First Community Bancshares, Inc.
Annual Report 1999

Plain-text annual report

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 

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