recognized in the fourth
quarter of 1999, or 52.9% of the 1996 loss. The
terms of the agreement with the customer group who
perpetrated the fraud calls for payments in addition
to that recognized in 1999 of approximately $2 mil-
lion to be realized over the next 10 years. The
present value of all consideration received and to be
received in this settlement
is estimated to
be in excess of $3.2 million representing 94% of the
$3.4 million in losses charged off in 1996.

agreement

First Community Bank began preparing for the

Year 2000 conversion in mid-1997.
and software used by the Company is state-of-the-art
and remediation to prepare for the end of 1999 was
minimal. As was the case for the financial services
sector, First Community experienced no Y2K disrup-

Internal hardware

tions and midnight on December 31, 1999 was
simply another
with the “only ball dropped being the one in Times
Square.”

routine nightly processing evening

During April 1999 all four banking subsidiaries

in

restructuring

of your Company were merged into a newly
chartered national association, First Community
Bank, N. A. Consolidation of the banking subsidiar-
ies not only resulted in some initial efficiencies, but
over time will allow for substantial
which will enable us to enjoy additional efficiencies
while providing increased services. In addition,
the Company moved to its new corporate
April
offices located in Bluefield, Virginia. This 36,000
square foot facility will ultimately house all Corpo-
rate support personnel as well as our Trust and
Financial Services Division. Consolidating operations
previously housed in four separate facilities into the
Corporate Center will not only improve internal
communication
but will also provide for a much
more effective use of both human and other
resources. In the future,
personnel will allow non-customer
tions to be consolidated so that
personnel will be able to devote their full time and
;ttention

to customer service.

the addition of other support

sensitive opera-

local banking

tion together with the products which First Commu-
nity offers will result
mortgage loan business for the Company as well as
provide new opportunities
for other banking products
and services to be offered in UFM’S primary markets.

in increased residential

The Company’s Five-Year Plan calls for

in the Virginia Bankers

to provide your Corporation with the

increased fee-based activities as well as compensation
programs which are purely performance based. Initia-
tives completed during 1999 include the Company’s
purchase of an equity interest
Insurance Center, LLC adding to our array of
financial services and providing new sources of fee-
based revenue. Development of executive retention
programs, which were completed in 1999, represent
an attempt
human resource leadership critical for success in the
future. Although in the initial stages, a new stake.
holders focused compensation and incentive program
provides the mechanisms necessary to migrate the
Company from a traditional
financial services com-
pensation program to one which is strictly based on
pay for performance. Creating new sources of fee-
based services and ensuring that compensation dollars
are expended based upon performance both will
ultimately result
term shareholder vaIue.

in the creation of increased long

1.054.0

I

1,000‘1

723.6

400 _

goo _
..

600 <-.
:.-

B780.Z

.....
—
200 .s
*..
—
f.--
1995

0

,

On September 28, 1999, the Company acquired

United First Mortgage, Inc. ((’UFM”), a Richmond,
Virginia-based mortgage brokerage firm. UFM oper-
ates nine offices throughout Virginia and specializes
in governmental
combination of UFM’S expertise in mortgage origina-

lending programs. The

residential

in a

to compound the

the level of customer service has suffered.

The financial services industry continues on a
path of consolidation where the very large become
even larger in pursuit of critical mass, anticipating
operational efficiencies which would all but guarantee
future success. While these operational efficiencies
were never anticipated to be immediate,
significant number of cases such efficiencies simply
have not been realized and,
problem,
Our Five-Year Plan calls for an internal
revolution
with every staff member at First Community Bank
focused on raising the level of customer service to a
place second to none in our industry and developing
meaningful, mutually beneficial relationships with our
most valuable customers. The quality of service not
only includes the availability of various access
channels for customers, both brick and mortar and
electronic, but even more importantly it includes the
attitude of all of the individuals at First Community’s
end of the service equation. Raising the bar on
service quality is a never ending process but one that
is necessary for our success in the future. First
Community enjoys a wonderful heritage full of
history and values. Our transition into a more
powerful financial
enjoy success in the new millennium is being
carefully orchestrated so as not
heritage.

institution which will continue to

to damage that

rich

5

Inthis

in our operations. Change

the first year of the new century, success
to our customers and

it is our way of life, our only

depends on being both relevant
communities and efficient
is not an event but
certainty in the world today. To ensure success,
reacting to change positively is not good enough; we
must become proactive agents of change, causing it
to happen. Every process, every procedure must
continually be on trial as we search for more
effective and more efficient ways to provide meaning-
ful products and services to an ever increasingly
sophisticated customer base which continually raises
its expectations. First Community is well equipped
with the economic and human resources necessary to
turn the challenges of the future into financial
success. With the rich heritage we enjoy, with roots

deep in the communities we serve, with shareholders
focused on long-term success, and with employees
to challenges as unrecognized opportuni-
who react
ties, we look forward to a future of continued record
setting performance.

As always, we greatly appreciate your loyalty and

support as customers and stockholders and welcome
your input and suggestions.

Sincerely,

James L. Harrison, Sr.
President & Chief Executive Officer

The Oficers of First Communi~ Bancs~res,

Inc. from left to tight:

Robert L. Buzzo, Vice President
John M. Mendez, Vice President and Chief Financial Officer
seated: James L. Harrison, Sr., President and Chief Executive Officer

C.%F5kity

Bancshares,

Inc.

Management’s Discussion and Analysis

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Reorganization and Acquisitions

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

.Stock Splits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Summary Financial Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. . .

. . .

. . .

. . .

Five-Year Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Market Price and Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Net Interest Margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . O.

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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Tmstand

Investment Management Services

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Liquidity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..

Interest Rate Sensitivity,

Interest RateRiskandAsset/LiabilityManagement

. . . . . . . . . . . . . . . . . . . . . .

Virginia Bankers Insurance Center

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Recent Legislation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Year 2000 Century Date Change.

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

8

8

8

8

10

10
11

12

12

13

13

14

15

15

16

16

17

18

18

18

18

18

19

19

20

21

22

7

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 First

the consolidated financial statements, notes and
tables included throughout
Community Bancshares, Inc. (the “Company” or
“First Community”) Annual Report on Form 1O-K.
Management’s discussion and analysis may contain
forward-looking statements
in the understanding of future financial performance.
However, such performance involves risks and uncer-
tainties, which may cause actual results to differ
materially from those expressed in forward-looking
statements.

that are provided to assist

First Community is currently a multi-state holding

company headquartered in Bluefield, Virginia. With
total resources of $1.088 billion at December 31,
1999, First Community provides financial, mortgage
brokerage and origination and trust services to
individuals and commercial customers through
31 full-service banking locations in West Virginia,
Virginia and North Carolina as well as nine mortgage
brokerage facilities oper~ted by United First Mort-
gage, Inc.

Reorganization

and Acquisitions

Effective with the close of business on April 30,

1999, the Company completed the merger of all
affiliate banks of First Community Bancshares,
into a single national association. Subsequent
merger, all banking operations are being conducted
within First Community Bank, N,A., a national
association subject
the Comptroller of the Currency. The merger was
designed to enhance operational efficiency and
streamline regulatory considerations.

to the supervision of the Office of

Inc.
to the

“Purchase” accounting does

“purchase” transaction.
not require restatement of prior years’ results and,
accordingly,
reflected from the date of acquisition forward.

the results of operation of UFM are

Stock Splits

The Company’s common stock was split five shares
for four on March 31, 1997, March31,
1998, and on
March 31, 1999. All share and per share data in this
report have been retroactively adjusted to reflect the
affect of these three stock splits, all of which were
effected through 25% stock dividends.

Summary Financial Results

.——.. . ..—.

20

15

10

50

5

On September 28, 1999, First Community Bank,

Net

income for 1999 was $16.9 million, up

(“FCBNA”),

the Company’s wholly-owned

N.A.
banking subsidiary, acquired 100% of the common
stock of United First Mortgage, Inc. ([’UFM’)
headquartered in Richmond, Virginia. The addition
of the mortgage brokerage operations of UFM added
nine additional
FCBNA. The operations of UFM cover a geographic
region along a corridor of Interstates 64 and 81 that
range from Virginia Beach, Virginia to Harrisonburg,
Virginia. The acquisition was accounted for as a

facilities to the Virginia operations of

income of $15.1 mil-

$3.75 million from $13.1 million in 1998 and up
$1.76 million from 1997 net
lion. Basic earnings per share also increased to a
record level of $1.92 per share, up from $1.49 and
$1.71 in 1998 and 1997, respectively. Cash earnings
per share for 1999 were $2.12, up from $1.69 in 1998
and $1.85 in 1997. Cash earnings per share represent
earnings per share (EPS) adjusted for non-cash
charges such as amortization of goodwill and other
intangibles.

The increase in net

income between 1998 and
1999 represents a combination of positive factors
including growth of $1.2 million in net
income, a $3.4 million reduction in the provision for
loan losses and a $1.3 million reduction in operating
expenses. The Company also realized a $1.8 million
recovery on check clearing losses dating back to
1996.

interest

During the current year, a greater emphasis was

increases in the loan portfolio and

placed on deposit rates and liability management,
which led to a reduction in interest expense and the
overall cost of funds. The Company also realized
significant
improved asset quality, resulting in an increase in the
net
interest margin from 4.8 l% in 1998 to the 1999
interest margin is
level of 5.03Yo. The increase in net
reflective of the reduction in interest cost on deposits
and an increase in the Company’s loan-to-deposit
ratio.

The $1.99 million decrease in net

income between

to a $2.9 million

1997 and 1998 is attributable
charge to the provision for loan losses associated with
a commercial
approximate $4.0 million increase in operating costs
and intangible amortization associated,
in part, with
bank and ~ranch acquisitions throughout

loan foreclosure in 1998 and an

1997

The Company’s key profitability ratios of Return
on Average Assets (ROA) and Return on Average
Equity (ROE) continue to reflect the strong earnings
performance of the Company and compare favorably
with regional and national peer groups. ROA, which
measures the Company’s stewardship of assets, was
1.62%, up from 1.24% in 1998 and 1.59% in 1997.
to an
These increases in ROA relate,
increased emphasis in controlling deposit costs as
well as operational efficiency improvements and the
previously discussed recovery of check collection
losses, which were incurred in 1996. ROE for the
Company remained strong in 1999 at 16.23% and
reflects an increase from 13.02% in 1998 and 16.05%
in 1997. The ROE reflects the combined affects of
earnings performance and check
strong operational
clearing recoveries in 1999.

in large part,

20 -~ -–

16.7
-.

15 ---

I

1

10 . ..

—

I

2.0

1.5

iI.O

0.5

0.0

. “no,
l.lu

1.73%

1.62%

5

[

0

1995

1996

1997

1998

1999

1995

1996

1997

1998

1999

9

Five-Year Selected Financial Data
(Amounts

in Thousands, Except Percent and Per Share Data)

1999

1998

1997

1996

1995

$

$

$

Balance Sheet Summary (at end of

period):

. . . . . . . . .
Loans, net of unearned income.
Reserve for loan losses . . . . . . . . . . . . . . . . .
Securities
. . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deposits
Other
. . . . . . . . . . . . . . . . . . .
Stockholders’ Equity . . . . . . . . . . . . . . . . . .

indebtedness

Summary of Earnings:
income . . . . . . . . . . . . . . . . . .
interest
Total
Total
interest expense . . . . . . . . . . . . . . . . .
Provision for loan losses . . . . . . . . . . . . . . .
income . . . . . . . . . . . . . . . . . .
Non-interest
expense . . . . . . . . . . . . . . . . . .
Non-interest
Income tax expense . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . .
Net Income

Per Share Data:
Basic earnings per common share . . . . . . . .
Diluted earnings per common share . . . . . .
Cash earnings per share . . . . . . . . . . . . . . . .
Cash dividends . . . . . . . . . . . . . . . . . . . . . . .
Book value at year-end . . . . . . . . . . . . . . . .

Selected Ratios:
average assets . . . . . . . . . . . . . . .
Retumon
average equity . . . . . . . . . . . . . .
Retumon
Dividend payout . . . . . . . . . . . . . . . . . . . . . .
Average equity to average assets . . . . . . . . .
Risk based capital
torisk adjusted assets . .
Leverage ratio . . . . . . . . . . . . . . . . . . . . . . . .

704,096
11,900
290,873
1,088,162
--
—---
833,258
10,218
103,488

$ 611,493
11,404
277,210
1,053,988
875,996
18,176
101,719

$ 671,817
11,406
270,969
1,042,304
853,507
24,330
97,842

$547,703
8,987
236,441
837,597
643,497
15,000
89,258

$ 64,941
26,933
2,273
9,070
24,358
6,530
13,917

$485,151
8,321
246,578
780,235
622,723
15,000
80,393

$58,954

23,482
2,235
7,214
22,694
4,968
12,789

76,492
32,250
2,893
10,732
27,457
7,772
16,852

1.92
1.91
2.12
.88
11.86

1.62%
16.23%
45.83%
9.96%
13.22%
8.25%

75,834
32,890
4,963
8,661
24,672
6,876
15,094

$

$

$

$

81,213
38,128
6,250
11,182
28,752
6,164
13,101

1.49
1.49
1.69
.84
11.60

$

1.71
1.71
1.85
.83
11.08

$

1.58
1.58
1.63
.73
10.11

1.46
1.46
1.52
.62
9.20

1.24%
13.02%
56.38%
9.50%
13.25%
7.37%

1.59%
16.05%
48.54%
9.90%
11.96%
6.96%

1.73%
16.26%
46.20%
10.64%
17.02%
10.33%

1.70%
16.77%
42.47%
10.12%
17.29%
9.86%

Common Stock and Dividends

The Company’s common stock is traded in the
over-the-counter market. Daily bid and ask quota-
tions areavailab~e through the NASDAQ Level 111
Electronic Billboard under the symbol FCBC. On
December 31, 1999, First Community’s common
stock price was $18.25, a decrease of 22.0% from the
split-adjusted December 31, 1998 closing price of
$23.40.

Book value per common share was $11.86 at

December 31, 1999, compared with $11.60 at
December 31, 1998, and $11.08 at the close of 1997.
The year-end market price for First Community

common stock of $18.25 represents 154% of the
Company’s book value as of the close of the year and
reflects total market capitalization of $159.3 million.
Utilizing the year-end market price and 1999 basic
earnings per share, First Community common stock
closed the year trading at a price/earnings multiple of
9.5 times basic earnings per share.

Dividends for 1999 totaled $.88 per share, up $.04

or 4.76% from the $.84 paid in 1998. The 1999
dividends resulted in a cash yield on year-end market
of 4.82Y0.

1.0-1

-——.—

. ...—.... —.—-...——— 9

$0.83

$0.84

$0.88

$0.73

$0.6

0.8 ‘

I0.6-

0.4-

0.2

[

1995

1996

1997

1998

1999

1

Market Price and Dividends

1999

Bid

High

Low

First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Second Quarter
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third Quarter
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth Quarter

$23.20
22.90
23.50
21.38

1998

First Quarter
Second Quarter
Third Quarter
Fourth Quarter

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$23.68
34.40
34.20
27.00

$20.70
18.50
18.88
18.00

$19.58
28.80
24.80
21.20

Net

Interest Margin

Book
Value
Per Share

$11.75
11.60
11.74
11.86

$11.34
11.21
11.48
11.60

Cash Dividends
Per Share

$.20
.21
.22
.25

$.88

$.20
.20
.20
.24

$.84

Net

interest

interest margin measures net

income
of average earning assets. In 1999,

interest margin recovered to 5.0390 for the year

as apercentage
net
from 4.81% in1998
atrained in 1997. The current year’s increase was due
in large part
instituted in the Iatter part of 1998 and a$92.6 mil-
lion increase in outstanding loans. The cost of funds

to deposit rate control measures

but below the 5.25% level

1999and
declined from 4.57% in1998t04.O%in
contributed to a 4.9% decrease in retail deposits.
Also during 1999, additional
funds were invested in
the securities portfolio in maturity and sector distri-
In the
butions to enhance the portfolio performance.
second halfof
increases in the loan
1999, significant
portfolio were then funded with wholesale advances
from the Federal Home Loan Bank.

11

Net

Interest

Income

20,000

.
1995

1998

1999

6 ,
1

----— ..—–.—
5.3—

I

I

5-

4.

3-

2-

1-

0 I

1995

1996

1997

1998

1999

interest

income,

The primary source of the Company’s earnings is
the difference between income

net
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
bearing liabilities.

the major portion of interest-

On a tax equivalent basis, net

interest

income

increased $1,250,000 or 2.7% in 1999 and $726,000
or 1.6% in 1998. Average earning assets decreased
1.8% in 1999 after increasing 10.9% in 1998. The
current year decrease of $17.5 million in earning
assets was primarily the result of reductions
interest bearing balances and federal funds sold. This
occurred in reaction to deposit
level decreases and
the general repricing of the interest bearing deposit
portfolio to achieve desired net

interest margins.

in

The increase in tax equivalent net

interest

income

for 1999 was driven by the declining cost of finds
which exceeded the overall decline in asset yield by
approximately 24 basis points and resulted in an
additional $1.3 million in tax equivalent net
income during 1999. The modest
equivalent net
by the sale of approximately $14.0 million in credit
card revolving loan accounts during 1998 which
reduced interest and fees on loans approximately
$747,000 in comparison to 1997. The proceeds of
sale were reinvested in interest bearing balances,

income in 1998 was impacted

increase in tax

interest

interest

the

Community
Bancshar~l

Inc.

which yielded substantially lower earnings and,
accordingly,
income.
The portfolio sale was part of an overall exit strategy
from the credit card line of business.

reduced current year net

interest

50,000

44,000

38,000

32,000

26,000

$40,395

$37,759—-.L.-
.
—

.-.—

lR

&—

__-.
1

1996

1997

Provision for Loan Losses

The provision for loan losses represents charges

to establish reserves for loan losses

against operations
inherent
in the Company’s loan portfolio. The level
of expense, as well as the required level of reserves,
dependent upon a number of factors including
historical
specific credit weaknesses within the portfolio, con-
type, assessment of the prevail.
centrations of credit
ing economic climate, and other
factors which may
affect the overall condition of the loan portfolio.

loss ratios by loan type, assessment of

is

The provision for loan losses was $2.9 million in
1999, $6.3 million in 1998 and $5.0 million in 1997.
The increase in the provision for loan losses in 1998
of $1.3 million was largely the result of a second
quarter provision taken in response to a commercial
loan foreclosure. Elevated provisions in both 1997
and 1998 also include higher
loan
charge-offs in the Company’s credit card division and
indirect auto financing program. Each of these
programs was curtailed in 1998 and losses associated
with these types of retail
lending have been substan-
tially reduced.

levels of consumer

The current year provision of $2.9 million,

although substantially reduced in comparison to 1998

and 1997, reflects provisions in response to increases
in outstanding loan balances at December 31, 1999
and management’s estimate of the risk profile of the
portfolio.

Non-Interest

Income

Non-interest

income consists primarily of fiduciary

income on trust services and service charges on
deposit accounts. Non-interest
$10.7 million in 1999, a $450,000 decrease or 4.5%
from the $11.2 million in 1998 and a $2.0 million or
23.0% improvement over the 1997 total of
$8.7 million.

income totaled

The reduction in total non-interest

revenue in

1999 of $450,000 is due largely to a $1,357,000
decline in other charges and fees relative to the
Company’s credit card portfolio which was sold in
1998, a $1,062,000 pension termination gain occur-
ring in the prior year and the recognition of a
$1.2 million gain on the sale of the credit card
portfolio in 1998. These reductions are partially offset
by a $1.8 million recovery recognized in the current
year of check clearing losses which were incurred in
1996, and the acquisition of United First Mortgage
which added $931,000 in revenues on the origination
and sale of mortgage loans.

Total non-interest

revenue from continuing sources
increased slightly by $160,000 which is largeIy due to
an increase in fiduciary income of $410,000 less a
$200,000 reduction in service charges on deposit
accounts and other service charges, commissions and
fees.

Higher

levels of non-interest

income for 1998 over

1997 include a pension termination gain of
$1,062,000 (net of federal excise tax of $764,000) as
a result of the Company’s termination
of its Defined
Benefit Pension Plan, which was completed in the
first quarter of 1998. Also included in other operat-
ing income for 1998 are gains totaling $1.2 million
on the sale of substantially all revolving loan
accounts and all merchant account
in
the Company’s credit card division. The Company’s
decision to exit this line of business was based on its
relatively small share of this market, vigorous compe.
tition for credit card accounts and rising consumer
delinquencies. At year-end 1998, the Company
retained approximately $2 million in revolving pri-
vate label credit card accounts and by the end of
1999 the outstanding balance of these accounts was
reduced to $669,000.

relationships

Service charges on deposit accounts are the largest
income. Service charge income

source of non-interest

totaled $3.6 million in 1999, a decrease of $106,000
or 2.8% from 1998. This contrasts with a 13.9%
increase of $457,000 between 1998 and 1997 which
is reflective of the full year of operations during 1998
of facilities added during 1997 which included Blue
Ridge Bank in early 1997 and branches acquired later
in that year.

Other service charges, commissions and fees
declined by 50% in 1999 versus 1998. This decline
was largely a result of the reduced transaction fees of
$1,357,000 related to the previously mentioned sale
of the credit card portfolio.

------------

2,500 ----

I

2,000 ~~------’----

I

$1,621

1,500---

1,000~

r

500

%2.092

... ——
$1.731

—..
.:=+--+=.-—.—G
“[

1996

1997

1998

1999

+_.—

.—

‘

.

Fiduciary income totaled $2.1 million in 1999

accounts, plus an increase in

increase in Trust assets, particularly in the

resulted in the twenty-
increase in fiduciary income in 1999.

versus $1.7 million in both 1998 and 1997. A
modest
area of retirement
estates under management,
three percent
Trust revenues are comprised of fees for asset
management
ated with the operation of the Trust and Financial
Services Division are included in non-interest
expense.

and estate settlement. Expenses associ-

Non-Interest

Expense

Non-interest

expenses consist of salaries and bene-

fits, occupancy, equipment and aII other operating
expense incurred by the Company. Non-interest
expense totaled $27.5 million in 1999, compared
with $28.8 million and $24.7 million in 1998 and
1997, respectively.
expense in 1999 of $1.3 million relates largely to the
elimination of the operating costs associated with the

decline in non-interest

fie

13

I

I

processing technology and the introduction
tronic banking services implemented in 1997 and
earIy 1998.

of elec-

2.5 -— --

2.27

I

2.22%

b
n

1.84°A

2.0-

1.5 --

I

1.0-

0.5 =-

0.0

1995

1

1

1998

rhe Company’s net overhead ratio (non-interest

income excluding security

expense less non-interest
gains and non-recurring gains divided by average
earning assets) is a measure of its ability to manage
and control costs. As this ratio decreases, more of the
net
The net overhead ratios for 1999, 1998 and 1997
were 1.96Y0, 2.06% and 1.84Y0, respectively.

income earned is realized as net

income.

interest

The Company’s efficiency ratio also measures
management’s ability to control costs and maximize
net revenues. The efficiency ratio is computed by
dividing non-interest
interest
income (all non-
recurring items excluded). The efficiency ratios for
1999, 1998 and 1997 were 44.2%, 47.4%. and
42.2%, respectively.

expense by the sum of net

income plus non-interest

Income Tax Expense

Income tax expense totaled $7.8 million in 1999,

compared with $6.2 million in 1998 and $6.9 mil-
lion in 1997. The $1.6 million increase between
1998 and 1999 reflects the subs~antial increase in
pre-tax earnings between the two periods as a result
of improved net
in loan
loss provisions and operating expenses as well as the
$1.8 million recovery of check clearing losses.

income, reductions

interest

and the

of technology for the electronic storage

credit card division of $1.25 million. Additionally,
savings were generated through the application of a
more centralized purchasing environment
introduction
and retrieval of reports which significantly reduced
paper costs and the aggregate cost of supplies, which
declined by $425,000 in 1999. The” substantial
increase in 1998 operating costs was attributable
the full year costs of Blue Ridge Bank and various
branches in 1998 versus the partial year of operation
of these offices in 1997. When comparing 1998 to
1997, the addition of Blue Ridge Bank and branches
acquired throughout
$956,000 and $1,268,000,
levels.

1997 added approximately

respectively, over 1997

to

Salaries and employee benefits increased $890,000

or 7.3% when comparing 1999 with 1998 and
$906,000 in 1998 in comparison to 1997. These
increases relate almost exclusively to the addition of
United First Mortgage, Inc. in 1999 and Blue Ridge
Bank and various branches acquired in 1997. The
effect of the three months of operations of the UFM
facilities in 1999 resulted in additional personnel
costs of approximately $811,000 in 1999. The effect
of a full year of operations of Blue Ridge Bank and
branches acquired in 1997 resulted in an additional
$1.1 million in personnel costs in 1998 when
compared to 1997. Blue Ridge accounted for an
additional $521,000 of this total while the branch
acquisitions added $597,000 in 1998.

Occupancy expense increased $185,000 or 9.5%
between 1998 and 1999. The acquisition of United
First Mortgage resulted in an increase of $84,000 in
the current year while increases of $87,000 were
noted in other categories including maintenance,
insurance, and depreciation. When comparing 1997
to 1998 occupancy cost increased $264,000 or 15.7%
as a result of the addition of Blue Ridge Bank and
branches acquired in 1997.

the

The $222,000 decrease in furniture and equipment
cost in 1999 is reflective of the reduced maintenance
on newer equipment used in check processing,
centralization of functions relative to the acquisition
of Blue Ridge Bank and branches in 1997 and the
elimination of specialized equipment used in the
credit card processing function. The 1998 increase
(19.7%)
$323,000 reflects not only the impact of acquisitions,
which added approximately $197,000 in additional
cost, but also includes depreciation and maintenance
associated with the implementation

in furniture and equipment expense of

of new check

.

@

ComRf;ity

Bancshares,

Inc.

The major difference between the statutory tax
rate and the effective tax rate (income tax expense
divided by pre-tax book income)
taxable for Federal
which is not
The primary category of non-taxable
of state and municipal securities and industrial
revenue bonds and tax-free loans. The effective tax
rate for 1999 was 31.6% as compared with 32.0% for
1998 and 31.3% in 1997.

results from income
income tax purposes.

income is that

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 Federal Home Loan Bank (FHLB), Federal
National Mortgage Association (FNMA), Govern-
ment National Mortgage Association (GNMA), Stu-
dent Loan Marketing Association (SLMA), Federal
Farm Credit Bank (FFCB), and Federal Home Loan
Mortgage Corporation

(FHLMC).

Obligations of States and Political Subdivisions
totaling $73.6 million at December 31, 1999 are
comprised of high grade municipal securities generally
carrying AAA bond ratings, many of which also
carry credit enhancement
of investment obligations.

insurance by major insurers

The average maturity of the investment portfolio
decreased from 10.05 years in 1998 to 9.63 years in
1999 with the tax equivalent yield increasing from
8.38% at year-end 1998 to 8.46% at the close of
1999. The increase in yield reflects the change in
portfolio composition that shifted toward the munici-
pal bond sector.

The investment portfolio totaling $78.8 million
decreased $5.2 million between 1998 and 1999. This
decrease is the result of prepayments and calls
occurring as a result of the declining interest
environment
in 1998 and continuing into mid-year
1999. Portions of these cash flows were invested in
new loan origination.

rate

—

Securities Available for Sale

Securities available for sale are used as part of
management’s asset/liability strategy. These securities
rates,
may be sold in response to changes in interest
changes in prepayment
risk, for liquidity needs and
other factors. These securities are recorded at market
value.

At December 31, 1999, the Company had

$212.1 million in securities available for sale, com-
pared with $193.2 million at year-end 1998. The
increase in this portfolio reflects the reinvestment of
funds received from loan principal prepayments
arising from early payoffs and calls and maturities of
investment
securities and corresponding decreases in
Federal Funds sold and interest-bearing balances held
at the Federal Home Bank.

The book value of securities available for sale

exceeded market value at year-end 1999 by $9.1 mil-
lion. The decline in the market value of the
securities available for sale is a direct result of overall
increases in the interest
rate environment, which has
an inverse effect on the market value of the
underlying instruments. The tax equivalent purchase
yield on securities available for sale in 1999 was
6.53% and the tax equivalent purchase yield in 1998
was 6.56Y0. The 3 basis point decline in yield on the
rates,
portfolio reflects the general decline in interest
which triggered above average calls and prepayments
during 1998 and which were then reinvested at
prevailing lower market rates. This trend continued
through the first half of the current year but began to
reverse in the latter part of 1999 when interest
increases were instituted by the Federal Reserve.

rate

The average maturity of the portfolio was

12.4 years and 15.6 years at December 31, 1999 and
1998, respectively. The declining average maturity is
also the result of the above average number of calls
in the agency portfolio and mortgage-backed security
prepayments as a result of the declining rate environ-
ment and reinvestment
securities with shorter
term securities have call provisions, which could
in redemption prior to their final maturity.
result

in early 1999 in Agency
final maturities. Most longer-

15

ioan Portfolio

real
loans

The loan portfolio is geographically diversified
among loan types and industry segments. Commercial
and commercial
real estate loans represent 42.7% of
the total portfolio. During 1999, commercial
estate loans increased as a percentage of total
and now comprise 29.6% of the portfolio. The
commercial and commercial
real estate sectors
increased by $53.1 million or 21.4% in 1999.
Additionally,
lion or 1.4% from $125.5 million at December31,
1998 to $127.2 million at the close of 1999.
Consumer
portfolio at the close of 1999 and 1998, respectively.
The sector that experienced the largest percentage
change was the commercial
which increased by $37.6 million or 40.6% of the
total

increase in the loan portfolio of $92.6 million.

loans represent 18.1% and 20.6% of the

loans increased by $1.7 mil-

real estate portfolio,

consumer

loans by

and loan

loan portfolio.

increase in the

In 1998 the Company exper-

1998. During 1999, a renewed

Loans, net of unearned income, were $704.1 mil-
lion at year-end 1999. The increase of $92.6 million
represents 15.1Yogrowth from the $611.5 million
level at December31,
emphasis on relationship management
development
resulted in a significant
total
ienced increased competition for commercial
other banks and capital market groups which
impacted minimum underwriting standards within the
industry leading to sub-prime interest
loan-to-value
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
principal prepayments and contributed to the decline
in the loan portfolio during 1998. This trend
reversed in 1999 as interest
market financing slowed.

ratios, and less emphasis on owner

resulted in above average

rates rose and capital

rate environment

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 as the
Company exited the credit card line of business.

The loan-to-deposit

ratio increased to 85% at

December 31, 1999 from 70% at December 31, 1998.
The increase in the loan-to-deposit
ratio is a result of
the increases in the loan portfolio of $92.6 million
coupled with a $42.7 million decline in total
deposits.

Bancsharwl

Inc.

RerdEstate- Constmction
3.5%

Commercial,Financial
andAgricultural_
13.1% A

~

-

Loansto
Individuals
18.1% I

RealEstate-
Residential
35.7%

RealEstate- Commercial
29.6%

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,
in the loan portfolio.
absorb potential
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
attributed reserves to various portfolio segments,
the
allowance is available for the entire portfolio.

in
is considered adequate to

loan loss experience, and trends

losses inherent

or pledged

The reserve for loan losses represents 130% of

non-performing
loans at year-end 1999 versus 140%
and 79% at December 1998 and 1997, respectively.
When other real estate is combined with non-
performing loans, reserves equal 107% of non-

performing assets at the end of 1999 versus 98% and
72% at December 31, 1998 and 1997, respectively.

Net charge-offs were $2.4 milIion in 1999, as

loan charge-off of $2.9 million relating to

compared with $6.3 million in 1998 and $4.5 million
in 1997, respectively. The $3.9 million decrease in
net charge-offs in 1999 is principally related to
elevated charge-offs in 1998 as a result of a
commercial
in Princeton, West
a failed furniture assembly plant
Virginia in the second quarter of 1998 as well as a
reduction in charge-offs associated with the credit
card portfolio that was sold in the latter part of 1998.
Additionally,
level of loan quality as a result of
the overall
of credit card lending in 1998 and a
termination
reduction in the level of indirect auto financing.

the current year reflects an increase in

.Net

to
loan losses of $955,000 and $468,000 in the

charge-offs for 1997 were elevated, due in part,
retail
credit card and indirect auto loan areas, respectively,
as well as a large single commercial
$800,000 on a car dealer floor plan arrangement.

loan’ charge-off of’

Non-Performing

Assets

Non-performing

assets include loans on which

real estate owned (OREO) pursuant

interest accruaIs have ceased, loans contractually past
due 90 days or more and still accruing interest, and
other
sure proceedings. Total non-performing
assets were
$11.1 million at December 31, 1999. The levels of
non-performing assets for the last five years are
presented in the table below.

to foreclo-

(Amounts in Thousands)

1999

1998

1997

December

31

Non-accrual Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans 90 Days ormore Past Due...
. . . . . . . . . . . . .
Other Real Estate Owned . . . . . . . . . . . . . . . . . . . . . .

$7,889

$7,763

$9,988

1,259
1,950

377
3,547

4,391
1,472

$11,098

$11,687

$15,851

1996

—

$5,476
780
2,225

$8,481

1995

—

$4,371
673
929

$5,973

Non-performing loans as a percentage of total
Non-performing
andother

assets as a percentage of total Ioans
. . . . . . . . . . . . . . .

real estate owned...

loans

1.3%

1.6%

1.3%

1.9%

2.l%

1.l%

1.0%

2.4%

1.6%

1.2%

Reserve for loan losses as a percentage of

non-performing loans

. . . . . . . . . . . . . . . . . . . . . . .

130.1%

140.1%

79.3%

143.7%

165.0%

Reserve for loan losses as a percentage of

non-performing assets . . . . . . . . . . . . . . . . . . . . . . .

107.2%

97.6%

72.0%

106.0%

139.3%

Non-performing

assets decreased $589,000 between
1998 and 1999 with a $1.6 million decrease in other
real estate owned and increases reflected in both
loans. The
ninety days past due and non-accrual
small increase in non-accrual
the addition and removal of several commercial
relationships
and removed from non-accrual
non-accrual
loans remains near $8.0 million due to
several larger loan relationships, which are slow in
resolution due to pending Chapter 11 Bankruptcy
proceedings. The increase in loans ninety days or

that were brought current or liquidated

loans is the result of

status. The volume of

(FmHA) and Small

more past due is the result of the addition of an
$892,000 commercial
loan relationship which is
secured by real estate and partially backed by
Farmer’s Home Administration
Business Administration
decline in other
primarily attributable
property that was acquired through foreclosure on a
furniture manufacturing company in southern West
Virginia. The facility was sold in March 1999 and
resulted in a $275,000 recovery of amounts previously
charged ofi.

real estate owned of $1.6 million is
to the sale of a commercial

(SBA) guarantees. The

17

Deposits

Stockholders’ Equity

Total deposits at December 31, 1999 decreased
$42.7 million or 4.9% when compared to Decem-
ber 31, 1998. The decrease in deposits is the result of
a general repricing of deposits which was instituted
in the latter part of 1998 and continued throughout
1999. The resultant effect was a decline in deposits,
deposit cost, and the cost of funds. As a result of
decreases in deposit
liabilities,
lower cost, short-term advances from the Federal
Home Loan Bank to supplement
of the Company.
interest bearing liabilities was 4.OYO,down from
4.57% in 1998.

the funding needs
In 1999, the average rate paid on

the Company utilized

Average deposits totaled $854.0 million for 1999
versus $870.8 million in 1998. The largest decrease
in average deposits was experienced in interest-
bearing time deposits, which decreased 4.9% versus
an overall deposit portfolio decrease of 1.9Y0.Average
savings deposit accounts also decreased 3.5Y0. Alter-
natively, average non interest-bearing demand depos-
its increased 7.2% and average interest-bearing
demand deposits experienced a 2.7% increase.

Short-Term Borrowings

The Company’s short-term borrowings consist pri-

marily of Federal Funds purchased from the FHLB
and securities sold under agreements to repurchase.
This category of funding is a source of moderately
priced short-term funds. Short-term borrowings
increased on average $6.9 million or 13.4% from
1998 following a 13.5% decrease between 1998 and
1997. The increase in average short-term borrowings
in 1999 is a direct result of the increased emphasis
on liability management
to increase the net
borrowings were used to fill the gap in funding due
to reduced levels of retail deposits.

interest margin. Short-term

and controlling deposit cost

Other

Indebtedness

Other

indebtedness, which represents long-term

to a

advances from the FHLB and acquisition debt
correspondent bank decreased by $8.0 million in
1999. The decrease is attributable
repayment of the acquisition debt
quarter of 1999. Remaining indebtedness of
$10.2 million is comprised primarily of long-term
advances from the FHLB to fund matched purchases
of earning assets.

to the complete
in the second

Bancsharm~

Inc.

Risk-based capital ratios are a measure of the

Company’s capital adequacy. At December 31, 1999,
the Company’s Tier I capital ratio was 11.96%
compared with 12.0% in 1998. Risk-based capital
ratios and the leverage ratio are used by regulators to
measure the capi~al adequacy of banking institutions.
Risk-based capival guidelines risk weight balance
sheet assets and off-balance sheet commitments
in
determining capital adequacy. The Company’s total
risk-based capi~al-to-asset ratio was 13.22°\o at the
close of 1999 compared with 13.25% in 1998. Both
of these ratios are well above the current minimum
level of 8% prescribed for bank holding companies as
depicted on Page 43.

The leverage ratio is the measurement of total

tangible equity to total assets. The Company’s
leverage ratio at December 31, 1999 was 8.25%
compared to 7.37% at December 31, 1998, both of
which are well above the minimum levels prescribed
by the Federal Reserve as depicted on Page 43.

Trust and Investment Management

Services

The company offers trust management

and estate
services through its Trust and Finan-

administration
cial Services Division (Trust Division). The Trust
Division reported market value of assets under
management of $368 million and $377 million at
December 31, 1999 and 1998, respectively. The Trust
Division manages intervivos trusts and trusts under
will, develops and administers employee benefit plans
retirement plans and manages and
and individual
settles estates. Fiduciary fees for these services are
charged on a schedule related to the size, nature and
complexity of the account.

The Trust Division employs 19 professionals and

investing and plan administration

support staff with a wide variety of estate and
financial planning,
skills. Trust Division operating expenses totaled
$1.3 million in 1999 and 1998. These costs are
comprised primarily of salaries and related benefits,
investment
services, asset custody fees and the cost of
information processing systems. The Trust Division is
located within the Company’s largest banking facility
in Bluefield, West Virginia. Services and Trust
development
activities to other branch locations and
primary markets are provided as an extension of this
division through professional staff who also serve as
field Trust Administrators.

Liquidity

securities, overnight

Liquidity represents the Company’s ability to
respond to demands for fimds and is usually derived
from maturing investment
investments, periodic repayment of loan principal,
and the Company’s ability to generate new deposits.
The Company also has the ability to attract short-
term sources of funds and draw on credit
lines that
have been established at financial
meet cash needs.

institutions

to

Total

liquidity of $372.1 million at December 31,

1999 is comprised of the following: cash on hand and
deposits with other financial
institutions of
$37.8 millio~ securities available for sale of
$212.1 million;
investment
due within one year of $1.7 million; and Federal
Home Loan Bank credit availability of
$120.5 million.

securities held to maturity

Interest Rate Sensitivity,
and Asset/Liability Management

Interest Rate Risk

The Bank’s profitability is dependent

to a large

interest

is subject

institutions,

income (NII), which is
income on inter-

extent upon its net
the difference between its interest
est-earning assets, such as loans and securities, and its
interest expense on interest-bearing
liabilities, such as
deposits and borrowings. The Bank, like other
financial
the degree that
its interest-earning
differently than its interest-bearing liabilities. The
Bank manages its mix of assets and liabilities with
the goals of limiting its exposure to interest
ensuring adequate liquidity, and coordinating its
sources and uses of funds while maintaining an
acceptable level of NII given the current
environment.

assets reprice

rate risk to

to interest

rate risk,

interest

rate

The Company’s primary component of operational

is subject

rate environments

to variation as a result of

in conjunction
in earning

rate risk
Interest
including repricing risk,

revenue, NII,
changes in interest
with unbalanced repricing opportunities
assets and interest-bearing liabilities.
has four primary components
basis risk, yield curve risk and option risk. Repricing
risk occurs when earning assets and paying liabilities
reprice at differing times as interest
Basis risk occurs when the underlying rates on the
assets and liabilities the institution holds change at
different
is the risk of adverse consequences as a result of

levels or in varying degrees. Yield curve risk

rates change.

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.

rate

income

including

its interest

level of interest

rate environments

indicate the exis-

the Company manages

rate
its interest

assets and interest-paying

In order to mitigate the effect of changes in the
rates,
and thus,

interest
in the general
rates. To measure its exposure to

general
repricing opportunities
sensitivity. The Bank seeks to control
risk (IRR) exposure to insulate net
and net earnings from fluctuations
level of interest
IRR, quarterly simulations of NII are performed using
financial models which project NII through a range
of possible interest
rising, declining, most likely and flat rate scenarios.
The results of these simulations
tence and severity of IRR in each of those rate
environments based upon the current balance sheet
position, assumptions as to changes in the volume
and mix of interest-earning
liabilities and management’s estimate of yields
attained in those future rate environments
which will be paid on various deposit
and borrowings. Specific strategies for management of
IRR have included shortening the amortized maturity
increasing the volume of adjus~a-
of fixed-rate loans,
ble rate loans to reduce the average maturity of the
Bank’s interest-earning
assets and monitoring the
term structure of liabilities to maintain a balanced
mix of maturity and repricing structures to mitigate
the potential exposure. The simulation model used by
the Company captures all earning assets, interest
bearing liabilities and all off balance sheet financial
instruments and combines the various factors affect-
ing rate sensitivity into an earnings outlook. Based
upon the latest simulation,
that
position. Absent adequate management,
tions can negatively impact net
interest
rising rate environment
impact net
environment.

the Company believes
it is slightly biased toward a liability sensitive

liability posi-
income in a

or, alternatively, positively

income in a falling rate

instruments

and rates

interest

The Company has established policy limits for

reduction in projected net

rate risk that allow for no more
interest

tolerance of interest
than a ten-percent
income based on quarterly income simulations. The
most recent simulation indicates that current exPo-
sure to interest
Company’s defined policy limits.

rate risk does not exceed the

19

The following table summarizes the impact on NII

and the Market Value of Equity (MVE) as of
December 31, 1999 and 1998, respectively, of imme-
rate
diate and sustained rate shocks in the interest
environment
of plus and minus 100 and 200 basis
points from the flat rate simulation. The results of
the rate shocks depicted below differ from the results
in quarterly simulations,
assumed to take effect immediately whereas,
quarterly income simulations, changes in interest
rates take place gradually over a 24-month horizon.
This table, which illustrates the prospective effects of
hypothetical
rate changes,
numerous assumptions including relative and esti-
mated levels of key interest
month time period. Management

rate factors over a twelve
this type

in that, all changes are

is based upon

feels that

interest

in the

of modeling technique, although useful, does not rake
into account all strategies which management might
undertake in response to a sudden and sustained rate
shock as depicted. Also, as market conditions vary
from those assumed in the sensitivity analysis, actual
results will also differ due to: prepayment/refinancing
levels likely deviating from those assumed, the
varying impact of interest
on adjustable rate assets, the potential effect of
changing debt service levels on customers with
adjustable rate loans, depositor early withdrawals and
product preference changes, and other
external variables. Additionally, management does
not believe that a rate shock of the magnitude
described is likely in the forecast period presented.

rate change caps or floors

internal/

(Dolkr Amounts in Thousands)

Change in
Interest Rates
(Basis Points)

1999

Net

Interest

Income

200 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$43,040.5

100 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

-o-

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

-loo . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

-200 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

45,655.7

47,960.7

49,994.4

50,734.5

Changein
Interest Rates
(Basis Points)

1998

Net

Interest

Income

200 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$43,698.5

100 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

-o-

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

-loo . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

–200 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

43,975.2

43,961.3

45,154.9

46,330.5

%

=

-10.26

-4.81

0.0

4.2

5.8

70

-

-0.6

0.3

0.0

2.7

5.4

Market Value
of Equity

$68,527.3

87,584.3

105,442.3

124,308.5

141,245.4

Market Value
of Equity

$ 89)626.2

99,119.2

108,354.2

118,235.6

128,938.6

0/0

a

-35.0

–16.9

0.0

17.9

34.0

Yo

-

-17.3

-8.5

0.0

9.1

19.0

When comparing theimpact

of the rate shock

Virginia Bankers Insurance Center

income and MVE. The

income reflect larger variances in
interest

analysis between 1999 and 1998, the 1999 changes
in net
interest
projected net
increased sensitivity is attributed to the increased life
of cereain assets and the control measures taken in
the fourth quarter of1998, which continued through-
out 1999, to reduce deposit cost. As a result,
in customer
deposit repricing led to areduction
deposits, a corresponding increase in short-term
borrowings andan
equity. Consequently,
rates have a larger effect on net
interest
income and the market value of equity.

increase in the overall durationof

changes in
interest

the hypothetical

the

In 1999 the company purchased a3.17Yo interest
(“VBIC”),

in the Virginia Bankers Insurance Center
a limited liability company organized to provide
access to the insurance line of business for participat-
ingbanks. This consortium of over sixty banks
resulted in the formation of a pool of capital which
will be used to enable the participating banks to
life, and
collectively enter
health insurance sales market.
It is expected that
insurance products will be available in the bank’s
branches through VBIC sometime in late 2000. The
through its extensive network
company believes that

the property, casualty,

Bancshar-1

Inc.

of bank branches and its thousands of customer
relationships,
it will be in a position to market
significant volumes of insurance, particularly property
and casualty insurance for homes and automobiles.
The company’s entry into the insurance line of
business is designed to provide new sources of fee
revenue and further solidify the financial relationship
between the company and its present customers.

Recent Legislation

is

impact on financial
including banks such as First

Congress completed this past year the long-awaited
financial modernization bill and the bill became law,
known as the Gramm-Leach-Bliley Financial Services
Modernization Act of 1999 (the “Act”) with an
enactment date of November 12, 1999. The Act
expected to have a significant
services companies,
Community. The Act’s most publicized provisions,
which generally take effect on March 11, 2000,
include: a) the elimination of many federal and state
legal barriers to affiliations among banks, securities
firms, insurance companies and other financial ser-
vices providers; b) the establishment of a statutory
framework pursuant
occur between these entities; and c) provision for
financial services organizations with flexibility in
structuring new affiliations through a Financial Hold-
ing Company (“FHC” ) structure with the Federal
Reserve Bank as the umbrella regulator. The overall
thrust of the Act
is to remove the historic laws that
separate commercial banking from other financial
services organizations.

to which full affiliations can

The Act establishes the requirements

for permit-
ting a bank holding company to engage in the new
financial activities and affiliations. A bank holding
company may elect
to become an FHC if all of its
subsidiary banks are well capitalized and well man-
aged and have received a satisfactory or better
Community Reinvestment Act rating. Thereafter,
FHC may engage in either denovo or through an
acquisition,
in any activity that has been, as defined
by the Act, and determined by the Federal Reserve
Bank to be financial
complementary to such financial activity.

in nature or incidental or

an

The Act also creates a new Investment Bank

structure under the

Holding Company (“IBHC”)
Securities Exchange Act of 1934. This provision is
designed to implement a new concept of supervision
by the Securities Exchange Commission of broker/
dealer holding companies that do not control deposi-
tory institutions.

The Act further provides for functional

regulation

it repeals the exemptions

of bank securities activities. Among many other
from the definition
matters,
of broker and dealer under the Federal Securities Law
that currently apply to banks, generally subjecting
banks and their affiliates and subsidiaries to the same
regulation as all other providers of securities products.
These provisions take effect 18 months after the date
of enactment. However,
limited exemptions
which banks have traditionally engaged. These
exemptions
trust activities,
as commercial paper and exempted securities,
employer and shareholder benefit plans, sweep
accounts, affiliate transactions, private placements,
safekeeping and custody services, asset~backed securi-
ties, and identified banking products such as tradi-
tional deposit accounts.

include third-party broker arrangements,
such
traditional banking transactions

the Act retains certain
to Facilitate certain activities in

The Act amends the Investment Advisors Act of
1940 and the” Investment Company Act of 1940 to
subject banks and bank holding companies that
advise mutual funds to the same regulatory scheme as
other advisors to mutual funds. It also requires banks
to make additional disclosure when a mutual fund is
sold or advised by a bank. These regulatory and
disclosure provisions likewise take effect 18 months
after the date of enactment.

If certain requirements are met and regulatory

is obtained, national banks of any size are
approval
permitted to engage,
through a financial subsidiary,
in financial activities authorized by the Act, which
specifically excludes certain types of activities
(including real estate investment and development)
which may be done only in FHCS.

21

Year 2000 Century Date Change

The arrival of the year 2000 and the associated

to present

in general,

of new, upgraded or

involved the identification,

threats to business and many aspects of

century date change ((’CDC”) were expected by
many experts and the public,
potential
everyday life due to the possibility that some
information systems and imbedded computer chips
might not function properly due to truncated two-
digit year date fields. In response to this threat,
the
Company initiated an exhaustive study of informa-
tion systems and electronic devices with embedded
the Company’s operations.
chips utilized throughout
This project
remediation,
testing and implementation
remediated systems and equipment
failures associated with the CDC threat. Through
these efforts the Company was able to successfully
transcend the CDC with no interruption
no processing failures, no loss of data or other
negative consequences associated with the CDC
(Y2K) threat.
compliance,
approximately $150,000 on new equipment,
vated systems and back-up processing arrangements.
In addition,
the Company incurred human resource
opportunity cost through the realignment of duties of
existing personnel
the overall cost of the project did not have a
material
of the Company in any fiscal year.

In achieving this state of year 2000
the Company budgeted and expended
reno-

impact on the results of operations

to achieve compliance. However,

to guard against

of service,

financial

The Act prohibits new unitary savings and loan

holding companies from engaging in non-financial
activities or affiliating with non-financial
entities.
This prohibition applies to a company that becomes
a unitary savings and loan holding company pursuant
to applications
chartered unitary savings and loan holding companies
and applicants are grandfathered.

filed after May 4, 1999. Previously

Any federal savings association chartered or in

operation before the date of enactment or with
branches in operation before the date of enactment
in one or more states, may convert, at its option,
with the approval of the Office of the Comptroller of
the Currency or the appropriate state bank supervi-
sor, into one or more national
state banks, each of
which may encompass one or more of the branches
of the federal savings msociation in operation before
the date of enactment
conversion will be available only for resulting
national or state banks which meet specified financial
and capital requirements.

in one or more states. This

One of the more significant provisions of the Act
is the authorization of financial subsidiary activities
which includes the establishment of insurance agency
activities for such subsidiaries without geographic
restriction. The Company does not presently main-
tain any financial subsidiaries as comprehended by
the Act and has not organized an FHC. The
Company is presently evaluating opportunities
afforded under the Gramm-Leach-Bliley Act.

uMA first

Community

Ban~hares,

Inc,

Consolidated Financial Statements

Consolidated Balance Sheets...

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Consolidated Statements of Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Consolidated Statements ofCash Flow . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Consolidated Statements of Stockholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Notes to Consolidated Financial Statements

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Independent Auditors’ Report...

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Report on Management’s Responsibilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

24

25

26

27

28

50

51

23

Consolidated Balance Sheets
(Amounts

in Thousands, Except Share Data)

ASSETS

banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash andduefiom
Interest bearing balances—FHLB
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal funds sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(amortized cost of$22l,226,
Securities available forsale
$191.131. 1998) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1999;

$

36,400
1,391
6

$

33,943
57,523
25,630

212,105

193,194

December

31

1999

1998

Investment

securities held to maturity

U.S. Treasury securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
agencies and corporations . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. Government
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
States and political subdivisions.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other securities

Total

investment
$88.256 .1998)
loans, net ofunearned
Less reserve for loan losses...

securities (market value, $78,917, 1999;
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total

Net
Premises and equipment
Other
. . . . .
receivable
Interest
Other assets . . . . . . . . . .
Intangible assets . . . . . . .

loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
real estate owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

100
3,663
73,640
1,365

78,768
704,096
11,900

692,196
18,630
1,950
8,090
15,178
23,448

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

Total Assets . . . .

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$1,088,162

$1,053,988

Deposits:

LIABILITIES

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Demand
demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest-bearing
Savings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

taxes and other

Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest,
Federal funds purchased . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities sold under agreements to repurchase . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other

indebtedness

Total Liabilities

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Common stock, $l par value in 1999and

1998, 10,000,000 shares authorized;

STOCKHOLDERS’ EQUITY

8,991,586 shares issued in 1999 and 1998, respectively; 8,726,836 and
8,767,552 shares outstanding in1999

and 1998, respectively . . . . . . . . . . . . . . .
Additional paid::!)
,

101,719

Total Stockholders’ Equity . . . . . . . . . . . . . . . . . . . . . .

. . . . .

. . .

. . . . . .

103,488

Total Liabilities and Stockholders’ Equity . . . . . . . . .

. . . . .

. . .

. . . . . .

$1,088,162

$1,053,988

See Notes to Consolidated Financial Smtements.

w.
*

ComK~hity

Bancshares,Inc

Consolidated Statements of Income
(Amounts

in Thousands, Except Share and Per Share Data)

Years Ended December31

1999

1998

1997

Income

Interest
Interest and fees on loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest
available for sale . . . . . . . . . . . . . . . . . . . . .
Interest on investment

insecurities

securities:

$58,036
13,217

$62,323
9,060

U. S. Treasury securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . .
agencies and corporations
U.S. Government
States and political subdivisions,
. . . . . . . . . . . . . .
tax exempt
Other securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest on federal funds sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
in banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest ondeposits

41
269
3,940
104
403
482

117
1,034
3,989
90
1,594
3,006

Total

interest

income . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

76,492

81,213

Interest Expense
Interest on deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . .
Interest onshort-term borrowings.
indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest on other

Total

interest expense

. . . . . . . . . . . . . . . . . . . . . . . . . . . .

Net

interest

income’ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Net

interest

income after provision for loan losses . . . .

Income

Non-Interest
Fiduciary income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Service charges on deposit accounts
. . . . . . . . . . . . . . . . . . . . . . .
Other service charges, commissions and fees . . . . . . . . . . . . . . . .
Net securities 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 . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill and core deposit amortization . . . . . . . . . . . . . . . . . . . .
Other operating expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total non-interest

expense

. . . . . . . . . . . . . . . . . . . . . . . .

Income before income taxes..
. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Net

Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Weighted average basic shares outstanding

. . . . . . . . . . . . . . . . .

Basic earnings per common share

. . . . . . . . . . . . . . . . . . . . . . . .

Diluted earnings per common share . . . . . . . . . . . . . . . . . . . . . . .

See Notes

to Consolidated Financial Statements.

29,137
2,332
781

32,250

44,242

2,893

41,349

2,092
3,640
1,476
—
3,524
—

10,732

13,132
2,128
1,743
2,049
8,405

27,457

24,624
7,772

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

$59,753
9,128

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

$16,852

8,766,209

$1.92

$1.91

$13:101

8,800,546

$1.49

$1.49

$15.094
“---
,,.

8,828,791

$1.71

$1.71

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

1999

1998

1997

$

16,852

$

13,101

$

15,094

operating activities:

Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . .
Depreciation ofpremises and equipment..
Amortization ofintangibles
. . . . . . . . . . . . . . . . . . . . . . . . . . . .
investment amortization and accretion . . . . . . . . . . . . . . .
Net
Net gain on the sale ofassets.
. . . . . . . . . . . . . . . . . . . . . . . . . .
(Increase) decrease in interest receivable . . . . . . . . . . . . . . . . .
(Increase) decrease in other assets . . . . . . . . . . . . . . . . . . . . . . .
Decrease in other liabilities
. . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net

Net cash provided by operating activities

. . . . . . . . . . . . . . . . . . . .

Investing Activities
Cash flows from investing activities:
Proceeds from sales ofsecurities 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 . . . . . . . . . . . . . . . . . . . . . . .
securities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase ofinvestment
. . . . . . . . . . . .
Net (increase) decrease in loans made to customers
Cash (used in ) provided by branch acquisitions, net
. . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . .
Purchase ofpremises and equipment
. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sale of equipment

securities

2,893
1,413
2,020
483
(832)
(1,060)
(3,668)
(754)
80

17,427

8,203
30,881
5,278

(69,6;)

(87,98;)
(1,417)
(2,222)
82

Net cash provided by (used in) investing activities

. . . . . . . . . . . .

(116,792)

(decrease)
(decrease)
increase (decrease)

Financing Activities
Cash flows from financing activities:
increase in demand and savings deposits . . . . . . . . .
Net
increase in time deposits . . . . . . . . . . . . . . . . . . . . . .
Net
Net
. . . . . . . . . . . . . . . . . . .
in short-term debt.
Repayment oflon~term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from long-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition oftreasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reissuance oftreasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash paid inlieuof
fractional shares . . . . . . . . . . . . . . . . . . . . . . . .
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Netcash

provided by (used in) financing activities

. . . . . . . . . . . .

Cash and Cash Equivalents
. . . . . . . . . . .
Net
Cash and cash equivalents at beginning of year . . . . . . . . . . . . . . . .

(decrease) increase incashand

cash equivalents

(23,154)
(19,579)
80,082
(7,993)

(1,5;)

(G)
(7,730)

20,066

(79,299)
117,096

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

46,542

28,556
(6,351)
(7,376)
(7,768)
1,500
(1,796)

(i)
(7,415)

(677)

69,973
47,123

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

i
(22)
(7,345)

186

19,821
27,302

Cash andcash

equivalents at endof year . . . . . . . . . . . . . . . . . . . .

$

37,797

$117,096

$ 47,123

See Notes

to Consolidated Financial Statements.

~Rrst
Community

Bancshares, Inc.

Consolidated Statements of Stockholders’ Equity
in Thousands, Except Share and Per Share Information)
(Amounts

Balance, December31, 1996 . . . . .
Comprehensiveincomti

Net income . . . . . . . . . . . . . . . . . .
Other comprehensiveincome:
Unrealizedholdinggainson

securitiesavailable-for-sale,
net of tax . . . . . . . . . . . . . . . .
Lessreclassificationadjustment

for gainsrealizedin net
income,net of tax. . . . . . . . .
Comprehensiveincome . . . .

Commondividendsdeclared

($.83pershare) . . . . . . . . . . . . . . .

Changefrom$5.00par value to

$l.OOparvalue . . . . . . . . . . . . . . .
Reissuanceof 909 treasurysharesat
$18.96pershare . . . . . . . . . . . . . .

Balance,December31, 1997 . . . . .
Comprehensiveincome:
Net income . . . . . . . . . . . . . . . . . . . .
Other comprehensiveincome:
Unrealizedholdinglosseson

securitiesavailable-for-sale,
net of tax . . . . . . . . . . . . . . . .
Lessreclassificationadjustment

for gainsrealizedin net
income,netof~ax . . . . . . . . .
Comprehensiveincome . . . .

Commondividendsdeclared

($.84pershare) . . . . . . . . . . . . . . .

Purchase55,914ESOPsharesat a

weightedcost of $29.76per share

Purchase5,156treasurysharesat

$25.50pershare . . . . . . . . . . . . . .

Balance,December31, 1998 . . . . .
Comprehensiveincome:
Net income . . . . . . . . . . . . . . . . . . . .
Other comprehensiveincome
Unrealizedholdinglosseson

securitiesavailable-for-sale,
netoft~ . . . . . . . . . . . . . .
.
Lessreclassificationadjustment

for gainsrealizedin net
income,net of tax.. . . . . . . .
Comprehensiveincome . . . .

Commondividendsdeclared

($.88pershare) . . . . . . . . . . . . . . .

Purchase71,589treasuryshares

at$21.54 per share . . . . . . . . . . . .
Allocationof ESOPshares. . . . . . . .

Unallocated
ESOP
Shares
–
$

Accumulated
Other
Comprehensive
Income (Loss)
$ 433

Total
$89,258

Common
Stock
$ 32,015

Additional
Paid-in
Capital
$11,283

—

—

—
—

—

—

—

—
—

—

(23,023)

23,023

—

—.

Retained
Earnings

$46,815

Treasury
Stock
$(1,288)

15,094

—

—

—
15,094

(7,345)

—

_

—

—
—

–

—

17

8,992

34,306

54,564

(1,271)

—

13,101

—

—

—

—

—

—

—

—

—
—

—

—

—

—
13,101

(7,415)

—

_

—

—
—

–

—

(132)

–

—

—

—
—

—

—

—

–

—

—

—
—

—

(1,664)

—

15,094

822

(4)
818

—

—

—

1,251

—

(11)

(2)
(13)

—

—

—

822

(4)
15,912

(7,345)

—

17

97,842

13,101

(11)

(2)
13,088

(7,415)

(1,664)

(132)

8,992

34,306

60,250

(1,403)

(1,664)

1,238

101,719

—

—

—

—

—

—
—

—

—

—
—

—

16,852

—

—

—

16,852

(7,73o)

—

—
—

—

(z)

:

(1,542)
_

—

—

—
—

.—

–
942

—

16,852

(6,711)

(6,711)

—

—

(6,711)

10,141

—

—
—

(7,730)

(1,542)
900

Balance,December31, 1999 . . . . . $ 8,992

$34,264

$69,372

$(2,945)

$ (722)

$(5,473)

$103,488

See Notes to Consolihted Fimncial Statements.

27

Notes to Consolidated Financia Statements

Notel.

Summary of Significant Accounting

Policies

Basis of Presentation

The accounting and reporting policies of First Community Bancshares,

Inc. and subsidiary (First

Community or the Company) conform to generally accepted accounting principles and to predominant
practices within the banking industry. In preparing financial statements, management
estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance
results could differ from those estimates. Assets held in
sheet and revenues and expenses for the period. Actual
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 its wholly owned
intercompany balances and transactions have been eliminated in consolidation.

subsidiary. All significant
the Parent Company financial statements,
the subsidiary increased by the unamortized portion of the excess of fair value over the cost of net assets
acquired, where applicable.

in subsidiary 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
risk, or other similar factors are classified as available for sale and are recorded at
changes in prepayment
market value. Unrealized appreciation or depreciation in market value above or below amortized cost is
included in stockholders’ equity net of income taxes which is entitled “Other Comprehensive
Income.”
Premiums and discounts are amortized to expense or accreted to income over the life of the security. Gain or
loss on sale is based on the specific identification method.

rates,

Investment Securities

Investments

in debt securities which management has the ability and intent

to hold to maturity are

carried at cost. Premiums and discounts are amortized to expense and accreted to income over the lives of uhe
securities. Gain or loss on the call or maturity of investment
method. At December 31, 1999 and 1998, no securities were held for trading purposes and no trading account
was maintained.

if any, is on the specific identification

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
is
provisions charged to operations and reduced by losses, net of recoveries. The amount charged to operations
based on several factors including
real esvate
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
appraisals of the loan portfolio conducted by federal and state supervisory authorities; and (4) management’s
judgment with respect
accrual
procedures, and any concentration

loans, trends in the volume and term of loans, anticipated impact from changes in lending policies and

loans and overall portfolio quality; (3) regular examinations

reviews of significant commercial and commercial

to current and expected economic conditions,

in certain industries or geographic areas.

the level of delinquencies and non-

of credit

and

RA

First
Communitv

Bancshar&~ Inc.

terms of the loan will
reviews the
sratus of all loans designated as non-accrual or which have been classified as “substandard” or

Impaired loans are evaluated in accordance with Statement of Financial Accounting Standards
(SFAS) No. 114, “Accounting by Creditors for Impairment of a Loan,” which requires ‘an allowance
established as a component of the reserve for loan losses for certain loans (using the discounted cash
fair value of collateral) when it is probable that all amounts due pursuant
not be collected and the recorded investment
impairment
“doubtful” by the Company’s loan review process. Management does not
installment
balance, homogeneous
impairment. These loans are evaluated on an aggregate basis using a formula-based approach in accordance
with the Company’s policy. All of the loans deemed to be impaired were evaluated using the fair value of the
collateral as the measurement

in the loan exceeds the fair value. Management

loans and residential mortgage loans for

individually evaluate certain smaller

loans, such as consumer

to be
flows or

to contractual

standard.

Premises and Equipment

Premises and equipment are s~ated 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 LongLived 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
income is normally
of the related collateral and the financial strength of the borrower. The accrual of interest
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 from prior years is charged to the reserve for possible loan losses. Consumer
revolving credit

loans that become 180 days past due are automatically charged to the reserve for loan losses.

interest accrued and not collected in the current year is reversed and interest

I

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 with 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
operations.

real estate are established through charges against current

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 are allocated to participant
years based upon relative employee compensation.

accounts over a period not

to exceed seven

29

Intangible Assets

The investment

in subsidia~ and branches in excess of amounts attributable

to tangible and identified
intangible assets at dates of acquisition is recorded as goodwill and is being amortized to operations over a
period of fifteen years using the straight-line method. The unamortized balance of goodwill was $22,913,000
and $23,684,000 at December 31, 1999 and 1998, respectively. A portion of the cost of purchased subsidiaries
has been allocated to values associated with the future earnings potential of acquired deposits and is being
amortized over the estimated lives of the deposits which range from seven to ten years. The unamortized
balance of identified intangibles associated with acquired deposits was $535,000 and $662,000 at December31,
1999 and 1998, respectively.

Income Taxes

The Company accounts for taxes using the provisions of SFAS No. 109, “Accounting for Income Taxes,”

which, under the asset and liability method, provides deferred income taxes which are recognized for the tax
consequences of “temporary differences” by applying enacted statutory tax rates to the differences between the
financial statement carrying amounts and the tax bases of existing assets and liabilities. Under SFAS No. 109.
.,
the effect on deferred
enactment date.

taxes of a change in tax rates is recognized in income in the period that

includes the

Reclassifications

Certain amounts included in the 1998 and 1997 financial statements have been reclassified to conform to

the presentation used in preparation of the 1999 financial statements.

Recent Accounting

Pronouncement

SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”, was issued in June 1998.

SFAS No. 133 sets forth a comprehensive
approach to addressing the accounting for derivative instruments,
including certain derivative instruments embedded in other contracts, and hedging activities. This standard
addresses &e type of activities, which are included within the definition of derivatives and embedded
derivatives, and identifies the methods to be used for valuation and income recognition.
derivative and hedging activities addressed,
to the available-for-sale or the trading category, which can only be applied at the date of
held-to-maturity
initial application of the Statement. This Statement will be effective for all fiscal quarters of all fiscal years
beginning after June 15, 2000. Earlier application of the provisions of this Statement
permitted only as of the beginning of any fiscal quarter. Management
the impact of Statement No. 133.

the standard also allows a one-time transfer of securities from the

is currently in the process of evaluating

In addition to the

is encouraged but

is

Cash Flows

In 1999, 1998 and 1997 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 1999, 1998 and 1997 were as follows:

include cash and
Interest

Interest
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Supplemental Schedule of Non-Cash Transactions
Transfers of loans to other
Unrealized loss (gain) on securities available for sale.

real estate owned . . . . . . . . .
. .

1999

$33,175
8,195

1997

1998
(Amounts in Thousands)
$38,267
6,744

$32,726
6,433

$ 1,667
11,184

$3,588

21

$

862
(1,375)

i

Note 2. Acquisitions

On September 28, 1999, First Community Bank, N.A.

(“FCBNA”),

the Company’s wholly-owned banking

subsidia~ acquired 100% of the common stock of United First Mortgage, Inc. (“UFM”), headquartered
in
Richmond, Virginia. UFM is a mortgage brokerage company and when acquired had assets of approximately
$6.4 million and 9 offices located in a geographic region along a corridor of Interstates 64 and 81 and ranging
to the Agreement, FCBNA exchanged cash
from Virginia Beach, Virginia to Harrisonburg, Virginia. Pursuant
of $1.95 million for all of UFM’S outstanding 3,000 common shares with provisions for additional consideration
contingent upon the financial performance of UFM in subsequent years. The toual init~al consideration paid
resulted in an intangible asset of approximately $1.2 million, which is being amortized on a straight-line basis
over a 15-year period. The contingent payments to be made in subsequent years will be capitalized as goodwill
upon the determination
any, of the original goodwill purchase. The acquisition was accounted for under the purchase method of
accounting. Accordingly,
acquisition. Subsequent
loans originated by UFM are classified as held for sale and are included in total
December 31, 1999. The loans are reviewed individually and presented at the lower of cost or market value,
however, due to the short
investors are identified at the point of the loan commitment,
UFM does not securitize the loans that are available for sale and UFM does not retain servicing on any of the
loans sold.

to sell these loans, and the fact that
the market value is generally greater than cost.

to the merger, UFM operates as a wholly owned subsidiary of FCBNA. Presently, all

of the contingent payment amounts and amortized over the remaining useful life, if

results of operations of UFM are included in the consolidated results from the date of

turnaround on outstanding commitments

loans outstanding as of

The following unaudited proforma financial

information shows the effect of the UFM acquisition as if the

transaction had been consummated on January 1, 1998:

First Community

Bancshares,

Inc.

Proforma Unaudited

Supplemental

Financial

Information

(Amounts

in thousands

except

per share data)

Net Interest
Net Income
Basic Earnings Per Common Share

Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . .

1999

$44,208
16,718
1.89

1998
$43,037
13,371
1.50

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:

1999

Amortized
cost

Unrealized
Gains

Unrealized
Losses

Market
Value

U.S. Government
States and political
Other

. .
. . . . .
securities . . . . . . . . . . . . . . . . . . .

agency securities.

subdivisions

$149,020
35,068
37,138

(Amounts in Thousands)
$

73
340
518

$ (5,457)
(2,053)
(2,542)

$143,636
33,355
35,114

Total . . . . . . . . . . . . . . . . . . . . . . . .

$221,226

$ 931

$(10,052)

$212,105

1998

Amortized
cost

Unrealized
Gains

Unrealized
Losses

Market
Value

U.S. Government
States and political subdivisions
Other

. .
. . . . .
securities . . . . . . . . . . . . . . . . . . .

agency securities.

$119,236
36,458
35,437

(Amounts in Thousands)
$ 713
$ (441)
(585)
1,470
(9)
915

Total . . . . . . . . . . . . . . . . . . . . . . . .

$191,131

$3,098

$(1,035)

$119,508
37,343
36,343

$193,194

31

Securities available for sale with market values of $175,911,000 and $65,421,000 at December31,

1999
and 1998, respectively, were pledged to secure public deposits, securities sold under agreements to repurchase
and other short-term borrowings and for other purposes.

As a condition to membership in the Federal Home Loan Bank System,

the Company’s wholly owned

banking subsidiary, FCBNA,
Bank (“FHLB’). At December 31, 1999, FCBNA owned approximately $5.1 million in stock in the FHLB of
Atlanra, which is classified as available for sale.

is required to subscribe to a minimum level of stock in the Federal Home Loan

The amortized cost and market value of securities available for sale by contractual maturity, at
December 31, 1999, are shown below. Expected maturities may differ from contractual maturities because
issuers may have the right
1997, sales of securities available for sale resulted in gains of $6,000;
the proceeds from these sales were
$18,000. There were no sales of securities available for sale during 1998 or 1999. During 1998, calls of
securities available for sale resulted in a gain of approximately $4,000. The basis for evaluating the gain or loss
securities available for sale
realized is the amortized cost. The following table presents maturities of investment
by type on both an amortized cost and market value basis at December31,

to call or prepay obligations with or without call or prepayment penalties. During

1999:

Us.
Government
Agencies &
Corporations

States
and
Political
Subdivisions

other
Securities

Total

Tax
Equivalent
Purchase
Yield

(Amounts in Thousands)

Amortized Cost
Maturit~

Within one year
After one year through five years
After
After

. . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . .
five years through ten years . . . . . . . . . .
ten years . . . . . . . . . . . . . . . . . . . . . . . . . .

$

4,858
30,395
50,144
63,623

$

380
4,998
5,087
24,603

$

–
—
29,027
8,111

$

5,238
35,393
84,258
96,337

5.33%
6.08%
6.48%
6.81%

Total amortized cost

. . . . . . . . . . . . . . . . . . .

$149,020

$35,068

$37,138

$221,226

Tax equivalent purchase yield . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . .
Average maturity (in years)

6.23%
12.16

8.21%
12.56

4.67%
12.96

6.53%
12.36

Market Value
Maturity

Within one year
After one year through five years
After
After

. . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . .
five years through ten years . . . . . . . . . .
ten years . . . . . . . . . . . . . . . . . . . . . . . . . .

$

4,839
29,445
48,150
61,202

Total market value . . . . . . . . . . . . . . . . . . . .

$143,636

$

380
5,061
5,285
22,629

$33,355

$

–
—
26,500
8,614

$

5,219
34,506
79,935
92,445

$35,114

$212,105

PfiFirst.

Community

Bancshares, Inc.

Note4.

Investment Securities

The following

table presents amortized cost and approximate market values of investment

securities at

December 31:

—

U.S. Treasury securities . . . . . . . . . . . . . . . . .
U.S. Government
corporations

. . . . . . . . . . . . . . . . . . . . . . . .
States and ~olitical subdivisions . . . . . . . . . .
Other
. . . . . . . . . . . . . .

.
securities

agencies and

. . . . . . .

1999

Amortized
cost

Unrealized
Gains

Unrealized
Losses

Market
Value

(Amounts in Thousands)

$

100

$–

$–$100

3,663
73,640
1,365

3
810
10

(59)
(613)
(2)

3,607
73,837
1,373

Total

. . . . . . . . . . . .

. . . . . . . . . . . . . .

$78,768

$823

$(674)

$78,917

1998

Amortized
cost

1998
Unrealized
Gains

Unrealized
Losses

Market
Value

(Amounts in Thousands)

U.S. Treasury securities . . .
. . . . . . . . . . . . . .
agencies
U.S. Government
and
. . . . . . . . . . . . . .
. . . . . . . . . .
corporations
State; and political subdivisions . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . .
Other securities

$loo$l$–

7,546
75,009
1,361

50
4,191
14

Total

. . . . . . . . . . . . . . . . . . . . . . . . . . . .

$84,016

$4,256

$

101

7,580
79,200
1,375

$88,256

(16)
—

J

$(16)
-

Various investment

securities with an amortized cost of approximately $27,050,000 and $27,875,000,

respectively, were pledged at December 31, 1999 and 1998 to secure public deposits and for other purposes
required by law. During 1998, calls of held-to-maturity
proceeds from these calls were $1,021,000. There were no gains from calls of investment
maturity during 1999. The following table presents maturities of investments by type on both an amortized cost
and market value basis at December 31, 1999:

securities resulted in gains of $2 1,000; the

securities held to

investment

Us.
Government
Agencies &
Corporations-

States &
Political
Subdivisions

Us.
Treasury

Other
Securities

Total

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 . . . . . . . . . . . . . . . . . . .

$100

—
—

Total amortized cost.

. . . . . . . . . . . .

$100

$ 594
2,268
801
—

$3,663

(Amounts in Thousands)

$1,012

$–

3,474
30,117
39,037

$73,640

1,065
300
—

$1,706

6,807
31,218
39,037

6.50%
7.49%
8.33%
8.82%

$1,365

$78,768

Tax equivalent purchase yield . . . . . . . . .
Average maturity (in years) . . . . . . . . . . .

6.01%
.5

6.17%
3.48

8.59%
10.05

7.74%
4.02

8.46%
9.63

33

Us.
Government
Agencies &
Corporations

Us.
Treasury

States &
Political
Subdivisions

Other
Securities

Total

(Amounts in Thousands)

Market Value
Maturi~

Within one year . . . . . . . . . . . . . . . . . .
After one year through five years . . . .
After five years through ten years.
. . .
After ten years . . . . . . . . . . . . . . . . . . .

Total market value . . . . . . . . . . . . . .

$100
—
—
—

$100

$ 585
2,225
797
—

$3,607

$1,013

$ — $1,698

3,530
30,433
38,861

1,073
300
—

6,828
31,530
38,861

$73,837

$1,373

$78,917

Note

5.

Loans

Loans consist of the following at December 31:

Real estate —commercial
Real estate —construction
Real estate presidential
Commercial,
Loans to individuals for household and other consumer

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . .

financial and agricultural

expenditures

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

All other

1999

1998

(Amounts in Thousands)

$208,227
24,684
251,157
92,739

127,227
62

$704,096

$170,669
8,988
228,218
77,233

125,491
894

$611,493

The banking subsidiary of the Company is a party to financial

instruments with off-balance sheet risk in

the normal course of business to meet
commitments
varying degrees, elements of credit and interest
The contractual
classes of financial

amounts of those instruments

instruments.

to extend credit, standby letters of credit and financial guarantees. These instruments

the financing needs of its customers. These financial

instruments

include
to

involve,

rate risk beyond the amount
reflect the extent of involvement

recognized on the balance sheet.

the Company has in particular

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 &ere is not a violation of

clauses and may require payment of a fee. Since many of the commitments
amounts do not necessarily represent

any condition established in the contract. Commitments
termination
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

are expected to expire
future cash

generally have fixed expiration dates or other

is based on management’s

commercial properties.

the total commitment

inventory,

Standby letters of credit and financial guarantees written are conditional

Company to guarantee the performance of a customer
letters of credit
involved in extending loan facilities to customers. To the extent
deemed necessary, collateral of varying types and amounts is held to secure customer performance under certain
of those letters of credit outstanding at December 31, 1999.

is essentially the same as that

issued by the
to a third party. The credit risk involved in issuing

commitments

&v .

Com#Biity

Bancshares, Inc.

instruments whose contract amounts represent credit risk at December 31, 1999 are
to extend credit

Financial
commitments
of credit and financial guarantees written — $3.2 million. At December 31, 1999, neither
subsidiary have any amounts outstanding representing futures, forward exchange contracts or interest swaps.

(including availability of lines of credit) — $132.1 million, and standby letters

the Company nor its

In the normal course of business, the Company originates loan commitments. Loan commitments generally

have fixed expiration dates or other
evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral deemed necessary
by the Company is based on management’s credit evaluation and underwriting guidelines for the particular
loan. The total commitments outstanding at December31,

termination clauses and may require payment of a fee. The Company

1999 are summarized as follows:

(fixed)
(variable)
(fixed ).....
(variable)

Real estate —commercial
Real estate — commercial
Real estate —construction
Real estate — construction
Real estate presidential
Real estate — residential
Commercial,
Commercial,
Loans to individuals for household and other consumer

. . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . .
(fixed)
. . . . . . . . . . . .
(variable)

(fixed)
(variable)
financial, agricultural
financial, agricultural

1999

Notional
Amount

Rate

(Amounts in Thousands)

$29,845
28,346
16,646
21,345
1,840
7,388
9,312
15,576

7.50- 10.50%
10.75%
6.50-
11.25%
7.75-
11.00%
8.25-
18.00%
6.50-
13.00%
6.43-
13.00%
5.60-
13.50%
6.50-

expenditures

(fixed) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3,888

5.00-

18.00%

Loans to individuals for household and other consumer

expenditures

(variable)

. . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,125

7.43-

18.00%

Total

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$135,311

Presently,

the Company has no significant concentrations

of credit risk other

than geographic

.
area. Although portions of the West Virginia economy are closely related to coal and
they are supplemented by service industries. The current economies of the Company’s markets are seen
to volatile economic change. The Company’s presence in

concentrations. Most loans in the current portfolio were made and collateralized in West Virginia and the
surrounding Mid Atlantic
timber,
as relatively stable and are not seen as highly subject
firee states including North Carolina, Virginia and West Virginia provides additional diversification against
geographic concentrations

of credit risk.

In the normal course of business, the banking subsidiary of the Company has made loans to directors and

executive officers of the Company and its subsidiary. All loans and commitments made to such officers and
directors and to companies in which they are officers or have significant ownership interest have been made on
substantially the same terms,
comparable transactions with other persons. The aggregate dollar amount of such loans was $8.6 million and
to the change
$7.3 million at December31,
from 1998 to 1999 total $3.1 million and $1.8 million,
respectively. The beginning balance of $7.3 million has
been restated from $9.8 million in the prior year due to the consolidation of the banking subsidiaries with and
into First Community Bank, N.A. and a reduction in the number of directors.

1999 and 1998, respectively. New loans and payments attributable

rates and collateral, as those prevailing at the time for

including interest

35

—

Note6.

Reserve for Loan Losses

Activity in the reserve for loan losses was as follows:

1999

1998

1997

Balance, January l . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . .
Recoveries credited to reserve
Provision for the year charged to operations . . . . .
Reserve acquired in acquisitions . . . . . . . . . . . . . . .

Loans charged-off . . . . . . . . . . . . . . . . . . . . . . . . . . .

$11,404
610
2,893
—

14,907
3,007

Balance, December 31 . . . . . . . . . . . . . . . . . . . . . . .

$11,900

(Amounts in Thousands)
$11,406
736
6,250
—

18,392
6,988

$11,404

$8,987

673
4,963
1,981

16,604
5,198

$11,406

The Company consistently applies amonthly

review processto

continually evaluate loans for changes in

credit risk. This process serves as the primary means by which the Company evaluates the adequacy of loan
loss reserves. The total
loan relationships which are on non-accrual
credit weakness (allocated reserves) and ii) formula and unallocated reserves.

loan loss reserve is divided into two categories which apply to i) specifically identified
status, ninety days past due or more and loans with elements of

Allocated reserves are specifically targeted to cover loan relationships which are identified with significant

credit weakness and for which a collateral deficiency may be present.
accordance with Statement of Financial Accounting Standard (“SFAS”) No. 5 and measured and recorded in
accordance with SFAS No. 114 and SFAS No. 118. The allocated reserves established under the specific
identification method are judged based upon the borrower’s current operating status and projected liquidation
value of pledged collateral.

Impaired loans are identified in

loans in general by specific category (commercial, mortgage, and consumer). To determine the amount

Formula and unallocated reserves are available to cover the homogeneous pool of loans, which are not
specifically identified as potential problems. The formula and unallocated reserve is developed and evaluated
against
of reserve needed for each loan category, a rolling three-year average net
calculated. The calculated percentage is used to determine the required reserve excluding any relationships
specifically identified under the allocated reserve method. The Company’s policy also requires that
reserve percentage be maintained at not
charge-off ratio.

the formula
irrespective of the historic net

less than 1Yofor each category of loans,

loan charge-off percentage is

The

composition of First Community’s allowance for loan losses was as follows at December 31, 1999 and

1998:

Specific Reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . .
Formula and Unallocated Reserves

Total Reserves

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$2,195

9,705

$11,900

$1,642

9,762

$11,404

December
1999

31

December
1998

31

(Amounts in Thousands)

The

s~ecific reserve for loan losses increased by $553,000 when comparing December 31. 1999 to

December >1, 1998. The increase is primarily a function of the amount a-rid expected realization of specific
loans included in the pool of identified loans. The increase in total reserves corresponds with increases in the
total
loan portfolio of $92.6 million. However, a greater portion of the reserve was allocated to the pool of
specifically identified loans. Total reserves to total outstanding loans decreased from 1.87% in 1998 to 1.69% at
December 31, 1999.

~;+~;;ity

Bancshares, Inc.

The following table presents the Company’s investment

in loans considered to be impaired and related

information on those impaired loans (in thousands):

in loans considered to be impaired.

Recorded investment
. . . . . . . . .
Loans considered to be impaired that were on a non-accrual basis . .
Allowance for loan losses related to loans considered to be impaired
Average recorded investment
. . . . . . . . . . . . . . . . .
income recognized on impaired loans . . . . . . . . . .
interest

in impaired loans

Total

Note 7. Premises and Equipment

Premises and equipment are comprised of the following as of December 31:

Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...””””””””.””.”””””
Bank premises . . . . . . . . . . . . . . . . . . . . ....o..””’.o””o”””.”””.”
Equipment

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ’ ” ”” ””””.”-””

Less: accumulated depreciation and amortization

. . . . . . . . . . . . . . .

1999

$5,851
5,851
1,297
5,247
124

1998

$5,266
5,266
1,019
5,023
148

1999

1998

(Amounts in Thousands)
$4,552
$5,553

21,302
13,690

40,545
21,915

20,124
13,906

38,582
20,596

Total

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...””””.”””””””

$18,630

$17,986

Note8.

Other

Indebtedness

The Company’s banking subsidiary is a member of the Federal Home Loan Bank (“FHLB”) of Atlanta,

which provides credit
assets. Lon~term debt from a commercial bank totaling $7.9 million at December 31, 1998 and used to acquire
Blue Ridge Bank, was repaid prior to its final maturity on April 30, 1999.

in the form of overnight and long-term advances collateralized by various mortgage

Long-term debt,

included in other

indebtedness, consists primarily of structured term advances from the

FHLB. Longterm advances from the FHLB and principal payments on correspondent bank debt as of
December 31, 1999 and 1998 mature as follows:

1999

1998

Amount

weighted
Average Rate

Amount

weighted
Average Rate

(Amounts in Thousands)

1999 . . . . . . . . . . . . . . . . . . . . . . . . . .
2000 . . . . . . . . . . . . . . . . . . . . . . . . . .
2001 . . . . . . . . . . . . . . . . . . . . . . . . . .
2002 . . . . . . . . . . . . . . . . . . . . . . . . . .
2003 . . . . . . . . . . . . . . . . . . . . . . . . . .
2004 . . . . . . . . . . . . . . . . . . . . . . . . . .
2005 . . . . . . . . . . . . . . . . . . . . . . . . . .
2008 . . . . . . . . . . . . . . . . . . . . . . . . . .

$––

—
—
—
8,000
—
—
2,000

$10,000

—
—
—
5.95%
—
—
6.27%

~h

$1,200

1,200
1,200
1,200
9,200
1,200
700
2,000

$17,900

6.61%
6.61%
6.61%
6.61%
6.04%
6.61%
6.61%
6.27%

:6.28%

Advances from the FHLB are secured by stock inthe FHLB of Atlanta, qualifying firs tmortgage loans,

mortgage-backed securities and certain other
restrictions or penalties
$218,000 at December 31, 1999 and $276,000 at December 31, 1998.

investment

in the event of prepayment. Other various debt obligations of the Company totaled

securities. The FHLB advances are subject

to

37

Note 9. Deposits

At December 31, 1999, the scheduled maturities of certificates of deposit are as follows:

2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2004 and thereafter

(Amounts in Thousands)
$340,936
65,587
20,853
12,678
6,736

$446,790

Time deposits include Certificates of Deposit

issued in denominations

of $100,000 or more which

amounted to $110.8 million and $113.4 million at December 31, 1999 and 1998, respectively.
on these certificates was $5.4 million, $6.5 million, and $5.5 million for 1999, 1998, and 1997, respectively.

Interest expense

Note lO.

Per Share Amounts

Basic earnings per share are based upon the weighted average number ofshares ofcommon

stock

outstanding during theyear. The Company’s common stock was split five shares for four on March 31, 1997,
data have been retroactively adjusted
March 31, 1998 andagainon March 31, 1999. Allshare mdpershare
to reflect these stock splits.

Notell.

Employee Benefits

Employee Stock Ownership

Plan

The Company maintains an Employee Stock Ownership and Savings Plan (“KSOP”). Coverage under the
to the stock
toallemployees meeting minimum eligibility requirements. Annual contributions

plan isprovided
portion of theplan
on the basis of relative compensation. Substantially all plan assets are invested in common stock of the
Company. Total expense recognized by the Company related to the Employee Stock Ownership Plan was
$918,000, $947,000 and$767,000in

at the discretion of the Board of Directors, and are allocated to plan participants

1999, 1998 and1997,

respectively.

aremade

Employee Savings Plan

The Company provides a 401(k) Savings feature within the KSOP that

employees meeting minimum eligibility requirements. The cost of Company contributions
Plan component of the KSOP was $149,000, $99,000, and $116,000 in 1999, 1998 and 1997, respectively. The
Company’s matching contributions
more than 6% of compensation. The Company matching rate was 25% for 1999, 1998 and 1997.

are at the discretion of the Board up to 50% of elective deferrals of no

is available to substantially all
under the Savings

Employee Welfare Plan

The Company provides various medical, dental, vision,

life, accidental death and dismemberment

and

long-term disability insurance benefits to all full-time employees who elect coverage under this program (basic
life, accidental death and dismemberment,

and long-term disability coverage is automatic).

During 1998, the Company formed the First Community Bancshares Employee Insurance Plan and Tmst, a
partially self-funded medical, dental and prescription welfare plan. The health plan is managed by a third party
are made to the trust, against which the
administrator
TPA processes and pays claims. Stop loss insurance coverage limits the Company’s funding requirements and
risk of loss to $50,000 and $1,533,000 for individual and aggregate claims, respectively.

(c’TPA”). Monthly employer and employee contributions

The Company adopted SFAS No. 106 “Employers’ Accounting for Postretirement Benefits Other Than

Pensions” as of January 1, 1993. The adoption of Statement

106 resulted in the recognition of a postretiretnent

&*

~ First,
Community

Bancshares, Inc.

benefit obligation at the date of adoption (transition obligation). The Company elected to recognize the
obligation over the average remaining life expectancy of the participants. The transition obligation totaled
$634,000 and is being recognized over 17 years. This obligation only applies to a selected group of retirees as
retiree benefits were phased out through 1993.

Deferred Compensation

Plan

The banking subsidiary of the Company has deferred compensation agreements with certain current and

former officers providing for benefit payments over various periods commencing at retirement or death. The
balance sheet
liability at December 31, 1999 was approximately $794,000. The expenses associated with this
plan for 1999, 1998 and 1997 were $76,000, $(11 ,000) and $58,000, respectively. As a result of an actuarial
adjustment
rate used in computing the present value of the future
benefits,

the 1998 cost reflected a reduction in total benefit cost resulting in a net creditof$11,000.

to the life expectancies and the discount

Executive Retention Plan

In 1999, the Company established an Executive Retention Plan for key members of senior management.

This Plan provides for a benefit at normal
at an assumed 3 Yosalary progression rate. Benefits under the Plan become payable at age 62. Actual benefits
payable under the Retention Plan are dependant on an indexed retirement benefit formula which accrues
benefits equal to the aggregate after-tax income of associated life insurance contracts
effected cost of funds for that plan year. Benefits under the Plan are dependent on the performance of the
insurance contracts and are not guaranteed by the Company.

(age 65) targeted at 15% of final compensation projected

less the Company’s tax-

retirement

As of December 31, 1999, the Company had not acquired the associated life insurance contracts.
Accordingly, no benefits under the Plan have accrued. The Company funded the contracts during the first
quarter of 2000.

In connection with the Executive Retention Plan,

Endorsement Method Split Dollar Agreements
Retention Plan. Under
surrender value) with the designated beneficiaries of the executives under life insurance contracts
the Retention Plan. The Company as owner of the policies retains a 20% interest
interest

in the cash surrender value of the policies.

the Company has also entered into Life Insurance
(the “Agreements”) with the executives covered under the
the Company shares 80% of death benefits (after recovery of cash

referenced in
in life proceeds and a 100%

the Agreements,

The Retention Plan also contains provisions for change of control, as defined, which allow the executives

to retain benefits under the Plan in the event of a termination
twelve months prior to a change in control or anytime thereafter, unless the executive voluntarily terminates
his employment within 90 days following the change in control.

than for cause during the

of service other

Because the Retention Plan was designed to retain the future services of key executives, no benefits are

payable under the Plan in the event of voluntary termination prior to retirement

age of 62.

Stock Options

In 1999, the Company instituted a Stock Option Plan to encourage and facilitate investment

in the

common stock of the Company by key executives and to assist in the long-term retention of service by those
executives. The Plan covers key executives as determined by the Company’s Board of Directors from time to
time. Options under the Plan were granted in the form of non-statutory
stock options with the aggregate
number of shares of common stock available for grant under the Plan set at 275,000 shares. Total options
the rights to acquire 272,578 shares with deemed grant dates of
granted under the Plan during 1999 represent
January 1 for each year 1999 through 2003 resulting in the deemed grant of 54,516 shares in each year of the
five-year deemed grant period. All stock options granted pursuant
to the Plan vest ratably on the first through
the seventh anniversary dates of the deemed grant date. The option price of each stock option is equal to the
fair market value of the Company’s common stock on the date of each deemed grant during the five-year grant
period. Vested stock options granted pursuant
date of the grantee’s retirement
employment

to the Plan are exercisable for a period of five years after the
(provided retirement occurs at or after age 62), and at disability, or death.
than by retirement, disability, or death, vested options must be exercised

is terminated other

If

39

within 90 days after the effective date of termination. Any option not exercised within such period will be
deemed cancelled.

The Company accounts for options under Accounting Principles Board Opinion No. 25, “Accounting for

Stock Issued to Employees” (APB 25) and related Interpretations. Under APB 25, because the exercise price of
the Company’s employee stock options equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.

Pro forma disclosure information regarding net

income and earnings per share is required by SFAS

No. 123, and is determined as if the Company had accounted for its employee stock options under one of the
fair value methods called for in that Statement. The fair value of options was estimated at the date of gmnt
using the Black-Scholes option pricing model using the following assumptions:
6.25%;
common stock of 32.8Yo; and iv) a weighted-average

rate of
iii) volatility factors for the expected market price of the Company’s

expected life of the options of 14.83 years.

ii) a dividend yield of 4.5%;

i) risk-free interest

Pro forma net

income and earnings per share for 1999 would have been as follows:

Net
income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fully diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1999

(Amounts in Thousands,
Except Per Share Data)
$16,818
1.92
$
1.91
$

A summary of the Company’s stock option activity, and related information for the year ended

December 31, 1999 is as follows:

. . . . . . . . . . . . . . . . . . . . . . .
Outstanding, beginning of year....
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Outstanding,

end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1999

Weighted-Average
Exercise Price

$–

24.20
—
—

$24.20

-

—
54,516
—
—

54,516

Weighted-average

fair value of options granted during the year

$

4.47

The exercise price for options outstanding as of December 31, 1999 was $24.20; however, no options are

currently exercisable. The weighted-average

remaining contractual

life of all options is 14.83 years.

Defined Benefit Pension Plan

In October 1996, the Company’s non-contributory

defined benefit pension plan was terminated and the

Company recorded a curtailment gain for the pending termination of the defined benefit pension plan of
$1,450,000. Additionally,
accrued benefits and
paying required excise taxes on the dissolution of the defined benefit plan, an additional $1,062,000
termination gain was recognized. There was no pension cost for the 1999 or 1998 years. Net periodic pension
expense in 1997 was as follows:

in the first quarter of 1998, after distributing all participant

Service cost — benefits earned during the year . . . . . . . . . . . . . . . . . .
Interest expense on projected benefit obligation . . . . . . . . . . . . . . . . .
Expected return on plan assets...
. . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Netamortization

and deferral

Net periodic pension (income) expense . . . . . . . . . . . . . . . . . . . . . . . .

$–

496
(879)
(56)

$(439)

1997

(Amountsin Thoman&)

*.
&

Com#Jiity

Bancshares, Inc.

Note 12. Compensating

Balances

Pursuant

to agreements with the Federal Reserve Bank, the Company has agreed
balances of approximately $1.0 million in lieu of charges for check clearing and other

to maintain cash
services.

Note

13.

Litigation

In the normal course of business, there are various outstanding commitments

and contingent

liabilities

such as threatened legal action and legal proceedings in which the Company and its subsidiary are defendants.

The most significant matter of litigation which is currently active involves a civil suit filed by heirs of one

the Company has entered a vigorous defense of this suit for the continuation

of the Company’s trust customers which seeks to overturn the establishment of a private foundation for which
the Company’s Tmst and Financial Services Division serves as Trustee. This suit seeks a total of $6 million in
compensatory and punitive damages as well as the termination
Ti-ustee believe the creation and operation of the foundation represent
of the foundation’s
accordingly,
filed a cross motion for partial summary judgment.
purpose. On October 15, 1998, the plaintiffs in the matter
In a hearing on this motion,
file a motion for summary
judgement and further ordered that discovery in this case be halted pending receipt of the motion for summa~
judgement. The motion for partial summary judgement was filed with the Court on January 14, 1999, and in a
subsequent
ruling,
discretionary use of principal
cause of action against

the Court granted the Company’s motion finding no wrongdoing by the Company in its

funds in this matter. This ruling in the Company’s favor resolved plaintiffs’ major

of the foundation. The Company and the

the intent and will of the donoq

the Company, as defendant,

requested that

the Company.

the Court

As of the date of this report, discovery in this matter continues with a number of depositions of material
witnesses completed and with other depositions scheduled for the near future. While the ultimate outcome of
the matter cannot be predicted, both management
the remainder of the suit is without merit and will be successfully defended with no material adverse impact on
the Company’s financial condition.

and the Company’s legal counsel are of the opinion that

Subsequent

to December 31, 1999, the Company was named as defendant

in a civil action brought by a

formalized previous asserted but unfiled claims that

foundation (plaintiff) as beneficiary under a Trust Under Will administered by the Company’s

not-for-profit
Trust and Financial Services Division. The complaint
Bank as Trustee failed to appropriately acknowledge and follow the investment philosophy set forth by the
plaintiff which allegedly resulted in a $425,000 loss of value of a bequest. The complaint
the Trustee failed to act prudently with respect
management
tangibly benefiting the Trust account. The Company vigorously denies these allegations and is preparing an
appropriate response to this complaint. The suit seeks recovery of the alleged losses, removal of the Trustee and
unspecified punitive damages. At
the Company and its legal counsel believe that
vigorously defend this suit.

further alleges that
to the investment of the Trust funds and alleges that account

fees charged to the Trust account were excessive and did not constitute legitimate services

the Company possesses meritorious defenses and intend to

the outcome of this actio~ however,

it is not possible to predict

this time,

the

Other

the Company is also subject

legal actions have arisen primarily from commercial

lending transactions and collection activities.
to terrain asserted and unassorted potential claims encountered in
Additionally,
the normal course of business. In the opinion of management, neither
the resolution of these claims nor the
funding of credit commitments will have a material effect on the Company’s financial position or results of
operations.

41

Note 14. Dividends

The primary source of funds for dividends paid by the Company is dividends received from its subsidiary

bank. Dividends paid by the subsidiary bank are subject
restrictive provision of the regulations requires approval by the Office of the Comptroller of the Currency if
dividends declared in any year exceed the year’s net
preceding years. At December 31, 1999, subsidiary earnings available for distribution as dividends to the
Company without prior approval were $8.4 million.

income, as defined, plus retained net profit of the two

to restrictions by banking regulations. The most

Note 15. Regulatory Capital Requirements

and Restrictions

First Community’ Bancshares, Inc. and First Community Bank, N.A.

(collectively referred to as “the

to various regulatory capital requirements administered by the federal banking agencies.

Bank”) are subject
Failure to meet minimum capital requirements can inittiate certain mandatory and possibly additional
discretionary actions by regulators that,
financial statements. Under
action, which applies only to the Bank, the bank must meet specific capital guidelines that
quantitative measures of the entity’s assets, liabilities, and certain off-balance sheet
regulatory accounting practices. The entity’s 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

and other factors.

risk weighings,

if undertaken,

Quantitative measures established by regulation to ensure capital adequacy require First Community

Bancshares, Inc. and the Bank to maintain minimum amounts and ratios (set forth in the table on page 43) for
total and Tier I capital
(as defined)
all capital adequacy requirements

to risk-weighted assets (as defined), and of Tier I capital
to average assets (as defined). As of December 31, 1999, the Company and banking subsidiary met

(as defined in the regulations)

to which they are subject.

As of December 31, 1999 and 1998, the most recent notifications

from the Federal Reserve Board

categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be
categorized as well capitalized,
I 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 Bank must maintain minimum Total Risk-Based, Tier I Risk-Based, and Xer

that

Capital

ratios for December 31, 1998 have been restated in order to reflect the merger of the subsidiary

entities of the Company with and into First Community Bank, N.A. The ratios presented for 1998 are
reflective of the restated combined results as if the combination had occurred prior to 1999.

.,

*f .
4

CoGfi;&ity

Bancshares, Inc,,

,,

.,

to Risk-Weighted Assets:

Total Capital
First Community Bancshares, Inc.
First Community Bank, N.A.

. . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . .

to Risk-Weighted Assets:

Tier 1 Capital
First Community Bancshares, Inc.
First Community Bank, N.A.

. . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . .

to Average Assets (Leverage):

Tier 1 Capital
First Community Bancshares, Inc.
First Community Bank, N.A.

. . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . .

to Risk-Weighted Assets:

Total Capital
First Community Bancshares, Inc.
First Community Bank, N.A.

. . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . .

to Risk-Weighted Assets:

Tier 1 Capital
First Community Bancshares, Inc.
First Community Bank, N.A.

. . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . .

to Average Assets (Leverage):

Tier 1 Capital
First Community Bancshares, Inc.
First Community Bank, N.A.

. . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . .

December

31, 1999

Actual

For Capital
Adequacy
Purposes

To Be Well
Capitalized Under
Prompt
Corrective
Action Provisions

Amount

Ratio

Amount

Ratio

Amount

Ratio

$94,484
79,226

13.22% $57,182
56,999
11.12%

8.00% $ N/A
8.00%
71,248

N/A
10.00%

$85,513
70,283

11.96% $28,591
28,499
9.86%

4.00% $ N/A
4.00%
42,749

N/A
6.00%

$85,513
70,283

8.25% $41,442
6.80%
41,364

4.00% $ N/A
51,704
4.00%

N/A
5.00%

December

31, 1997

Actual

For Capital
Adequacy
Purposes

Amount

Ratio

Amount

Ratio

.—

To Be Well
Capitalized Under
Prompt
Corrective
Action Provisions

Amount

Ratio

$84,130
66,966

13.25% $50,782
51,252
10.45%

8.00% $ N/A
8.00%
64,065

N/A
10.00%

$76,153
58,916

12.00% $25,391
25,626
9.20%

4.00% $ N/A
4.00%
38,439

N/A
6.00%

$76,153
58,916

7.37% $30,998
32,057
5.51%

3.00% $ N/A
3.00%
53,428

N/A
5.00%

Note 16.

Income Taxes

Income taxes are as follows:

Income exclusive of securities gains
. . . . . . . . . . . . . . . . . .
Net securities gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Income tax provisions consists of:

Current
Deferred tax(benefit)

tm expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
expense . . . . . . . . . . . . . . . . . . . . . . .

Years Ended December

31

1999

—

1998

_

1997

_

(Amounfs in Thousands)

$7,772
—

—
$7,772
—

$6,154
10

_
$6,164
_

$6,874
2

$6,876

Years Ended December

31

1999

—

1998

_

1997

(Amounts in Thousands)

$8,324
(552)

$7,772
—

$6,605
(441)

$6,164
_

$6,520
356

$6,876

43

Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of
reporting purposes and the amounts deducted for income tax purposes. The

items comprising the Company’s net deferred tax assets as of December 31, 1999 and

assets and liabilities for financial
tax effects of significant
1998 are as follows:

1999

1998

(Amounts in ~ousands)

Deferred tax assets:

Reserve for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized asset losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred compensation
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred insurance premiums
Unrealized loss on securities available for sale . . . . . . . . . . . . . . .

Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Deferred tax liabilities:

Purchase accounting adjustments
. . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on pension termination
. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized gain on securities available for sale . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other

Total deferred tax liabilities

. . . . . . . . . . . . . . . . . . . . . . . . . . . .

$4,659
243
1,050
326
3,628

$9,906

1,384
311
282
—

553

2,530

$4,463
248
956
344
—

$6,011

2,306
331
497
825
592

4,551

Netdeferred

tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$7,376

$1,460

Thereconciliation

be~eenthe

federal statutory raxrate

and the effective income tax rate is as follows:

Taxat
(Reductions)

statutory rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

increases resulting from:
interest on investment

Tax-exempt
State income taxes, net of federal benefit.
Amortization of purchase accounting adjustments
Other, net

securities and loans . . . . .
. . . . . . . . . . . . . . . .
. . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

YearsEnded December31

1999

1998

1997

35.0%

35.0%

35.0%

(7.9%)
.9%
1.8%
1.8%

(9.6%)
1.3%
2.3%
3.0%

(6.7%)
1.1%
1.6%
.3%

Effective tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

31.6%

32.0%

31.3%

Note 17. Other Comprehensive

income

The Company currently has one component of other comprehensive
gains and losses on securities available for sale and is detailed as follows:

income, which includes unrealized

1999

1998

1997

(Amounts in Thousands)

Other Comprehensive
Holding (losses) gains arising during the period . . . . . . . . . . . $(1 1,184)
Tax benefit
4,473

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(expense)

Income:

Holding (losses) gains arising during the period, net of tax.
income,
Reclassification adjustment

for gains realized in net

.

(6,711)

net of t= . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
of reclassifications . . . . . . . . . . . . . . . . . . . . . . . . .

Taxexpense

Other comprehensive
Beginning accumulated other comprehensive

(loss) income . . . . . . . . . . . . . . . . . . . . .
. . . . . .

income.

—
—

(6,711)
1,238

Ending accumulated other comprehensive

(loss) income . . ..$

(5,473)

.

$

(17)
6

(11)

(4)
2

(13)
1,251

$1,238

$1,381
(559)

822

(6)
2

818
433
$1.251

@

Comg;hity

Bancshares, Inc.

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:

YearsEnded December

31

1999

1998

1997

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)
$1,315

$1,671
*

959

*
*

SFAS No. 107, “Disclosures about Fair Value of Financial

Instruments”

requires disclosure of fair value

instruments, whether or not recognized on the balance sheet, for which it is

to estimate the value. Statement No. 107 defines a financial

information about financial
practical
ownership in an entity, or a contract
to either
a financial
forced sale or liquidation, and is best evidenced by a quoted market price if one exists.

instrument could be exchanged in a current

receive or deliver cash for another

that conveys or imposes on an entity that contractual

financial

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
among other
are subject
actually be realized or paid upon settlement or maturity on these various instruments could be significantly
different.

the results may not be precise. Subjective factors include,
rates all of which
the amounts which will

things, estimates of cash flows, risk characteristics, credit quality, and interest

to change. Since the fair value is estimated as of the balance sheet date,

in nature and,

therefore,

Assets:

from banks . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash anddue
Securities available for sake . . . . . . . . . . . . . . . . . . . . . . . . .
securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment
Federal funds sold,
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans (net of reserve for loan losses) . . . . . . . . . . . . . . . . .
receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest
Liabilities:

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Demand deposits
demand deposits . . . . . . . . . . . . . . . . . . . .
Interest-bearing
Savings deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal funds purchased . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities sold under agreements to repurchase.
. . . . . . . .
. . . . . . . . . . . . . . . . .
taxes and other obligations
Interest,
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other

indebtedness

1999

1998

Carrying
Amount

Fair Value

Carrying
Amount

Fair Value

(Amounts in

Thousands)

$37,791

$37,791

$91,484

212,105
78,768
6
692,196
8,090

115,288
133,073
138,107
446,790
86,700
41,062
13,436
10,218

212,105
78,917
6
701,020
8,090

115,288
133,073
138,107
443,611
86,700
41,062
13,436
9,276

193,194
84,016
25,630
600,089
7,030

123,992
137,169
148,461
466,374
0
47,680
10,417
18,176

$91,484

193,194

88,256

25,630

601,205

7,030

123,992
137,169
148,461
467,054
0
47,680
10,417
18,179

Financial

Instruments with Book Value Equal

to Fair Value

The book values of cash and due from banks, federal finds sold and purchased, securities sold under
liabilities are considered to be

taxes and other

agreements to repurchase,
to fair value as a result of the short-term nature of these items.

receivable, and interest,

interest

equal

45

Securities Available

for Sale

For securities available for sale, fair value is based on current market quotations, where available.

If quoted

market prices are not available, fair value has been based on the quoted price of similar instruments.

Investment

Securities

For investment

securities, fair value has been based on current market quotations, where available.

If

quoted market prices are not available, fair value has been based on the quoted price of similar instruments.

Loans

For all categories of loans fair value is estimated by discounting the future cash flows using the current

rates for similar loans.

Deposits

Deposits without a stated maturity,

including demand,

interest-bearing demand, and savings accounts, are

reported at their carrying value in accordance with Statement No. 107. No value has been assigned to the
franchise value of these deposits. For other
by discounting future cash flows based on interest
characteristics and maturities.

rates currently being offered on deposits with similar

types of deposits with fixed maturities,

fair value has been estimated

Other

Indebtedness

Fair value has been estimated based on interest

rates currently available to the Company for borrowings

with similar characteristics and maturities.

Commitments

to Extend Credit, Stand-by Letters of Credit, and Financial Guarantees

The amount of off-balance sheet commitments

to extend credit, stand-by letters of credit, and financial
guarantees is considered equal to fair value. Because of the uncertainty involved in attempting to assess the
likelihood and timing of commitments being drawn upon, coupled with the lack of an established market and
the wide diversity of fee structures,
to provide an estimate of
fair value that differs from the given value of the commitment.

the Company does not believe it is meaningful

Note 20.

Parent Company Financial

Information

Condensed financial

information related to First Community
and 1998, and for the years ended December 31, 1999, 1998 and

Bancshares, Inc. as of December 31,
1997 are as follows:

Condensed Balance Sheets
(Amounts

in Thousands)

December

31

1999

1998

ASSETS
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment
in subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total Assets

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 13,421
87,962
2,267

$103,650

$

814
108,889
1,506

$111,209

Other

liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

162

$

9,490

LIABILITIES

STOCKHOLDERS’ EQUITY

Common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional paid-in capital
Retained easings
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unallocated ESOP shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

8,992
34,264
63,899
(2,945)
(722)

Total Stockholders’ Equity..

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

103,488

8,992
34,306
61,488
(1,403)
(1,664)
101)719

Total Liabilities and Stockholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . .

$103,650

$111,209

Condensed Statements of Income
(Amounts

in Thousands, Except Per Share Data)

Cash dividends received from subsidiary banks . . . . . . . . . . . . . . . . . . . .
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Income t~ benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity in undistributed earnings of subsidiary

1999

$ 6,500
275
(468)

6,307
62

(Dividends in excess of earnings of subsidiary) . . . . . . . . . . . . . . . . . .

10,483

Net

Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$16,852

Basic Earning

sPerShare

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Diluted Earning

sPerShare

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

$

i.92

1.91

December

31

1998

$7,500

112
(1,143)

6,469
331

6,301

$13,101

$

$

1.49

1.49

1997

$25,050
148
(779)

24,419
210

(9,535)

$15,094

$

$

1.71

1.71

47

Condensed Statements of Cash Flows
(Amounts

in Thousands)

Cash flows

from operating

activities:

Net

income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$16,852

$13,101

$15,094

Adjustments

to reconcile net

income to net cash provided by

operating activities:
Equity inundistributed

earnings of subsidiary (Dividends in

YearsEnding December

31

1999

1998

1997

excess of earnings ofsubsidiary)

Increase (decrease)
Increase (decrease)

. . . . . . . . . . . . . . . . . . . . . . .
in other assets . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . .
in other

liabilities

Net cash provided by operating activities

. . . . . . . . . . . . . . . . . . .

Cash flows from investing activities:
Proceeds from sale of securities available for sale . . . . . . . . . . . . . . .
in and (advances to) subsidiary . . . . . . . .
PaYments for investments

Netcash

provided by (used in) investing activities

. . . . . . . . . . .

cash flows from financing activities:

. . . . . . . . . . . . . . . . . . . . .
Proceeds from issuance oflong-term debt
Repayment oflong-term debt
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition oftreasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net

Net cash (used in) providedby

financing activities

. . . . . . . . . . .

increase (decrease)

Net
Cash and cash equivalents at beginning ofyear

in cash and cash equivalents . . . . . . . . . . . .
. . . . . . . . . . . . . . . .

( 10,483)
118
51

6,538

—
24,719

24,719

(9,3;)
(1,542)
(7,730)
—

(18,650)

12,607
814

(6,301)
271
(194)
6,877

—
—

—

3,000
(2,851)
(132)
(7,415)
—

(7,398)
(521)
1,335

9,535
(136)
98

24,591

12
(27,695)

(27,683)

11,730
(2,400)

(7,3;)

(6)

1,979
(1,113)
2,448

Cash and cash equivalents atend

of year

. . . . . . . . . . . . . . . . . . . . .

$13,421

$

814

$

1,335

~o~;;;ity

Bancshares, Inc.

Note 21. Supplemental

Financial Data

Quarterly earnings for the years ended December 31, 1999 and 1998 are as follows:

First Community Bancshares,

Inc.

Quarterly Earnings Summary (Unaudited)

March 31

June 30

1999

=

Dec 31

(Amounts in Thousands, Except Per Share Data)

Income

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest
Interest Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$18,736
8,404

interest

Net
income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
income after provision for possible loan losses . . . . .
Net
Other
income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

interest

Income before income taxes.
Income taxes

. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

10332
444
9,888
2,138
6,450

5,576
1,742

$18,896
7,926
10,970
391
10,579
2,215
6,889

5,905
1,787

$19,088
7,771

$19,772
8,149

11,317
505
10,812
1,928
6,745

5,995
1,941

11,623
1,553
10,070
4,451
7,373

7,148
2,302

Net

income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$3,834

$4,118

$4,054

$4,846

Per share:

Basic earning s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..O
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends
. . . . . . . . . . . . . . . . . .

Weighted average basic shares outstanding

$ 0.44
$ 0.20
8,786

$
$

0.47
0.21
8,777

$
$

0.46
0.22
8,766

$
$

0.55
0.25
8,737

Income

Interest
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

interest

income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net
Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net
income after provision for Ioan losses . . . . . . . . . . . .
Other
income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

interest

Income before income taxes..
Income taxes

. . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

March 31

June 30

$20,655

$20,620

9,551

11,104

1,287

9,817

3,259

7,338

5,738

1,784

9,678

10,942

3,789

7,153

2,452

7,388

2,217

681

=

$20,330
9,633

10,697
749
9,948
3,100
7,258

5,790
1,795

Dec 31

$19,608

9,266

10,342

425

9,917

2,371

6,768

5,520

1,904

Net

income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$3,954

$1,536

$3>995

$3,616

Per share:

Basic and diluted earnings.
Dividends

. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . .

Weighted average basic shares outstanding

$
$

.46
.20
8,829

$

$

.18

.20

7,049

$
$

.46
.20
7,032

$

$

.39

.24

7,019

Note22.

Other

Items

In July 1999, the Company executed a commitment

to purchase an equity interestin

the Virginia Bankers

Insurance Center, LLC(’’VBI~’).The
a full line ofproperty,
investment
investment was recorded and is being accounted for using the cost method of accounting. The VBIC is in the
development

life and health insurance products through its branch network. The initial

in the newly established bank consortium. This

in a3.17Yo ownership interest

operations asof December3l,

investment and participation

allow the Com~anY tooffer

in VBICresuIted

stage andhasno

in VBICwiIl

casualty,

1999.

49

Independent Auditors’ Report

Deloitte&
ToucheLLP

2500 OnePPGPlace &
Pittsburgh,Pennsylvania
15222-S401

Tothe Board of Directors

and Stockholders

of First Community

Bancshares,

Inc.

We have audited the accompanying consolidated balance sheets of First Community Bancshares, Inc. and

subsidiary as of December 31, 1999 and 1998, and the related consolidated statements of income, changes
in stockholders’ equity and cash flows for each of the three years in the period ended December 31, 1999.
These financial statements are the responsibility of First Community Bancshares, Inc.’s management. Our
responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing standards. Those standards

require that we plan and perform the audit
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 overaIl

the consolidated

In our opinion, such consolidated financial statements present

fairly, in all material

respects,

the financial

position of First Community Bancshares, Inc. and subsidiary as of December 31,
of their operations and their cash flows for each of the three years in the period
conformity with generally accepted accounting principles.

1999 and 1998, and the results
ended December 31, 1999 in

Pittsburgh, Pennsylvania
January 28, 2000

.

.

8

Com~;kity

Bancshares, Inc.

Re~ort on Management’s Res~onsibilities

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
and communication
training of qualified personnel, appropriate divisions of responsibility,
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

51

Board of Directors, First Communitv Bancshares, Inc.

Sam Clark
Agent, State Farm Insurance

Allen T. Hamner
Professor of Chemistry, West Virginia Wesleyan
College; Member Executive Committee

James L. Harrison, Sr.
President and Chief Executive Officer,
First Community Bancshares, Inc.; Member Executive
Committee; President, First Community Bank, N. A.

B. W. Harvey
President, Highlands Real Estate Management,
Member Executive Committee

Inc.;
and Audit Committee

1. Norris Kantor
Partner, Katz, Kantor & Perkins, Attorneys-at-Law

John M. Mendez
Vice President, Chief Financial Officer and Secretary,
First Community Bancshares, Inc.; Senior Vice
President — Finance & Chief Administrative Officer,
First Community Bank, N. A.

A. A. Modena
Past Executive Vice President and Secretary,
First Community Bancshares,
Chief Executive Officer, The Flat Top National Bank
of Bluefield; Member Executive Committee

Inc.; Past President &

Robert E. Perkinson, Jr.
Past Vice President — Operations, MAPCO Coal,
Inc. — Virginia Region

William P. Stafford
President, Princeton Machinery Service,
Chairman, First Community Bancshares,
Member Executive Committee

Inc.;
Inc.;

and Audit Committee

William P. Stafford,
Attorney-at-Law, Brewster, Morhous & Cameron,
PLLC; Member Executive Committee

II

W. W. Tinder, Jr.
Chairman of the Board and Chief Executive Officer,
Tinder Enterprises,
Corporation
Executive Committee

(Real Estate Holdings); Member

Inc.; President, Tnco Leasing

and Audit Committee

Officers, First Community Bancshares, Inc.

James L. Harrison, Sr.
President and Chief Executive Officer

John M. Mendez
Vice President, Chief Financial Officer and Secretary

Robert L. Buzzo
Vice President

Board of Directors. First Communitv Bank, N. A.

K. A. Ammar, Jr.
President and Chief Executive Officer,
Ammar’s Inc. and Magic Mart

Dr. James P. Bailey
Veterinarian, Veterinary Associates, Inc.
Chairman, First Community Bank, N.A.

Jr.
W. C. Blankenship,
Agent, State Farm Insurance

D. L. Bowling, Jr.
President, Tme Energy, Inc.

Juanita G. Bryan
Homemaker

Sam Clark
Agent, State Farm Insurance

C. William Davis
Attorney at Law, Richardson & Davis

Allen T. Hamner, Ph.D.
Professor of Chemistry,
West Virginia Wesleyan College

James L. Harrison, Sr.
President and Chief Executive Officer,
First Community Bancshares, Inc.;
President, First Community Bank, N. A.

B. W. Harvey
President, Highlands Real Estate Management,

Inc.

1. Norris Kantor
Partner, Katz, Kantor & Perkins, Attorneys-at-Law

John M. Mendez
Vice President, Chief Financial Officer and Secretary,
First Community Bancshares,
President — Finance and Chief Administrative
Officer, First Community Bank, N. A.

Inc.; Senior Vice

A. A. Modena
Past Executive Vice President and Secretary, First
Community Bancshares, Inc.; Past President and
Chief Executive Officer, The, Flat Top National Bank
of Bluefield

Robert E. Perkinson, Jr.
Past Vice President — Operations, MAPCO Coal,
Inc. — Virginia Region

Clyde B. Ratliff
President, Gasco Drilling,

Inc.

Richard G. Rundle
Attorney at Law, Rundle and Rundle, LC

William P. Stafford
President, Princeton Machinery Service, Inc.

William P. Stafford,
Attorney at Law, Brewster, Morhous and
Cameron, PLLC

II

W. W. Tinder, Jr.
Chairman and Chief Executive Officer,
Tinder Enterprises,

Inc.

Dale F. Woody
President, Woody Lumber Company

53

First Communitv Bank. N. A.

(A NATIONAL

ASSOCIATION — MEMBER FDIC)

1001 Mercer Street
Princeton, West Virginia 24740-5939
(304) 487-9000 or (304) 327-5175
Pine Plaza Branch (304) 425-7523

211 Federal Street
Bluefield, West Virginia 24701-0950
(304) 325-7151
Mercer Mall Branch (304) 327-0431

Blue Prince Road, Green Valley
Bluefield, West Virginia 24701-6160
(304) 325-3641

Highway 52
Bluefield, West Virginia 24701-3068
(304) 589-3301

Corner of Bank and Cedar Streets
Pineville, West Virginia 24874-0269
(304) 732-7011
East Pineville Branch
(304) 732-7011

600 Guyandotte Avenue
Mullens, West Virginia 25882-1024
(304) 294-0700

Route 10, Cook Parkway
Oceana, West Virginia 24870-1680
(304) 682-8244

2 West Main Street
Buckhannon, West Virginia 26201-0280
(304) 472-1112

Tennerton
Route 20 South Tennerton
Buckhannon, West Virginia 26201
(304) 472-1112

100 Market Street
Man, West Virginia 25635
(304) 583-6525

77 North Morgan Boulevard
Logan, West Virginia 25601
(304) 752-8102

Comer of Main and Latrobe Streets
Grafton, West Virginia 26354-0278
(304) 265-1111

216 Lincoln Street
Grafton, West Virginia 26354-1442
(304) 265-5111

Main Street
Rowlesburg, West Virginia 26425
(304) 454-2431

16 West Main Street
Richwood, West Virginia 26261
(304) 846-2641

874 Broad Street
Summersville, West Virginia 26651
(304) 872-4402

Route 20 and Williams River Road
Cowen, West Virginia 26206
(304) 226-5924

Route 55, Red Oak Plaza
Craigsville, West Virginia 26205
(304) 742-5101

643 E. Riverside Drive
Tazewell, Virginia 24651
(540) 988-5577

302 Washington Square
Richlands, Virginia 24641
(540) 964-7454

Chase Street & Alley 7
Clintwood, Virginia 24228
(540) 926-4671

Rt. 1, BOX408
Max Meadows, Virginia 24360
(540) 637-3122

8044 Main Street
Pound, Virginia 24279
(540) 796-5431

910 East Main Street
Wytheville, Virginia 24382
(540) 228-1901

101 Brookfall Dairy Road
Elkin, North Carolina 28621
(336) 835-2265

5519 Mountain View Road
Hays, North Carolina 28635
(910) 696-2265

57 N. Main Street
Sparta, North Carolina 28675
(336) 372-2265

150 N. Center Street
Taylorsville, North Carolina 28681
(828) 632-2265

United First Mortgage, Inc.

(A WHOLLY-OWNED

SUBSIDIARY OF FIRST COMMUNITY

BANK, N. A.)

1503 Santa Rosa Road, Suite 109
P. O. BOXK-177
Richmond, VA
23288
(804) 282-5631

Financial Information

Corporate Headquarters

First Community Bank, N.A.
One Community Place
P.O. Box 989
Bluefield, Virginia
24605-0989
(540) 326.9000

Stock Registrar and Transfer Agent

First Community Bank, N.A.
Trust and Financial Services Division
P. O. Box 950
Bluefield, West Virginia
24701-0950
(304) 325-7151

Form 10-K

The Annual Report on Form 10.K, filed with
the Securities and Exchange Commission,
is available to shareholders upon request
Vice President & Chief Financial Officer of
First Community Bancshares, Inc.

to the

Financial Contact

John M. Mendez
Vice President &
Chief Financial Officer,
First Community Bancshares,
P. O. Box 989
Bluefield, VirginPa
24605.0989
(540) 326-9000

Inc.

Internet Access

Website: www.fcbinc.com
fcbcorp@aol.com
E-Mail:

55

Notes