First Community Bancshares, Inc.
2002 Annual Report
Diluted Earnings Per Share ($)
}
Financial Highlights
(Amounts in Thousands, Except Percent and Per Share Data)
Contents
}
Message to Stockholders
Introduction
2002 Annual Report
}}} }
Earnings and Dividends
Net income
Basic earnings per share
Diluted earnings per share
Cash dividends per share
Return on average equity
Return on average assets
2002
$ 24,719
2.49
2.48
1.00
17.16 %
1.68%
2001
$ 19,134
1.92
1.92
.089
14.80%
1.49 %
2000
$ 17,063
1.78
1.78
.086
15.70 %
1.51 %
Balance Sheet Data
at Year-End
Total Assets
Deposits
Securities sold under
agreements to repurchase
FHLB borrowings
and other indebtedness
Stockholders’ equity
2002
2000
$ 1,524,363 $ 1,478,235 $ 1,218,017
899,903
1,078,260
1,139,727
2001
91,877
79,262
46,179
124,357
152,462
145,320
133,041
138,015
120,682
Management’s Discussion and Analysis
Application of Critical Accounting Policies
Recent and Pending Acquisitions
Summary Financial Results
Five-Year Selected Financial Data
Common Stock and Dividends
Results of Operations
Balance Sheet Discussion
Liquidity
Interest Rate Sensitivity, Interest Rate Risk and
Asset/Liability Management
Trust and Investment Management Services
Recent Legislation
Consolidated Financial Statements
Report of Independent Auditors
Report of Management Responsibilities
Board of Directors
Locations & Other Information
1
5
6
7
10
12
15
16
18
26
33
34
37
37
40
74
75
76
78
A message to our friends and
stockholders
Stockholders
1
Dear Stockholders and Friends,
}}
We, at First Community Bancshares, Inc., are very pleased to provide this annual report on the
operations of the Company for 2002. It has been an eventful year, full of many new projects
geared toward growth of the Company and the establishment of First Community as a regional
provider of financial services. We consider ourselves very fortunate that we have been able to
post another year of record earnings while continuing to build and invest in resources for
development and growth. In the following summary, we will discuss our financial performance
for the year along with recent announcements and many of the projects that are part of our
strategic plan for growth and expansion of services.
At the forefront of our recently completed year, were the strong operating results. Earnings for
2002 not only set new records, but increased by more than 29% over the preceding year. Net
income for 2002 was $24.7 million, an increase of $5.6 million over the $19.1 million record
posted in 2001. The $5.6 million increase includes a $1.9 million (net of tax) reduction in
goodwill amortization as a result of the required adoption of Financial Accounting Standards
142 and 147. In addition, record results for 2002 were principally achieved through an increase
in net interest income of $10.8 million. The increase in net interest income is the result of
meticulous management of asset yields and cost of funds throughout a year of historic lows
in prevailing short-term interest rates and prime loan rates. Interest rate forecasts early in
2002 indicated a possible 50 to 75 basis point increase in short-term interest rates by year-
end 2002. However, in response to continued weakness in the U.S. economy, the Federal
Reserve Open Market Committee continued an accommodative stance and further lowered
the federal funds rate by another 50 basis points in November 2002. The continuation of lower
John M. Mendez
President and CEO
First Community Bancshares, Inc.
Continuing to build and invest
Growth
in resources for growth and development
interest rates constrained margins, to a degree, as deposit rates reached historic lows and
yields on loans continued to drop as a result of repricing of adjustable rate loans and the
attainment of lower yields on new loan production. Despite this unforeseen interest rate
environment, we were able to increase net interest margin from 4.55% in 2001 to 4.76% for
the full year 2002. Management of rates offered through our product group and growth in
average loans held for investment and held for sale were important factors in the
improvement in net interest margin for the year.
Stockholders
Message
2
(continued)
In 2002, we opened five new full-service branches. In August,
we opened our new West Atlantic branch in Emporia, Virginia.
This replaced our Halifax Street location, which did not offer
drive-up banking and had limited parking and other facilities.
In November, we opened our new Ridgeview branch in
Bluefield, Virginia. We believe that this new facility will
significantly enhance our service to both our Tazewell County,
Virginia, and Mercer County, West Virginia, customers. And on
November 30, 2002, we completed the acquisition of Bank of
Greenville, which added three branches in Monroe and
Summers Counties in West Virginia.
}}
Non-interest income growth was concentrated in the $1.1
million increase in deposit service charge revenue which stems
from continued growth in deposits and refinement in the
Company’s product set and service charge structure. Partially
offsetting this increase was a $500,000 drop in other operating
revenues and a $572,000 decrease in securities gains and
losses. During 2002, the Company recorded a $576,000 write-
down on the impairment of a municipal bond issue which led to
this decrease in securities gains. Low interest rates on fifteen
and thirty-year mortgages, which were available throughout the
year, resulted in residential mortgage loan originations through
the Company’s mortgage subsidiary of over $790.0 million in
2002, up from $621.0 million in 2001. Despite the higher
volume of loan originations, net income from mortgage banking
fell short of the preceding year as a result of higher hedge costs,
primarily in the third quarter. Overall, non-interest revenues
were unchanged from the preceding year at $20.3 million.
Basic and diluted earnings per share (“EPS”) for 2002 reached
$2.49 and $2.48, respectively, and compared with $1.92 per
share basic and diluted in 2001, an increase of 29% year over
year on a diluted basis. The adoption of the new goodwill
accounting standards in 2002 added $0.19 per share to diluted
EPS. Without the effect of the new standards, diluted EPS
increased 18.0% in 2002 versus 2001. Return on equity in 2002
climbed to 17.16%, up from 14.80% in 2001. The improvement in
return on equity came as a result of improved leverage from
acquisitions in late 2001 as well as growth in net interest income
and operational improvements which impacted net income.
Return on average assets also improved significantly, increasing
from 1.49% in 2001 to 1.68% for the current year. Based on our
year-end closing stock price of $30.76, 2002 earnings per share
produce a price/earnings multiple of 12.4X. Our common stock
price also experienced significant price appreciation during
2002, increasing from $26.79 (year-end 2001 adjusted for the
March 2002 10% stock dividend) to $30.76 at December 31,
2002. Total cash dividends paid in 2002 of $9.93 million also
resulted in a 3.7% cash return on the opening market value of
First Community common stock and combined with current
year price appreciation, resulted in an 18.5% total return on
investment for 2002.
3
}}
The branch additions are only part of your Company’s plan to
expand the scope of its operations and provide a full array of
financial services, in a community bank setting, to a larger
market which encompasses a large portion of the Mid-Atlantic
region. We plan to continue this expansion through the
addition of de novo branches, small bank affiliations and
acquisition of financial service providers. A major milestone in
this strategy was achieved in January 2003 when we
announced the signing of a definitive agreement for the
The CommonWealth Bank in Richmond,
acquisition of
Virginia. CommonWealth is a $134 million bank operating four
branches within the Richmond metro market. This acquisition
will supplement our Southside, Virginia operations and
establish a strong base of operations in eastern Virginia. We
are very excited about the addition of CommonWealth and its
fine staff of financial professionals. Subject to regulatory
approvals and the affirmative vote of CommonWealth
stockholders, we expect to close on this transaction in the
second quarter of 2003.
On the North Carolina front, we are pleased to announce that
we have completed the acquisition of our first of two branch
properties in Winston-Salem, North Carolina with plans to
open these new full service banking facilities in the second
quarter of 2003. This continues our expansion in North
locations within the
Carolina and provides our first
Piedmont/Triad area.
In the area of expanded financial services, we are pleased
to announce our recent acquisition of Stone Capital
Management, Inc., a registered investment advisory firm
providing financial advisory and wealth management services
to individual investors. Stone Capital is based in Beckley, West
Virginia with current assets under management of over $94
million. Future plans include the expansion of these services
to other First Community markets under the Stone Capital
brand as well as the extension of asset management services,
through Stone Capital, to customers of the First Community
Bank Trust and Financial Services Division. The addition of
Stone Capital is coupled with the recent recruitment of our
new Senior Vice President of Trust and Financial Services who
comes to us with superior qualifications and background.
Mike Earle, who received his MBA from George Washington
University, is also an attorney and Certified Financial Planner
with over twenty years of experience in trust management,
equity investing and business valuation services. These new
resources significantly improve our financial advisory
capabilities.
Great strides have been made in the past year in the area of
asset quality with significant reductions in ninety-day past
due loans and non-accrual loans. These two areas of non-
performing assets have been reduced to very modest levels
and are well below our peer group averages, indicating a
higher level of asset quality when benchmarked against
commercial banks of similar size. Total non-performing assets
to total assets were reduced to 0.41% at year-end 2002, down
from 0.58% at December 31, 2001. Asset quality is evident not
only in non-performing asset measures but also in loan
delinquencies, which are at their lowest level in the history of
the Company. Loans past due thirty days or more to total loans
were 1.18% at year-end 2002, including ninety-day and non-
accrual loans. This compares favorably with 1.53% at year-end
2001. Each of these measures ranks your Company very high
among commercial banks in terms of asset quality. In 2002 we
recruited some very talented and experienced staff members
who have enhanced administrative controls over the credit
portfolio and sharpened policy and standards for the
production and administration of both commercial and
consumer loans.
In July of last year Congress passed sweeping legislation
known as the Sarbanes-Oxley Act of 2002. This legislation is
intended to improve the quality of financial reporting,
increase corporate accountability for financial reporting,
improve corporate governance and reform the accounting
profession in areas of attestation services, all with the
objective of restoring investor confidence in public company
accounting and
reporting. First Community
Bancshares has a strong record of producing quality financial
reports and integrity in corporate governance. Despite our
Company’s existing commitment to excellence in these areas,
financial
Stockholders
Message
4
(continued)
}}
we have redoubled our efforts to ensure the continued confidence of you, our
stockholders, and the investing public at large. Since the passage of the act, we
have further formalized our financial reporting processes with the formation of our
Financial Reporting and Disclosure Committee, which is an integral part of our
financial report review process. This committee further enhances the integrity of
the financial reporting process through formalized assessment of accounting
policies and evaluation of financial disclosures. We have also formed our Business
Trends Committee, which meets monthly to consider and evaluate trends and
business conditions, and ensure important disclosures are communicated through
the organization and considered for disclosure where appropriate. These new
controls are in addition to the many existing controls and processes already
employed by our Company to ensure the accuracy and fair presentation of financial
information that we publish on a quarterly and annual basis. Portions of this
annual report are dedicated to these new processes, the audit committee and the
people who work very hard to ensure quality financial reporting.
Once again, we thank you for your commitment to the success of our Company,
whether as a customer of First Community Bank, as one of our dedicated
employees or as an investor and shareholder. We are indeed grateful for the
opportunity to provide quality financial services and to serve as custodians of the
many resources of this growing company.
Sincerely,
John M. Mendez
President and Chief Executive Officer
Introduction
5
}}
The 2002 annual report reflects another record year in the history of
First Community Bancshares, Inc. As we grow and prosper, the basic
tenets of our philosophy remain the same. Our commitment to serve
the financial needs of our customers guides our path as we continue
our efforts to be Your First Financial Resource.
Our shareholders, customers and employees depend on us to be
trustworthy. We guard our corporate reputation and strive to earn
and keep the trust of our stakeholders. We believe that mutual trust
results in strong and stable relationships and creates satisfied
shareholders, loyal customers and proud employees.
Our commitment to the communities we serve remains strong. Good
corporate citizenship and corporate integrity go hand in hand with
our efforts to continue to build a financially strong company that
provides service to our communities and employment opportunities
for our friends and neighbors. We strive to meet the responsibility
inherent in the name First Community Bank.
This report features the Board of Directors and the committees who
provide the oversight that ensures we are true to our values
and honor our commitment to our shareholders, customers and
employees. These directors and officers provide the guidance for
ethical business practices so necessary to maintain our corporate
integrity. We trust that you will find it reassuring to learn about the
people who attest to the accuracy of the information you receive in
this annual report.
Robert L. Buzzo
Vice President and Secretary
First Community Bancshares, Inc.
President
First Community Bank, N. A.
E. Stephen Lilly
Chief Operating Officer
First Community Bancshares, Inc.
Senior Vice President and COO
First Community Bank, N. A.
Robert L. Schumacher
Chief Financial Officer
First Community Bancshares, Inc.
Senior Vice President-Finance
First Community Bank, N. A.
Management’s
6 Discussion and Analy
}}
This discussion should be read in conjunction with the consolidated financial statements, notes
and tables included throughout this report and the First Community Bancshares, Inc., (the
"Company" or “First Community") Annual Report on Form 10-K. All statements other than
statements of historical fact included in this Annual Report, including statements in the
Message to Stockholders and in Management’s Discussion and Analysis of Financial Condition
and Results of Operations are, or may be deemed to be, forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act of
1934. Generally, the words “believe,” “expect,” “intend,” “estimate,” “anticipate,” “project,”
“will” and similar expressions identify forward-looking statements, which generally are not
in nature. All statements that address operating performance, events or
historical
developments that we expect or anticipate will occur in the future — including statements
relating to growth, share of revenues and earnings per share growth and statements expressing general optimism
about future operating results — are forward-looking statements. Forward-looking statements are subject to
certain risks and uncertainties that could cause actual results to differ materially from our Company’s historical
experience and our present expectations or projections. As and when made, management believes that these
forward-looking statements are reasonable. However, caution should be taken not to place undue reliance on any
such forward-looking statements since such statements speak only as of the date when made.
Many factors could cause the Company’s actual results to differ materially from the results contemplated by the
forward-looking statements. Some factors, which could negatively affect the results, include: (1) general economic
conditions, either nationally or within the Company’s markets, could be less favorable than expected, (2) changes
in market interest rates could affect interest margins and profitability, (3) competitive pressures could be greater
than anticipated,
results,
(5) acquisition cost savings may not be realized or the anticipated income may not be achieved, and (6)
adverse changes could occur in the securities and investments markets. The foregoing list of important
factors is not exclusive.
the Company’s
or accounting
could affect
changes
legal
(4)
Forward-looking statements made herein reflect management’s expectations as of the date such statements are
made. Such information is provided to assist stockholders and potential investors in understanding current and
anticipated financial operations of the Company and are included pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. The Company undertakes no obligation to publicly update or
revise any forward-looking statements, whether as a result of new information, future events or otherwise.
First Community is a multi-state holding company headquartered in Bluefield, Virginia. With total assets of $1.52
billion at December 31, 2002, First Community through its banking subsidiary, First Community Bank, N. A.
(“FCBNA” or “Bank”), provides financial, mortgage brokerage and origination and trust services to individuals and
commercial customers through 41 full-service banking locations in West Virginia, Virginia and North Carolina as
well as eleven mortgage brokerage facilities operated by United First Mortgage, Inc. (“UFM”.) UFM is a wholly
owned subsidiary of FCBNA. FCBNA also operates Stone Capital Management, Inc. (“Stone Capital”), an investment
advisory firm, with offices in Beckley, West Virginia.
ysis
of financial condition and results of operations.
7
Application of Critical Accounting Policies }}
First Community's consolidated financial statements are prepared in accordance with accounting principles
generally accepted in the United States of America and conform to general practices within the banking industry.
First Community’s financial position and results of operations are affected by management’s application of
accounting policies, including judgments made to arrive at the carrying value of assets and liabilities and
amounts reported for revenues, expenses and related disclosures. Different assumptions in the application of
these policies could result in material changes in First Community’s consolidated financial position and/or
consolidated results of operations.
Estimates, assumptions and judgments are necessary principally when assets and liabilities are required to be
recorded at estimated fair value, when a decline in the value of an asset carried on the financial statements at fair
value warrants an impairment write-down or valuation reserve to be established, or when an asset or liability
needs to be recorded based upon the probability of occurrence of a future event. Carrying assets and liabilities at
fair value inherently results in more financial statement volatility. The fair values and the information used to
record valuation adjustments for certain assets and liabilities are based either on quoted market prices or are
provided by third party sources, when available. When third party information is not available, valuation
adjustments are estimated in good faith by management primarily through the use of internal modeling
techniques and/or appraisal estimates.
First Community’s accounting policies are fundamental to understanding Management’s Discussion and Analysis of
Financial Condition and Results of Operations. The following is a summary of First Community’s more subjective and
complex “critical accounting policies.” In addition, the disclosures presented in the Notes to the Consolidated
Financial Statements and in management’s discussion and analysis, provide information on how significant assets
and liabilities are valued in the financial statements and how those values are determined. Based on the valuation
techniques used and the sensitivity of financial statement amounts to the methods, assumptions and estimates
underlying those amounts, management has
identified the determination of the allowance
for loan losses, the valuation of loans held
for sale and the valuation of derivative
instruments utilized in hedging activity to be
the accounting areas that require the most
subjective or complex judgments.
Management’s
Stability
Discussion and Analysis
through management
8
Allowance for Loan Losses }}
Loans Held for Sale
Derivative Instruments and Hedging Activities}}
The allowance for loan losses is established and maintained at
all levels that management deems adequate to cover losses
inherent in the portfolio as of the balance sheet date and is
based on management’s evaluation of the risks in the loan
portfolio and changes in the nature and volume of loan
activity. Estimates for loan losses are determined by analyzing
historical loan losses, current trends in delinquencies and
charge-offs, plans for problem loan resolution, the opinions of
our regulators, changes in the size and composition of the
loan portfolio and industry information. Also included in
management’s estimates for loan losses are considerations
with respect to the impact of economic events, the outcome of
which are uncertain. These events may include, but are not
limited to, a general slowdown in the economy, fluctuations in
overall lending rates, political conditions, legislation that may
directly or indirectly affect the banking industry and economic
conditions affecting specific geographical areas in which
First Community conducts business. The loan portfolio
also represents the largest asset type on the consolidated
balance sheet.
As more fully described in Notes 1 and 6 to the Consolidated
Financial Statements and in the discussion included in the
Allowance for Loan Losses section of management’s
discussion and analysis, the Company determines the
allowance for loan losses by making specific allocations to
impaired loans and loan pools that exhibit
inherent
weaknesses and various credit risk factors. Allocations to
loan pools are developed giving weight to risk ratings,
historical
loss trends and management's judgment
concerning those trends and other relevant factors. These
factors may include, among others, actual versus estimated
losses, regional and national economic conditions, business
segment and portfolio concentrations, industry competition
and consolidation, and the impact of government regulations.
The level of consumer and residential mortgage loan
allowance is maintained at a total portfolio level based on
a review of historical loss percentages and other qualitative
factors including concentrations, industry specific factors and
economic conditions.
The Company’s mortgage subsidiary, UFM, originates,
acquires, and sells residential mortgage products on a
servicing released basis into the secondary market. Currently,
UFM originates all loans with the positive intent to sell. Loans
held for sale are stated at the lower of cost or market
(“LOCOM”). The LOCOM analysis on pools of homogeneous
loans is applied on a net aggregate basis. Interest income with
respect to loans held for sale is accrued on the principal
amount outstanding. LOCOM valuation techniques applicable
to loans held for sale are based on estimated market price
indications for similar loans. Pricing estimates are established
by participating mortgage purchasers and prevailing
economic conditions. The majority of the loans held for sale
have predetermined pricing indications. However, loans
which have yet to be committed to an individual investor ($6.7
million at December 31, 2002) are evaluated for necessary
write-downs. The applicable market for these loans at
year-end was $6.9 million and as such, no write-down
was necessary.
UFM provides a distribution outlet for the sale of loans
produced by UFM’s wholesale and retail operations. UFM
originates residential mortgage loans through its production
offices located in eastern Virginia and sells the majority of
its loans through pooled commitments to national investors.
In addition, UFM acquires loans from a network of wholesale
brokers for subsequent resale to these national investors
as well. The loans held for sale portfolio at December 31,
2002, was $66.4 million compared to $65.5 million at
December 31, 2001.
Risks associated with this lending function include interest
rate risk, which is mitigated through the utilization of financial
instruments (commonly referred to as derivatives) to assist
in offsetting the effect of changing interest rates. The
Company accounts for these instruments in accordance with
Financial Accounting Standards Board (“FASB”) Statement No.
133 “Accounting for Derivative Instruments and Hedging
Activity” as amended by Statements No. 137 and No. 138.
These Statements established accounting and reporting
}}
standards for derivative instruments and for hedging
activities. UFM uses forward mortgage contracts (short
position sales) to manage interest rate risk in the pipeline of
loans and interest rate lock commitments (“RLCs”) from the
point of the loan commitment to the subsequent sale to
outside investors. As a result of the timing from origination
to sale, and the likelihood of changing interest rates, forward
commitments are placed with counter-parties to substantially
lock the expected margin on the sale of the loan. The forward
commitment to sell the security is considered to be a
derivative and, as such, is recorded on the Consolidated
Balance Sheets at fair value, and the changes in fair value are
reflected in the Consolidated Statements of Income.
The RLCs (representing forward commitments to fund loans
which will be held for sale) are also considered derivatives
and are valued at estimated fair market value based on
prevailing interest rates, expected servicing release premiums
and the assumed probability of closing (pull-through). The
assumption of a given pull-through percentage also enters
into the determination of the volume of forward contracts.
Pull-through assumptions are continually monitored
for changes in the interest rate environment and
characteristics of the pool of RLCs. Differences between
pull-through assumptions and actual pull-through could
result in a mismatch in the volume of forward contracts
corresponding to RLCs and lead to volatility in margins on
the loan products ultimately delivered.
At December 31, 2002, the Company’s mortgage
subsidiary held an investment in forward mortgage
contracts with a notional value of $75 million. These
contracts hedge interest rate risk associated with RLCs
and closed loans not allocated to a forward commitment.
Adjustment of the forward mortgage contracts to fair
value resulted in a $700,000 write-down at December 31,
2002, while the adjustment to market value on RLCs
yielded a $1.8 million increase over the prior year. The
market valuation of RLCs at December 31, 2002 assumes
68.4% RLC pull-through. If actual pull-through in
9
succeeding months proves to be more or less than 68%, the
full market value of RLCs may or may not be realized and/or
the valuation of RLCs may change. The valuation of RLCs is
considered critical because of the impact of borrower behavior
and the impact that this behavior pattern will have on the
pull-through ratio during times of significant rate volatility.
Customer behavior is modeled by a mathematical tool based
upon historical pull-through experience; however, substantial
volatility can be and was experienced in 2002, as a result of
the continued decline in mortgage rates experienced in the
latter half of 2002 and, as a result, daily pull-through varied
significantly over this time period. For the year ending
December 31, 2002, the Company incurred $8.1 million in
forward mortgage derivative contracts to
the cost of
originate and sell $791.8 million in loans in comparison to the
prior year where $621.6 million in loans were sold with
underlying forward mortgage contracts that cost $1.6 million.
The significant increase in hedging cost demonstrates
the potential volatility to earnings and the sensitivity to
pull-through assumptions.
Partnerships like this are built on trust, Kay Bayless
of Princeton, West Virginia, and John Bowling of FCB.
Expansion
10
Recent and Pending Acquisitions }}
On November 30, 2002, the Company acquired Monroe Financial, Inc. and its banking subsidiary, Bank of Greenville, at a cost of
$1.96 million. Bank of Greenville’s three branch facilities, Greenville and Lindside in Monroe County, West Virginia, and Hinton in
Summers County, West Virginia, were simultaneously merged with and into the Bank. The completion of this transaction resulted
in the addition of $29.8 million in assets, including $17.4 million in loans and added an additional $28.0 million in deposits to
the Bank. The excess of the fair market value of the net assets acquired over purchase price of $1.27 million was reallocated to the
non-financial assets acquired.
On January 27, 2003, the Company announced the signing of a definitive merger agreement pursuant to which the Bank will
acquire The CommonWealth Bank, a Virginia-chartered commercial bank ("CommonWealth Bank"), for total consideration of
approximately $25.0 million. Under the terms of the merger agreement, each share of CommonWealth Bank common stock issued
and outstanding immediately prior to the merger shall become and
be converted into the right to receive either $30.50 in cash or a
number of whole shares of the Company’s common stock as
determined by dividing $30.50 by the average closing price of the
Company’s common stock during a specified period preceding the
merger agreement, plus cash in lieu of any fractional share interest.
The cash/stock allocation is subject to procedures set forth in the
merger, as amended, which permits CommonWealth shareholders
to elect to have up to 50% of their outstanding shares converted into
the right to receive cash. The merger is expected to close during the
second quarter of 2003, pending the receipt of all requisite
regulatory approvals and the approval of CommonWealth Bank’s
shareholders. At December 31, 2002, CommonWealth Bank had
total assets of $134.1 million, net loans of $106.2 million and total
deposits of $107.3 million.
“We’re broadening our base and geographic reach as
we take a stronger foothold in Virginia and North
Carolina,” said President and CEO, John M. Mendez
pictured with Robert L. Buzzo,
Robert L. Schumacher and E. Stephen Lilly.
In January 2003, the Bank completed the acquisition of Stone
Capital Management, Inc. This acquisition will expand the
Bank’s operations to include a broader range of financial
services, including wealth management, asset
allocation, financial planning and investment
advice. Stone Capital at December 31, 2002, had
total assets of $94 million under management.
Stone Capital will continue to operate under its
name in conjunction with First Community’s Trust
and Financial Services Division.
Monroe Financial, Inc. Bank of Greenville The CommonWealth Bank
11
Stone Capital Management
Commitment to
Excellence
12
Summary Financial Results}}
Net income for 2002 was $24.7 million, up $5.6 million from
$19.1 million in 2001 and up $7.6 million from 2000 net
income of $17.1 million. Basic and diluted earnings per share
for 2002 were $2.49 and $2.48, respectively, up from basic
and diluted earnings per share of $1.92 each and $1.78 each
in 2001 and 2000, respectively. The change in basic earnings
per share to $2.49 represents an increase of 29.7% compared
to $1.92 per share in 2001. Due to the adoption of a new
accounting standard on January 1, 2002, and the application
of another new accounting standard retroactively applied to
January 1, 2002, the Company discontinued the amortization
of goodwill, subject to annual
impairment testing. On a
comparative basis, without goodwill amortization, the prior
year basic and diluted earnings per share would have been
$2.11. On a fully comparative basis without goodwill
amortization, the current year income increased 18% per
dilutive share. The most significant factors contributing to the
increase in net income were a $10.8 million increase in net
interest income, a $926,000 decrease in the provision for
loan losses due to improvement in overall loan quality, and a
$2.15 million reduction in goodwill amortization due to the
adoption of Financial Accounting Standards Board (“FASB”)
Statements No. 142 and 147 in 2002. These factors were
partially offset by an increase of approximately $3.4 million in
salaries and benefits and a $2.3 million increase in other
operating expenses.
The improvement in net interest income was largely the result
of an increase in average earning assets of $180.3 million. The
yield on these assets decreased 81 basis points between 2001
and 2002, but was offset by a 118 basis point decrease in the
cost of interest-bearing liabilities. The impact of these rate
and volume changes was an increase in the net interest rate
spread from 3.91% to 4.29% for the year 2002, a 38 basis
point increase between 2001 and 2002. The Company’s tax
equivalent net interest margin of 4.76% for 2002 reflects an
increase of 21 basis points compared to 2001 when the tax
equivalent yield was 4.55%. Interest expense was managed
through the use of a combination of retail deposits, Federal
Home Loan Bank borrowings, and active product pricing and
marketing strategies in the low rate environment.
The Company's key profitability ratios of Return on Average
Assets (ROA) and Return on Average Equity (ROE) compare
favorably with the average of the Company’s national peer
ratios of 1.19% and 13.74%, respectively, based on the
September 2002 Bank Holding Company Performance Report.
ROA, which measures the Company's stewardship of assets,
was at 1.68%, compared to 1.49% in 2001 and 1.51% in 2000.
ROE for the Company increased to 17.16% in 2002, compared
to 14.80% in 2001 and 15.70% in 2000. ROE was impacted
positively by increases in the current year earnings and an
increase in the Company’s leverage position.
Neighborhood
Service is our highest priority at all locations
13
Raymond Hall of FCB serves local companies like Artistic Woodworkers of Bluewell, West Virginia.
With the adoption of FASB Statement No. 142, the Company
ceased amortization of certain goodwill beginning January 1,
2002, as required by the Statement, and with the adoption
of Statement 147 in October 2002, amortization of remaining
goodwill
associated with branch acquisitions was
discontinued. Cessation of such amortization decreased
goodwill expense in 2002 by $2.15 million compared to 2001.
This resulted in an additional $1.9 million in after tax net
income, or $0.19 per share, in comparison to the prior year.
Non-interest income for 2002 which primarily consists of
fiduciary earnings, service charges on deposit accounts and
mortgage banking income, remained fairly consistent with the
prior year as a result of continued strength in mortgage
banking and consistent earnings derived from deposit
account charges. Service charges on deposit accounts
increased through growth in accounts and improved usage of
deposit programs. The level of total non-interest income in
2002 in comparison to the prior year was maintained despite a
securities write-down of $576,000 as more fully described
under “Results of Operations -- Non-interest Income.”
Operating expense for 2002, which included salaries and
benefits, increased by $4.3 million from $38.0 million reported
for 2001 to $42.3 million in 2002. The cost increases reflect the
increased commission payments at UFM related to the
substantial increase in the volume of loans originated and sold,
the full year impact of four branches acquired in the fourth
quarter of 2001, and additional banking facilities opened in
Athens, West Virginia, and Emporia and Bluefield, Virginia.
14 Results
Earning the respect from customers.
Glenn Hawkins, owner of Hawkins Supply and Fertilizer, of
Emporia,Virginia, and Cheryl Allen of FCB discuss business.
Summary Financial Results continued}}
The increase in net income between 2000 and 2001 of $2.0 million
or 12.1% was driven by a $7.8 million increase in non-interest
income and a $3.8 million increase in net interest income. The
improvement in net interest income was the result of continued
strong loan demand as indicated by the 7.4% increase in loans
outstanding, excluding loans acquired through branch acquisitions
in December 2001. In addition, increased mortgage banking activity
stemming from the lower interest rate environment during 2001
caused loans held for sale at December 31, 2001 to, increase by
466.4%. As a result of the change in the volume of loans, interest
and fees on loans outpaced the preceding year, increasing $7.1
million from $68.4 million in 2000 to $75.5 million in 2001.
In 2001, the Company’s cost of funds experienced a $3.0 million
dollar increase over 2000, as the level of deposits and borrowings
also increased. The rate paid on interest-bearing liabilities declined
by 22 basis points to 4.21% while the yield on earning assets
declined 58 basis points to 8.13%, resulting in a tax equivalent net
interest margin of 4.55% for the year compared to 4.86% in 2000.
Operating costs in 2001 included depreciation and certain
expenses which reflected a substantial investment in the future of
the Company as over $3.0 million was invested in technology
upgrades, image campaigns and marketing programs. Operating
expense for 2001 increased by $7.0 million from $31.0 million for
2000 to $38.0 million in 2001. This increase included the increased
operating costs at UFM related to the substantial increase in the
volume of loans originated and sold, the full year impact of Citizens
Southern Bank which was acquired in the fourth quarter of 2000,
additional banking facilities including the new Athens, West
Virginia, branch and the four branches acquired in December 2001.
Perform
Return on average equity of 17.16 %
15
}}
Five-Year Selected Financial Data
(Amounts in Thousands, Except Percent and Per Share Data)
Balance Sheet Summary (at end of period):
Loans, net of unearned income
Loans held for sale
Allowance for loan losses
Securities
Total assets
Deposits
Other indebtedness
Stockholders’ equity
Summary of Earnings:
Total interest income
Total interest expense
Provision for loan losses
Non-interest income
Non-interest expense
Income tax expense
Net income
Per Share Data:
Basic earnings per common share
Diluted earnings per common share
Cash dividends
Book value at year-end
Selected Ratios:
Return on average assets
Return on average equity
Dividend payout
Average equity to average assets
Risk-based capital to risk-adjusted assets
Leverage ratio
$
$
$
%
2002
2001
2000
1999
1998
927,621
66,364
14,410
341,899
1,524,363
1,139,727
124,357
152,462
904,496
65,532
13,952
395,891
1,478,235
1,078,260
145,320
133,041
811,256
11,570
12,303
283,298
1,218,017
899,903
138,015
120,682
704,096
N/A
11,900
290,873
1,088,162
833,258
10,218
103,488
611,493
N/A
11,404
277,210
1,053,988
875,996
18,176
101,719
96,204
35,008
4,208
20,049
42,269
10,049
24,719
2.49
2.48
1.00
15.42
1.68
17.16
40.16
9.79
13.33
8.10
92,829
42,409
5,134
20,275
38,025
8,402
19,134
1.92
1.92
0.89
13.39
1.49
14.80
46.35
10.05
12.10
7.93
85,958
39,379
3,986
12,492
30,968
7,054
17,063
1.78
1.78
0.86
12.14
1.51
15.70
48.31
9.64
12.93
8.37
76,492
32,250
2,893
10,732
27,457
7,722
16,852
1.75
1.75
0.80
10.78
1.62
16.23
45.71
9.96
13.22
8.25
81,213
38,128
6,250
11,182
28,752
6,164
13,101
1.35
1.35
0.76
10.55
1.24
13.02
56.30
9.50
13.25
7.37
ance
Shareholder Value
16
Common Stock and Dividends }}
The Company's common stock trades on the NASDAQ Small-Cap Market under
the symbol FCBC. On December 31, 2002, First Community's year-end common
stock price was $30.76, a 14.8% increase over the $26.79 closing price on
December 31, 2001.
Book value per common share was $15.42 at December 31, 2002, compared with
$13.39 at December 31, 2001, and $12.14 at the close of 2000. The year-end
market price for First Community common stock of $30.76 represents 199.5% of
the Company's book value as of the close of the year and reflects total market
capitalization of $304.2 million. Utilizing the year-end market price and 2002
diluted earnings per share, First Community common stock closed the year
trading at a price/earnings multiple of 12.4 times diluted earnings per share.
Cash dividends for 2002 totaled $1.00 per share, up $0.11 or 12.36% from the
$0.89 paid in 2001. The 2002 dividends resulted in a cash yield on the year-end
market value of 3.25%. Total dividends paid for the current and prior year totaled
$9.9 million and $8.9 million, respectively.
First Community Bank, N. A.
Board of Directors
Front Row:
Sam Clark, I. Norris Kantor, W.W. Tinder, Jr.,
B.W. Harvey, Dale F. Woody and Juanita G. Bryan
Second Row:
Richard G. Rundle, Robert L. Buzzo, K.A. Ammar, Jr.,
John M. Mendez, William P. Stafford and Allen T. Hamner
Back:
James P. Bailey, A.A. Modena, Clyde B. Ratliff,
Robert E. Perkinson, Jr., D.L. Bowling, Jr. and
William P. Stafford, II
17
}}
2002
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2001
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
$
High
30.75
33.00
33.10
33.33
$ 18.88
30.00
33.80
31.60
Bid
$
$
Low
25.36
28.00
28.00
29.17
17.13
17.85
29.75
23.75
Book
Value
Per Share
$ 13.67
14.50
15.10
15.42
$
Cash Dividend
Per Share
0.25
0.25
0.25
0.25
1.00
$
$ 12.64
12.85
13.33
13.39
$
$
0.21
0.21
0.21
0.26
0.89
Results of
Operations
18
Net Interest Margin }}
Net interest margin measures net interest income as a percentage of average earning
assets. In 2002, the net interest margin was 4.76% for the year, above the 4.55% and
slightly below the 4.86% levels attained in 2001 and 2000, respectively. The current
year’s increase was due in large part to the combined effect of a $180.3 million
increase in average earning assets, and a general decline in the cost of funds, which
was partially offset by a decline in the yield on earning assets. The associated
reductions in loan and investment yields were the result of the declining interest rate
environment experienced beginning in 2001 and continuing into 2002.
Average loans, which include loans held for sale, increased $89.0 million in volume,
which resulted in an increase of $400,000 in interest and fees on loans, on a tax
equivalent basis, despite the decline in the yield on total loans from 8.56% to 7.82%.
Average investment securities available for sale increased $91.0 million over 2001,
producing an additional $3.8 million in interest revenue while the yield declined from
6.57% in 2001 to 5.92% by year-end 2002. The slight increase in yield on investment
securities held to maturity was offset by a decrease in the average balance to $41.0
million in 2002 as compared to the average balance of $42.2 million in 2001, resulting
in a $70,000 decrease in interest income on such investment securities. The increase
in average loan and security volume was partially offset by a reduction in yield on the
underlying assets. Total tax equivalent interest income increased $3.6 million. Despite
volume increases in average interest-bearing deposits of $131.3 million, the Company
experienced an overall decrease in interest on total deposits of $6.5 million due to the
decline in the cost of funds. Short-term borrowings, including retail repurchase
agreements with existing bank customers and Federal Home Loan Bank (“FHLB”)
advances increased $17.5 million and experienced an 85 basis point decline in the cost
of these funding sources. In 2002, significant increases in the loan portfolio were
funded with a combination of increased deposits and short-term borrowings.
19
The increase in net interest income in 2001 was primarily due
to a $161.1 million or 15.7% increase in average earning assets
over 2000. The 2001 increase in average earning assets was
the result of a $137.4 million increase in average total loans,
an $8.5 million increase in average investment securities and
a $15.8 million increase in average interest-bearing deposits.
The net yield on earning assets was 8.13% in 2001, compared
to 8.71% in 2000, while the cost of funds was 4.21% in 2001,
compared to 4.43% in 2000.
Average interest-bearing liabilities increased $118.8 million in
2001, which is largely attributable to increases in deposits of
$76.4 million and a $42.3 million increase in short-term
borrowings and other indebtedness. Additionally, there was a
$17.6 million increase in average non-interest bearing
demand deposits compared to the prior year.
Net Interest Income
}}
The primary source of the Company's earnings is net interest
income, the difference between income on earning assets and
the cost of funds supporting those assets. Significant
categories of earning assets are loans and securities while
deposits and short-term borrowings represent the major
portion of interest-bearing liabilities.
On a tax equivalent basis, net interest income increased $11.1
million, or 20.5% in 2002 compared to an increase of $4.1
million, or 8.3% in 2001, in each case, over the prior year. The
increase in 2002 was the net result of an $8.7 million increase
due to the higher volume of interest-earning assets and
interest-bearing liabilities and a $2.4 million increase due to
changes in rates on these assets and liabilities. The increase
in net interest income in 2002 was primarily due to a $180.3
million or 15.2% increase in average earning assets over 2001.
The increase in 2002 average earning assets was the result of
an $89.0 million increase in average total loans, an $89.8
million increase in average investment securities and a $3.2
million increase in other interest yielding deposits. The cost of
all interest bearing liabilities decreased to 3.03% in 2002,
compared to 4.21% in 2001.
Average interest-bearing liabilities increased $148.7 million in
2002, which included a $131.3 million increase in interest-
bearing deposits, a $26.1 increase in fed funds purchased
and repurchase agreements and an $8.7 million decrease in
short-term borrowings and other indebtedness. Additionally,
there was a $22.6 million increase in average non-interest
bearing demand deposits compared to the prior year. The
acquisition of Bank of Greenville in the fourth quarter of
2002 accounted for only $2.0 million of the average interest-
bearing deposit balance increase in 2002 while the branch
acquisitions in the fourth quarter of 2001 accounted for
approximately $94.0 million.
Objective
Measurements
20
Provision for Loan Losses }}
Non-interest Income }}
The provision for loan losses was $4.2 million in 2002,
$5.1 million in 2001 and $4.0 million in 2000. The
provision and underlying allowance for loan losses is
quantified through a series of objective measurements,
evaluation of economic indications and estimation of
levels of probable losses within the population of loans
that portray inherent weaknesses.
The current year provision of $4.2 million decreased by
more than $900,000 from 2001 in response to
continuing improvements in asset quality in the current
year and only modest growth in the loan portfolio
year over year. The decline in the provision is consistent
with the noted improvements in all categories of non-
performing loans and other real estate owned. The 2001
provision of $5.1 million was elevated in comparison to
2000 in response to usual consumer charge-offs in 2001
coupled with larger charge-offs of commercial credits as
the Company pursued workout and resolution of two
commercial
loans in non-accrual status. See the
further discussion under “Balance Sheet Discussion --
Allowance for Loan Losses.”
Samuel L. Elmore
Senior Vice President
and Chief Credit Officer
First Community Bank, N. A.
Non-interest income primarily consists of fiduciary income on
trust services, service charges on deposit accounts and income
derived from the origination and sale of mortgages. Non-
interest income totaled $20.1 million in 2002, which is
substantially unchanged from the $20.3 million recognized in
2001 and a $7.60 million or 60.5% increase over the 2000 total
of $12.5 million.
The current year reflects a net increase in the level of service
charges on deposit accounts of $1.1 million or an 18.3%
increase. The prior year also reflected increases over 2000 in
this category of non-interest revenues of $2.0 million, or 48.9%.
The increases in both 2002 and 2001 can be largely attributed
to a program developed for well managed demand deposit
accounts, OverdraftHonor®, that allows the customer greater
flexibility in managing overdrafts to their accounts. As a result
of this program, approximately $5.4 million in deposit account
charges were recorded in 2002 in contrast to the $4.6 million
recorded in 2001. The aforementioned deposit account program
was introduced in the latter part of 2000 and is the primary
reason for the increase to $7.1 million in service charges on
deposit accounts recorded in 2002.
The Company’s mortgage banking segment recognized $9.4
million in mortgage banking income in 2002, which is primarily
comprised of origination fees, gains on loan sales, and hedging
costs on mortgage derivative commitments. All loans are sold
servicing released. The level of mortgage banking income
declined slightly from the prior year level of $9.6 million. The
decrease, despite increased loan applications, is attributable to
lower margins recognized on loan sales in the third and fourth
quarters of 2002. The reduction in margin is attributable to
lower than anticipated pull-through rates (closings versus
commitments) as mortgage rates fell to record lows and the
earnings on a portion of the loan commitments outstanding
were not realized. Higher than anticipated hedging cost
reduced the margin on loan sales by approximately $1.1 million
in 2002 due to the increased cost of mortgage derivative
}}
Fiduciary Income }}
21
Fiduciary income continued at the $1.8 million level again in
2002 as it did in 2001 and 2000. The level of trust and estate
revenues remained relatively consistent in 2002 even though
the total market value of the assets managed declined during
2002. The volume of revenue generated from sources such
as trust, estate and asset management services is highly
dependent upon the corresponding assets under management
and can be cyclical in nature. Trust revenues, as described
above, are comprised of fees for asset management and
estate settlement. Expenses associated with the operation
of the Trust and Financial Services Division are included in
non-interest expense.
(continued on next page)
to accurately predict
commitments used to hedge the price volatility of loan
commitments. The inability of the mortgage company’s hedge
model
loan fallout percentages
experienced in the third and early in the fourth quarter 2002
resulted in higher than predicted fallout. This fallout was due
to loan applicants who “opted out” of the mortgage company’s
process prior to closing and, instead, reapplied elsewhere
or simply waited on the sidelines for more declines in
mortgage rates, as they continued to decline to historically
unprecedented lows. The hedge model, which predicted the
need to invest at a specified level based upon historic
information, failed to predict the sudden increase in fallout,
and in turn, hedge volume was elevated when measured
against the loan commitments which ultimately closed.
UFM originated and sold $791.8 million in loans during 2002
in comparison to the prior year’s volume of $621.6 million.
The corresponding sale of loans resulted in gross gains on
sales during 2002 and 2001 of $12.9 million and $7.5 million,
respectively. Elevated hedge costs in 2002 and increased
expense associated with the higher volume of origination
resulted in a drop in mortgage banking pre-tax earnings from
$2.0 million in 2001 to $798,000 in 2002. Pretax earnings
for 2002 were further reduced by a $400,000 payment to a
former mortgage company executive to acquire a non-compete
agreement on his termination of employment.
In the third quarter of 2002, management implemented
various procedures to better manage the mortgage division,
loan pipeline and hedging process, including the establishment
of a committee to oversee risk management activities of UFM.
Committee members meet weekly to measure the ongoing
effectiveness of the mortgage delivery and hedging process.
In addition, daily monitoring is performed to determine that
the adequate level of hedge is carried commensurate with
the volume of loans hedged and the implied volatility of the
market for mortgage securities.
Trust
22
Fiduciary continued }}
Non-interest Expense }}
Other service charges, commissions and fees of approximately
$1.4 million also remained relatively consistent in 2002, 2001
and 2000. These fees are dependent upon customer behaviors
and usage of the various products and services of the Company
and are transaction oriented revenues. Other service charges,
commissions and fees declined by $55,000 in 2002 compared
to 2001 and increased by $74,000 in 2001 versus 2000.
Revenues in this category include, among others, commissions
on sales of credit life insurance, sales of checking supplies, ATM
surcharge revenues and safe deposit box rents.
During 2002, the Company experienced a net loss from
available for sale securities of approximately $390,000. The
loss resulted from an other-than-temporary write-down of a
municipal issue within the portfolio of $576,000 and losses
from the sale of securities of $313,000. These losses were
partially offset by gains resulting from securities sold and called
of $496,000. During 2001, a net gain of $181,000 was realized
as a result of the sale of available for sale securities with gains
of $209,000 and losses of $28,000.
The increase in total non-interest income in 2001 of $7.8 million
in comparison to 2000 was driven by the impact of loan
origination income generated by UFM, adding an additional
$4.9 million in revenues in 2001 versus 2000, while the
OverdraftHonor® deposit account program generated an
additional $2.0 million in non-interest income in 2001.
Non-interest expense consists of salaries and benefits,
occupancy, equipment and all other operating expense
incurred by the Company. Non-interest expense totaled
$42.3 million in 2002, compared with $38.0 million and $31.0
million in 2001 and 2000, respectively. The increase in non-
interest expense in 2002 of $4.3 million is primarily
attributable to a $3.4 million increase in salaries and
benefits, $1.0 million of which was due to the acquisition of
the four branches in the fourth quarter of 2001, along with a
$700,000 increase in salaries and commissions in the
mortgage operations of UFM (primarily attributable to
increased loan production) and a general increase in salaries
as staffing needs at several locations were satisfied in order to
support added corporate services and continued branch
growth. In addition, the combined impact of increases in
other non-interest expense categories of $800,000 is
attributable to increased operating expenses from the
increased operations
branch acquisitions ($380,000),
of UFM ($820,000) and additional increases of $1.6 million in
other non-interest expense categories including costs
associated with occupancy and facilities maintainance, data
communications and marketing campaigns. These expenses
were offset by the decline and goodwill amortization of
$2.0 million.
The $7.1 million increase in non-interest expense in 2001
relates largely to the impact of the operation of UFM of
$3.1 million over the prior year because of substantial
increases in loan production and the addition of new
branches during 2001. Additional operating cost increases
were experienced in 2001 due to the full year’s operations of
Citizens Southern Bank, which was acquired in the fourth
quarter of 2000 and the new branch acquisitions in December
2001. Other increases in 2001 included the cost of
consolidating the Company’s customer databases and the
undertaking of substantial marketing campaigns.
23
Financial collaboration with attorneys Meade Snyder
and Jim Snyder of Clifton Forge, Virginia
and R. Mason Cauthorn of FCB.
$150,000 in 2001. The increase in other operating expense
in 2001 compared to 2000 of $2.9 million was largely impacted
by the substantial
increase in loan volume and the
corresponding cost associated with the implementation of
the wholesale loan origination program at UFM ($1.1 million)
and other increases in advertising, ATM fees, correspondent
bank fees and data processing costs relative to the
increased infrastructure, size and needs of the Company.
}}
Occupancy expense increased $259,000 or 9.9% between
2001 and 2002, and $133,000 or 5.4% between 2000 and
2001. The current year’s increase primarily consists of
$160,000 related to the full year’s occupancy costs of the
branch facilities purchased in fourth quarter 2001, and
additional costs of $70,000 associated with UFM. The
$133,000 increase between 2000 and 2001 was also
largely due to a full year’s operations of branch facilities
added through the Citizens Southern acquisition as well as
a general level of increased maintenance costs throughout
the Company.
With the adoption of FASB Statement No. 142, the Company
certain goodwill beginning
ceased amortization of
January 1, 2002, as required by the Statement and with the
adoption of Statement 147 in October 2002, amortization
of remaining goodwill associated with branch acquisitions
was discontinued. Cessation of such amortization decreased
goodwill expense in 2002 by $2.15 million compared to
2001. This resulted in an additional $1.9 million in after tax
net income in comparison to the prior year.
Other operating expense also increased by $2.3 million in
2002 compared to 2001. These accounts include increases in
other operating costs associated with UFM of $700,000
(tied to increased loan production and the payment of a
$400,000 non-compete fee to the retiring president of UFM
in connection with his departure). Other increased expenses,
largely due to the acquisition of the new branches, included
an increase in telephone and data communications expense
of $237,000, an increase in ATM service fees of $162,000 and
an increase in courier and travel expense of $214,000.
Advertising expense was also up $114,000 in comparison
to last year due to ad campaigns for new products and
branch promotions. A
to
reimbursement of legal costs which reduced legal fees by
litigation settlement
led
Stewardship
24
Overhead and Efficiency Ratios }}
The Company's net overhead ratio (non-interest expense less non-interest income excluding
security 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 interest income
earned is realized as net income. The net overhead ratios for 2002, 2001 and 2000 were 1.48%,
1.39% and 1.64%, respectively. Improvement in the 2001 ratio reflected substantial increases
in non-interest revenues associated with UFM and the Company’s restructured product set.
The slight increase in the overhead ratio for 2002 reflects the relative stability of non-interest
income coupled with the increased salaries and benefits associated with the first full year of
operations of various branches, the increased costs associated with commissions paid at UFM
and a one-time charge of $400,000 representing the cost of a non-compete agreement with
UFM’s retiring president.
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 expense by
the sum of net interest income plus non-interest income (all non-recurring items and
amortization of intangibles are excluded). The efficiency ratios for 2002, 2001 and 2000 were
51.0%, 47.8% and 45.8%, respectively. Increases in the current and prior year are reflective of
the higher operating costs incurred by UFM in the development of its wholesale division which
began production in the latter part of 2000 as well as the Bank’s addition of new branch
facilities from the branch acquisitions completed in December 2001, the fourth quarter 2001
branch facility constructed in Athens, West Virginia, plus the addition of new Emporia and
Bluefield, Virginia, branches in 2002.
IntegrityThrough solid business practices
Income Tax Expense
}}
Income tax expense totaled $10.0 million in 2002, compared with $8.4 million in 2001 and $7.1
million in 2000. The $1.6 million increase in 2002 is reflective of the higher level of pre-tax
earnings in 2002 as is the $1.3 million increase between 2000 and 2001. Pre-tax earnings
increased $7.2 million between 2001 and 2002, including $6.8 million in tax-exempt earnings
generated from state and municipal bonds within the Company’s investment portfolio and
lower levels of state income tax.
The major difference between the statutory tax rate and the effective tax rate (income tax
expense divided by pre-tax income) results from income not taxable for federal income
tax purposes. The primary category of non-taxable income is that of state and municipal
securities and industrial revenue bonds and tax-free loans. The effective tax rate for 2002 was
28.9% compared with 30.5% for 2001 and 29.3% in 2000. The reduction in the Company’s
effective tax rate in 2002 was partially attributable to the cessation of amortization of non-
deductible goodwill.
25
First Community
Bancshares, Inc.
Board of Directors
Front Row:
B.W. Harvey,
Sam Clark,
William P. Stafford,
W.W. Tinder, Jr.
and I. Norris Kantor
Second Row:
John M. Mendez,
Robert E. Perkinson, Jr.
and Allen T. Hamner
Third Row:
William P. Stafford, II
and A.A. Modena
Balance Sheet
Discussion
26
Securities Held to Maturity
}}
Investment securities held to maturity are comprised largely
of U.S. Agency obligations and state and municipal bonds.
Obligations of States and Political Subdivisions represent the
largest portion of the held to maturity portfolio and totaled
$40.3 million at December 31, 2002. These are comprised of
high-grade municipal securities generally carrying AAA bond
ratings, most of which also carry credit enhancement
insurance by major insurers of investment obligations.
The average final maturity of the investment portfolio
decreased from 9.79 years in 2001 to 9.06 years in 2002 with
the tax equivalent yield increasing from 8.59% at year-end
2001 to 8.62% at the close of 2002. The average maturity of
the investment portfolio, based on market assumptions for
prepayment, is reduced to 3.3 years and 4.2 years at
December 2002 and 2001, respectively. The average maturity
data differs from final maturity data because of the use of
assumptions as to anticipated prepayments.
Securities Available for Sale
}}
At December 31, 2002, the Company had $300.9 million
in securities available for sale, compared with $354.0
million at year-end 2001, a decrease of $53.1 million or 15.0%.
During the year, $41.5 million in securities were purchased.
However, these increases were offset by maturities, calls,
and mortgage-backed security principal payments and
prepayments of $94.8 million and sales of $15.9 million.
The fair value of securities available for sale exceeded book
value at year-end 2002 by $11.3 million. The increase in the
fair value of the securities available for sale is a result of the
decline in market rates for comparable securities. When
market rates decrease, as they did in 2002, the prices of the
securities in the Company’s portfolio rise. The tax equivalent
purchase yield on securities available for sale was 6.32% in
2002 and 6.52% in 2001.
The average final maturity of the available for sale portfolio
was 13.5 years and 14.8 years at December 31, 2002, and
2001, respectively. The decrease in average final maturity
was the result of the $94.8 million in calls, principal
payments and prepayments that occurred as a result of the
declining interest rate environment. The average maturity of
the portfolio, based on market assumptions for prepayment,
was 2.9 years and 5.4 years, respectively, at December
31, 2002, and 2001, substantially shorter than the average
final maturity.
Securities available for sale are used as part of management's
asset/liability strategy. These securities may be sold in
response to changes in interest rates, changes in prepayment
risk, for liquidity needs and other factors. These securities
are carried at market value.
27
Loan Portfolio
}}
Loans Held for Sale: Loans held for sale were $66.4 million at December 31, 2002, compared with $65.5 million at December 31,
2001, an increase of just under $1.0 million, or 1.4%. Secondary market loan demand remains strong as a result of the favorable
interest rate environment for borrowers. At December 31, 2002, refinance applications represented approximately 85% of the
total volume of loan commitments outstanding at year-end. Loans originated for sale and funded during the current year were
$791.8 million versus $621.6 million in 2001.
2002
2001
}}
Loans Held for Investment: Loans held for investment net of
unearned income, were $927.6 million at December 31, 2002.
The increase of $23.1 million represents 2.6% growth from
the $904.5 million level at December 31, 2001. The fourth
quarter acquisition of The Bank of Greenville accounted for
$17.4 million of this growth. The addition of these loans did
not materially affect the distribution of loan product types
within the portfolio.
The held for investment loan portfolio is geographically
diversified among loan types and industry segments.
Commercial and commercial real estate loans represent
38.8% of the total portfolio. During 2002, commercial real
estate loans increased by $26.1 million to $285.8 million and
comprised 30.8% of total loans. Commercial loans decreased
by $22.5 million to $74.2 million and represented 8.00% of
total loans. The decline in commercial loans was partially the
result of the payoff of several large commercial loans. The
combined commercial and commercial real estate sectors
increased by only $3.7 million, or 1.03% in 2002. Real estate
construction loans, which amounted to $72.3 million, and
comprised 7.8% of the portfolio, decreased by $5.1 million in
2002. This category includes both residential and commercial
construction with the decrease attributable to completion of a
number of development projects during 2002. Additionally,
consumer loans decreased by $6.6 million, or 4.8%, to $130.5
million at the close of 2002. Consumer loans represented
14.1% of the portfolio at the close of 2002. Residential real
estate loans amounted to $364.1 million, an increase of $31.4
million, or 9.4% in 2002 and represented 39.3% of the total
portfolio at the end of 2002. This increase is the result of lower
residential mortgage rates during 2002 and the acquisition of
Bank of Greenville.
Standards
28
}}
The total loans held for investment to deposit ratio, a measure
of the volume of loans supported by the customer deposit
base, declined to 81.4% at December 31, 2002, from the prior
year level of 83.9%. The decrease in the loan to deposit ratio is
reflective of the $23.1 million increase in the loan portfolio
(excluding loans held for sale) coupled with a larger and
offsetting increase in deposits of $61.5 million. As a result of
the Greenville acquisition completed in the fourth quarter of
2002, the Company also acquired $28.0 million in deposits.
The additional deposits and loans acquired in the acquisition
accounted for approximately 45.6% and 75.3%, respectively, of
the total annual
increase in deposits and loans held for
investment, respectively.
Slower growth in the loan portfolio in 2002 reflects the
highly competitive environment for both commercial and
residential lending as customers continually seek refinance
opportunities. Slower economic conditions in some of the
Company’s lending markets have also resulted in fewer
requests for new credit and greater competition from
competing banks and non-bank lenders.
Allowance for Loan Losses
}}
The allowance for loan losses is maintained at a level sufficient
to absorb probable loan losses inherent in the loan portfolio.
The allowance is increased by 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, according to a systematic process of measurement, is
the required amount needed to absorb
reflective of
probable losses.
Management performs monthly assessments to determine the
appropriate level of allowance. Differences between actual
loan loss experience and estimates are reflected through
adjustments that are made by either increasing or decreasing
the loss provision based upon current measurement criteria.
Commercial, consumer and mortgage loan portfolios are
evaluated separately for purposes of determining the
allowance. The specific components of the allowance include
allocations to individual commercial credits and allocations to
the remaining non-homogeneous and homogeneous pools of
loans. Management’s allocations are based on judgment of
qualitative and quantitative factors about both the macro and
micro economic conditions reflected within the portfolio of
loans and the economy as a whole. Factors considered in this
evaluation include, but are not necessarily limited to, probable
losses from loan and other credit arrangements, general
economic conditions, changes in credit concentrations or
pledged collateral, historical loan loss experience, and trends
in portfolio volume, maturity, composition, delinquencies, and
non-accruals. While management has attributed the allowance
for loan losses to various portfolio segments, the allowance is
available for the entire portfolio. The allowance for loan losses
represents 455% of non-performing loans at year-end 2002
versus 280% and 186% at December 31, 2001, and 2000,
respectively. When other real estate is combined with non-
performing loans, the allowance equals 239% of non-
performing assets at the end of 2002 versus 174% and 137% at
December 31, 2001, and 2000, respectively.
Net loan charge-offs were $4.1 million in 2002, compared with
$4.0 million in 2001 and $4.6 million in 2000, respectively. The
level of charge-offs has remained relatively constant over the
three-year period, although two commercial loan relationships
resulted in spikes in charge-offs within the commercial loan
category. In 2000, the Company charged off $373,000 on a
convenience store and gasoline retailer along with a $586,000
charge-off on a golf course residential development. These two
relationships represented 20% of net charge-offs in 2000. In
2001, the Company charged off an additional $1.2 million (30%
of total charge-offs) on the convenience store loans as it
intensified its attempts to market the underlying collateral.
Excluding these larger commercial charge-offs, a noticeable
decrease in consumer charge-offs was realized in 2001 with a
reversal in 2002 as consumer charge-offs rose through the
third quarter and then moderated late in the year.
29
Non-performing Assets
}}
Non-performing assets include loans on which interest
accruals have ceased, loans contractually past due 90 days or
more and still accruing interest, and other real estate owned
(OREO) pursuant to foreclosure proceedings. The levels of non-
performing assets for the last five years are presented in the
table on page 30.
Total non-performing assets were $6.0 million at December 31,
2002, compared to $8.0 million at December 31, 2001. Non-
performing assets decreased $2.0 million between 2001 and
2002. Every component of non-performing assets improved,
led by a $1.3 million or 93.3% decline in loans 90 days or more
past due, which are still accruing. In addition, other real estate
owned decreased $174,000, or 5.7% and non-accrual loans
decreased $558,000, or 15.4% compared to 2001. The
decrease in non-accrual loans resulted from the resolution of a
number of loan relationships through payment, repossession,
or foreclosure and write-down of the loan balances to reflect
the net realizable value of the assets. The decrease in loans 90
days or more past due is a result of movement of these credits
to non-accrual status and a more aggressive approach in
collecting loans 90 days or more past due.
Dedicated
To service
Helping others to help the community.
(Pictured from left to right) Sam Elmore,
Jim Shannon, President of the Beaver Volunteer
Fire Department, Hazel Burroughs, J.P. Morgan,
Brenda Troitino, Larry Raines and Susie Webb
Evaluation
30
}}
Non-Performing Assets
(Amounts in Thousands)
Non-accrual Loans
Loans 90 Days or more Past Due
Other Real Estate Owned
Nonperforming loans as a percentage of total loans
Nonperforming assets as a percentage of total loans
and other real estate owned
Allowance for loan losses as a percentage of nonperforming loans
Allowance for loan losses as a percentage of nonperforming assets
2002
2001
2000
1999
1998
December 31,
$ 3,075
91
2,855
$ 6,021
%
0.3
%
0.6
% 455.1
% 239.3
3,633
1,351
3,029
8,013
0.6
0.9
279.9
174.1
5,397
1,208
2,406
9,011
0.8
1.1
186.3
136.5
7,889
1,259
1,950
11,098
1.3
1.6
130.1
107.2
7,763
377
3,547
11,687
1.3
1.9
140.1
97.6
Certain loans included in the non-accrual and 90 day past due
categories have been written down to the estimated realizable
value or have been assigned specific reserves within the
allowance for loan losses based upon management’s estimate
of loss upon ultimate resolution.
During 2002, 2001 and 2000, $2,168,000, $2,116,000 and
$2,530,000 of assets were acquired through foreclosure and
transferred to other real estate owned.
In addition to non-performing loans reflected in the foregoing
table, the Company has identified certain performing loans as
impaired based upon management’s evaluation of credit
strength, projected ability to repay in accordance with the
contractual terms of the loans and varying degrees of
dependence on the sale of related collateral for liquidation of
the loans. These loans were current under loan terms and
were classified as performing at year-end 2002.
In the fourth quarter of 2002, the Company added two loan
relationships to this list of impaired loans. The first is a $5.0
million loan secured by a hotel property which has suffered
declines in levels of occupancy. The allowance for loan losses
related to this loan was $1.7 million at December 31, 2002. The
second relationship is a group of loans totaling $1.16 million
related to a dairy farm whose performance declined in
conjunction with a drop in milk prices. The allowance for loan
losses related to this group of loans at year-end was $1.06
million. This group of
loans subsequently became
uncollectable and resulted in a $1.06 million charge off during
the first quarter of 2003. As of the date of this report,
management continues its efforts to determine the level of
collateral available and priority of liens which will determine
the possibility of any recovery. Due to questions raised
regarding the priority of lien status and the rights to certain
escrowed proceeds, no value was assigned to certain
collateral and escrowed funds in arriving at the related
allowance and charge off.
The following table presents the Company's investment in
loans considered to be impaired and related information on
those impaired loans:
The Company has considered all
impaired loans in the
evaluation of the adequacy of the allowance for loan losses at
December 31, 2002.
}}
Impaired Loans
Recorded investment in loans considered to be impaired
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 in impaired loans
Total interest income recognized on impaired loans
2002
2001
(Amount in Thousands)
$ 8,980
$ 1,238
3,907
9,176
512
5,129
1,229
1,310
5,674
255
31
Deposits
}}
Total deposits at December 31,2002,increased $61.5 million or 5.7% when compared to December
31, 2001. Approximately $28 million of the increase related to deposits acquired through Bank
of Greenville acquisition in November 2002. Without considering the acquisition, deposits
increased for the year by $33.5 million. The Company utilized short-term advances from the FHLB
to supplement the funding needs of the Company throughout 2001 and 2002. In 2002, the
average rate paid on interest bearing liabilities was 3.03%, down from the 4.21% in 2001.
Average deposits increased to $1.1 billion for 2002 versus $939.8 million in 2001, an increase of
16.4%, reflecting the effectiveness of new product offerings and marketing campaigns introduced
during the year as well as a full year’s impact of the deposits obtained in the December 2001
branch acquisitions. Average savings deposits increased by $38.6 million while time deposits
increased by $48.6 million. Average interest-bearing demand and non-interest bearing demand
deposits increased by $44.1 million and $22.6 million, respectively.
Short-Term Borrowings
}}
The Company's short-term borrowings consist primarily of overnight Federal Funds purchased
from the FHLB and securities sold under agreements to repurchase. This category of funding is a
source of moderately priced short-term funds. Short-term borrowings increased on average
approximately $17.5 million in comparison to the prior year. The increase in average short-term
borrowings in 2002, along with the increase in average deposits of $153.9 million, was
accompanied by an offsetting increase in total loans as these funds were used to finance
the average loans held for investment portfolio growth ($73.4 million) and the average
increase in available for sale securities ($91.0 million). The price sensitivity of funding cost
is managed by the Company’s “Product Group”, which monitors product and pricing initiatives
including, among other things, the management of the overall cost of funds to assist in
maintaining an acceptable net interest margin, and to act as a resource in developing new
products and establishing pricing guidelines.
Capitalization
and leverage
32
Other Indebtedness
}}
FHLB borrowings and other indebtedness, which includes long-term
advances from the FHLB and structured term borrowings from the FHLB,
decreased by $21.0 million in 2002 due primarily to a $25.0 million
maturity in June 2002. Fixed rate FHLB term advances and applicable
interest rates were $8.0 million (5.95%) and $2.0 million (6.27%),
maturing in September 2003 and September 2008, respectively.
Additional borrowings of $100.0 million are comprised of structured term
convertible advances from the FHLB with final maturities in 2010. These
convertible advances are callable by the FHLB based upon predefined
factors in quarterly increments after a lockout period that may
substantially shorten the lives of these instruments. The callability of
these instruments is controlled by and at the option of the FHLB.
Additionally, UFM has entered into a loan purchase agreement with
Countrywide Credit (“Countrywide”) whereby Countrywide will pre-fund
certain loans anticipated to be purchased by Countrywide Home Loans,
Inc. This borrowing arrangement by UFM with Countrywide resulted in
additional borrowings at December 31, 2002, of $14.3 million at a floating
rate of one month LIBOR plus 200 basis points, or approximately 3.42% at
December 31, 2002.
Stockholders' Equity
}}
Risk-based capital ratios are a measure of the Company's capital adequacy.
At December 31, 2002, the Company's Tier I capital ratio was 12.06%
compared with 10.82% in 2001. Federal regulatory agencies use risk-based
capital ratios and the leverage ratio to measure the capital adequacy of
banking institutions. Risk-based capital guidelines, risk weight balance
sheet assets, and off-balance sheet commitments are used in determining
capital adequacy. The Company's total risk-based capital-to-asset ratio was
13.33% at the close of 2002 compared with 12.10% in 2001. Both of these
ratios are well above the current minimum level of 8% prescribed for bank
holding companies. The leverage ratio is the measurement of total tangible
equity to total assets. The Company's leverage ratio at December 31, 2002,
was 8.10% versus 7.93% at December 31, 2001, both of which are well
above the minimum levels prescribed by the Federal Reserve. (See Note 13
of the Notes to Consolidated Financial Statements.)
33
}}
The strength of customer service.
Ricky Hamm of Sparta, North Carolina
with Tom Gentry of FCB.
Liquidity }}
Liquidity represents the Company's ability to respond to demands for
funds and is primarily derived from maturing investment securities,
overnight investments, periodic repayment of loan principal, and the
Company's ability to generate new deposits. The Company also has the
ability to attract short-term sources of funds and draw on credit lines that
have been established at financial institutions to meet cash needs.
Total liquidity of $619.2 million at December 31, 2002, is comprised of the
following: cash on hand and deposits with other financial institutions of
$124.6 million; securities available for sale of $300.9 million; securities
held to maturity due within one year of $138,000; and Federal Home Loan
Bank credit availability of $193.6 million.
Liquidity management is both a daily and long-term function of business
management. Excess liquidity is generally used to pay down short-term
borrowings. On a longer-term basis, the Company maintains a strategy of
investing in various securities, mortgage-backed obligations and loans.
funds primarily to meet ongoing
The Company uses sources of
commitments, to pay maturing savings certificates and savings
withdrawals, fund loan commitments and maintain a portfolio of
securities. At December 31, 2002, approved loan commitments
outstanding amounted to $104.9 million. Certificates of deposit scheduled
to mature in one year or less totaled $392.8 million and FHLB borrowings
that are scheduled to mature within the same period amounted to $8.0
million. Management believes that the Company has adequate resources
to fund outstanding commitments and could either adjust rates on
certificates of deposit in order to retain or attract deposits in changing
interest rate environments or replace such deposits with advances from
the FHLB or other funds providers if it proved to be cost effective to do so.
Community
Lending a hand throughout the community
Risk Assessment
34
Interest Rate Sensitivity, Interest Rate Risk and Asset/Liability Management }}
The Bank’s profitability is dependent to a large extent upon its
net interest income (NII), which is the difference between
its interest income on interest-earning assets, such as loans
and securities, and its interest expense on interest-bearing
liabilities, such as deposits and borrowings. The Bank, like
other financial institutions, is subject to interest rate risk to
the degree that its interest-earning assets reprice differently
than its interest-bearing liabilities. The Bank manages its
mix of assets and liabilities with the goals of limiting its
exposure to interest rate risk, ensuring adequate liquidity,
and coordinating its sources and uses of
funds while
maintaining an acceptable level of NII given the current
interest rate environment.
The Company's primary component of operational revenue,
NII, is subject to variation as a result of changes in interest
rate environments in conjunction with unbalanced repricing
interest-bearing
opportunities on earning assets and
liabilities. Interest rate risk has four primary components
including repricing risk, basis risk, yield curve risk and option
risk. Repricing risk occurs when earning assets and paying
liabilities reprice at differing times as interest rates change.
Basis risk occurs when the underlying rates on the assets and
liabilities the institution holds change at different levels or
in varying degrees. Yield curve risk is the risk of adverse
consequences as a result of unequal changes in the spread
between two or more rates for different maturities for the
same instrument. Lastly, option risk is due to "embedded
options" often called put or call options given or sold to
holders of financial instruments.
In order to mitigate the effect of changes in the general
level of interest rates, the Company manages repricing
opportunities and thus, its interest rate sensitivity. The Bank
seeks to control its interest rate risk (IRR) exposure to insulate
and
liabilities
interest-paying
net interest income and net earnings from fluctuations in the
general level of interest rates. To measure its exposure to IRR,
quarterly simulations of NII are performed using financial
models that project NII through a range of possible interest
rate environments including rising, declining, most likely and
flat rate scenarios. The results of these simulations indicate
the existence and severity of IRR in each of those rate
environments based upon the current balance sheet position,
assumptions as to changes in the volume and mix of interest-
and
earning assets
management’s estimate of yields to be attained in those
future rate environments and rates that will be paid on various
deposit instruments and borrowings. Specific strategies for
management of IRR have included shortening the amortized
maturity of new fixed-rate loans, increasing the volume of
adjustable 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
affecting rate sensitivity into an earnings outlook. Based upon
the latest simulation, the Company believes that it is biased
toward an asset sensitive position. Absent adequate
management, asset sensitive positions can negatively impact
net
income in a falling rate environment or,
alternatively, positively impact net interest income in a rising
rate environment.
interest
The Company has established policy limits for tolerance of
interest rate risk that allow for no more than a 10% reduction
in projected NII based on quarterly income simulations. The
most recent simulation indicates that current exposure to
interest rate risk is within the Company’s defined policy limits.
35
}}
The following table summarizes the impact on NII and the
Market Value of Equity (MVE) as of December 31, 2002, and
2001, respectively, of immediate and sustained rate shocks in
the interest rate environment of plus and minus 100 and 200
basis points from the flat rate simulation. The results of the
rate shock analysis depicted below differ from the results in
quarterly simulations, in that all changes are assumed to
take effect immediately; whereas, in the quarterly income
simulations, changes in interest rates are assumed to take
place over a 24-month horizon simulating a more likely
scenario for a changing rate environment. This table, which
illustrates the prospective effects of hypothetical interest rate
changes, is based upon numerous assumptions including
relative and estimated levels of key interest rates over a
twelve-month time period. This type of modeling technique,
although useful, does not take into account all strategies that
management might undertake in response to a sudden and
sustained rate shock as depicted. Also, as market conditions
vary from those assumed in the sensitivity analysis, actual
results will also differ due to: prepayment/refinancing levels
likely deviating from those assumed, the varying impact of
interest rate change caps or floors 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
internal/external variables.
(Amount in Thousands)
Increase (Decrease) in
Interest Rates
(Basis Points)
200
100
(100)
(200)
(Amount in Thousands)
Increase (Decrease) in
Interest Rates
(Basis Points)
200
100
(100)
(200)
2002
Net Interest
Income
$ 4,466
2,387
(2,018)
(6,756)
2001
Net Interest
Income
$ 1,950
1,059
(907)
(3,692)
%
Change
7.1
3.8
(3.2)
(10.8)
%
Change
3.5
1.9
(1.6)
(6.6)
Market Value
of Equity
$ (8,709)
(3,882)
4,885
12,468
Market Value
of Equity
$ (4,674)
(1,338)
637
1,396
%
Change
(5.5)
(2.5)
3.1
7.9
%
Change
(3.3)
(1.0)
0.5
1.0
36
}}
When comparing the impact of the rate shock analysis
between 2002 and 2001, the 2002 changes in NII reflect the
impact of the change in the balance sheet composition of
assets and liabilities and as the profile moved toward
greater asset sensitivity. The change is the result of the
heightened asset prepayment levels experienced in light of
the declining interest rate environment beginning in 2001
and continuing with a 50 basis point decline in the targeted
fed funds rate in November 2002. Much of the change in
balance sheet composition is attributed to the declining
interest rate environment and the level of asset prepayments.
The asset sensitivity is reflected in the increased liquidity of
$91.2 million (Federal Funds sold and interest-bearing
balances held with other banks). The Company began to
experience a shift in the balance sheet toward asset
sensitivity in 2000 which was attributed to the reduced lives
of certain assets and the control measures taken in prior
years, and continuing throughout 2002, to reduce deposit
cost and identify opportunities for product and net interest
income enhancement. The
tables present
contractual cash obligations and commercial commitments
as of December 31, 2002.
following
Contractual cash obligations:
Certificates of deposit
FHLB advances
Note Payable
Total contractual cash
obligations
Payment Due Period
Total
$ 593,088
110,000
14,357
Less than
One Year
Two to
Three Years
Four to
Five Years
After
Five Years
(Amount in Thousands)
$ 392,821
8,000
14,322
$ 145,472
-
35
$ 15,102
-
-
$ 39,693
102,000
-
$ 717,445
$ 415,143
$
145,507
$ 15,102
$ 141,693
Commitments:
Commercial lines of credit
Consumer lines of credit
Undispersed portion of loans in process
Letters of credit
Total commitments
Total
$ 39,645
24,547
8,835
6,023
$ 79,050
Amount of Commitment Expiration Per Period
Less than
One Year
Two to
Three Years
Four to
Five Years
After
Five Years
(Amount in Thousands)
$ 34,600
10,435
8,835
4,277
58,147
$
$
$
3,508
926
-
1,652
6,086
$
$
767
1,274
-
20
2,061
$
$
770
11,912
-
74
12,756
Lines of credit with no stated maturity date are included in commitments for less than one year.
Trust
37
Trust and Investment Management Services }}
As part of its banking services, the Company offers trust management and estate administration services through its Trust and
Financial Services Division (Trust Division). The Trust Division reported market value of assets under management of $433 million
and $486 million at December 31, 2002, and 2001, respectively. The Trust Division manages intervivos trusts and trusts under will,
develops and administers employee benefit plans and individual retirement plans and manages and settles estates. Fiduciary fees
for these services are charged on a schedule related to the size, nature and complexity of the account.
The Trust Division employs 18 professionals and support staff with a wide variety of estate and financial planning, investing and
plan administration skills. The Trust Division is located within the Company’s banking offices in Bluefield, West Virginia. Services
and trust development activities to other branch locations and primary markets are offered through the Bluefield-based division.
Recent Legislation }}
On July 30, 2002, President Bush signed into law the
Sarbanes-Oxley Act of 2002 (“Act”). The stated goals of the Act
are to increase corporate responsibility, to provide for
enhanced penalties for accounting and auditing improprieties
at publicly traded companies, and to protect investors by
improving the accuracy and reliability of corporate disclosures
pursuant to the securities laws. The proposed changes are
intended to allow stockholders to more easily and efficiently
monitor the performance of companies and directors.
The Act generally applies to all companies, both U.S. and non-
U.S., that file or are required to file periodic reports with the
Securities and Exchange Commission (“SEC”) under the
Securities Exchange Act of 1934 (“Exchange Act”). Given the
extensive SEC role in implementing rules relating to many of the
Act’s new requirements, the final scope of these requirements
remains to be determined.
The Act
includes very specific additional disclosure
requirements and new corporate governance rules, requires the
SEC and securities exchanges to adopt extensive additional
disclosure, corporate governance and other related rules and
mandates further studies of certain issues by the SEC and the
Comptroller General. The Act represents significant federal
involvement in matters traditionally left to state regulatory
systems, such as the regulation of the accounting profession,
and to state corporate law, such as the relationship between a
board of directors and management and between a board of
directors and its committees.
This Act addresses, among other matters: audit committees;
certification of financial statements by the chief executive officer
and the chief financial officer; the forfeiture of bonuses and
profits made by directors and senior officers in the twelve-
month period covered by restated financial statements; a
prohibition on insider trading during pension plan black-out
periods; disclosure of off-balance sheet transactions; a
loans to directors and officers
prohibition on personal
(excluding Federally insured financial institutions); expedited
filing requirements for stock transaction reports by officers and
directors; disclosure of a code of ethics and filing a Form 8-K for
a change or waiver of such code; “real time” filing of periodic
reports; the formation of a public accounting oversight board;
auditor independence; and various increased criminal penalties
for violations of securities laws.
38 Governance
out items of risk, exposure and possible disclosure which might
exist and be known at lower levels within the Company, but not
necessarily be known to executive management and those who
prepare financial statements or make significant decisions
regarding disclosures within the financial statements. The BTCE
meets monthly and its membership covers all areas of the
Company from both an operational and geographic perspective.
Although many of the items for discussion at the FRDC and BTCE
were already considered in the preparation of financial
statements and appropriately disclosed, these new processes
are considered valuable in further discussion of these items and
should provide a valuable forum for future evaluation of
disclosure items and selection of accounting policies.
It is believed that the addition of these new processes has
brought with it a broader and more in depth analysis to the
Company’s already effective and detailed disclosure process.
These more recent additions to the process are expected to
enhance the Company’s overall disclosure control environment.
Recent Legislation continued }}
At the September 2002 Board of Directors' meeting, within one
month of the passage of the Act, the Board of Directors of First
Community approved a series of actions to strengthen and
improve its already strong corporate governance practices.
Included in those actions was the establishment of a new
Financial Reporting and Disclosure Committee (the “FRDC”),
which was appointed to evaluate and monitor the continued
effectiveness of the design and operation of disclosure controls
in order to meet the objectives of adequate disclosure as it
impacts the full and fair presentation of the Company’s financial
statements. The FRDC consists of key members of senior
management as official and ex officio members. SEC counsel
participates in the committee on an advisory basis to provide
technical and legal guidance on matters of
technical
preparation, form of periodic reporting and general advice on
compliance with securities laws. Independent accountants also
attend FRDC meetings to provide technical assistance and
advice on matters of financial reporting and to assist in
financial accounting
interpretation and application of
standards. The committee also includes the Chairman of the
Audit Committee of
the Board of Directors to ensure
independent thought and board perspective. The FRDC meets a
minimum of quarterly, but typically more frequently and its
process culminates in the pre-Audit Committee review of the
interim (10-Q) and annual financial statements (10-K).
The FRDC complements the Company’s longstanding committee
structure and process, which has consistently proven an
invaluable tool for communication of disclosure information.
Every key element of operation is subject to oversight by a
committee to ensure proper administration, risk management
and an upstreaming of critical management information and
disclosures to finance and control, executive management and
the board of directors. The FRDC agenda is designed to capture
information from all segments of the business though reports
from senior managers and committee chairmen. In addition to
the FRDC, the Company also implemented the Business Trends
and Current Events Committee (BTCE), which is designed to draw
Assurance
39
Audit Committee:
Allen T. Hamner, William P. Stafford,
Robert E. Perkinson, Jr. and B.W. Harvey.
Financial Reporting and
Disclosure Committee:
Kenneth P. Mulkey,
E. Stephen Lilly,
Robert L. Schumacher,
Robert L. Buzzo,
John M. Mendez,
Timothy D. Velie,
and Allen T. Hamner.
Consolidated Financial Statements
40
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Cash Flow
Consolidated Statements of Changes in Stockholders’ Equity
Notes to Consolidated Financial Statements
Report of Independent Auditors
Report of Management’s Responsibilities
41
42
43
44
46
74
75
Consolidated Financial Statements
Consolidated Financial Statements
}}
}} Consolidated Balance Sheets
}}
}}
(Amounts in Thousands, Except Share Data)
Assets
Cash and due from banks
Interest-bearing deposits with banks
Federal funds sold
Total cash and cash equivalents
Securities available for sale (amortized cost of $289,616, 2002; $352,759, 2001)
Securities held to maturity (fair value, $43,342, 2002; $43,393, 2001)
Loans held for sale
Loans held for investment, net of unearned income
Less allowance for loan losses
Net loans held for investment
Premises and equipment
Other real estate owned
Interest receivable
Other assets
Goodwill
Other intangible assets
Total Assets
Liabilities
Deposits:
Non-interest-bearing
Interest-bearing
Total Deposits
Interest, taxes and other liabilities
Federal funds purchased
Securities sold under agreements to repurchase
FHLB borrowings and other indebtedness
Total Liabilities
Stockholders’ Equity
Common stock, $1 par value; 15,000,000 shares authorized in 2002
and 2001; 9,956,714 shares issued in 2002 and 9,955,425 in 2001;
9,888,482 and 9,936,442 shares outstanding in 2002 and 2001
Additional paid-in capital
Retained earnings
Treasury stock, at cost
Accumulated other comprehensive income
Total Stockholders’ Equity
Total Liabilities and Stockholders’ Equity
See Notes to Consolidated Financial Statements
December 31,
2002
2001
41
$
33,364
88,064
3,157
124,585
300,885
41,014
66,364
927,621
14,410
913,211
25,078
2,855
7,897
15,391
25,758
1,325
$ 1,524,363
$
$
165,557
974,170
1,139,727
15,940
–
91,877
124,357
1,371,901
$
47,566
249
–
47,815
354,007
41,884
65,532
904,496
13,952
890,544
21,713
3,029
8,765
18,468
25,347
1,131
$ 1,478,235
$
$
161,346
916,914
1,078,260
15,852
26,500
79,262
145,320
1,345,194
9,957
58,642
79,084
(1,982)
6,761
152,462
$ 1,524,363
9,955
60,189
62,566
(424)
755
133,041
$ 1,478,235
Consolidated Financial Statements
}}
}} Consolidated Statements of Income
(Amounts in Thousands, Except Share and Per Share Data)
42
Interest Income
Interest and fees on loans held for investment
Interest on loans held for sale
Interest on securities-taxable
Interest on securities-nontaxable
Interest on federal funds sold and deposits in banks
Total interest income
$
Interest Expense
Interest on deposits
Interest on short-term borrowings
Interest on other indebtedness
Total interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Non-interest Income
Fiduciary income
Service charges on deposit accounts
Other service charges, commissions and fees
Mortgage banking income
Net securities (losses) gains
Other operating income
Total non-interest income
Non-interest Expense
Salaries and employee benefits
Occupancy expense of bank 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
Weighted average diluted shares outstanding
Basic earnings per common share
Diluted earnings per common share
See Notes to Consolidated Financial Statements
Years Ended December 31,
2001
2002
72,415
3,584
13,001
6,819
385
96,204
25,366
9,035
607
35,008
61,196
4,208
56,988
1,773
7,056
1,380
9,435
(391)
796
20,049
$
72,582
2,956
10,259
6,190
842
92,829
31,884
9,913
612
42,409
50,420
5,134
45,286
1,815
5,966
1,435
9,582
181
1,296
20,275
23,267
2,874
2,082
245
13,801
42,269
34,768
10,049
24,719
9,924,636
9,973,129
2.49
2.48
$
$
$
19,830
2,615
1,814
2,285
11,481
38,025
27,536
8,402
19,134
9,944,310
9,980,919
1.92
1.92
$
$
$
2000
68,132
281
11,543
5,575
427
85,958
30,718
8,045
616
39,379
46,579
3,986
42,593
1,804
4,007
1,361
4,651
1
668
12,492
16,046
2,482
1,698
2,154
8,588
30,968
24,117
7,054
17,063
9,607,217
9,607,217
1.78
1.78
$
$
$
$
Consolidated Financial Statements
}}
}} Consolidated Statements of Cash Flow
(Amounts in Thousands)
Operating Activities
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Provision for loan losses
Depreciation of premises and equipment
Amortization of intangibles
Net investment amortization and accretion
Net gain on the sale of assets
Mortgage loans originated for sale
Proceeds from sale of mortgage loans
Decrease (increase) in interest receivable
(Increase) decrease in other assets
Increase in other liabilities
Other, net
Net cash provided by (used in) operating activities
Investing Activities
Cash flows from investing activities:
Proceeds from sales of securities available for sale
Proceeds from maturities and calls of securities available for sale
Proceeds from maturities and calls of held to maturity securities
Purchase of securities available for sale
Net increase in loans made to customers
Purchase of bank-owned life insurance
Cash provided by acquisitions, net
Purchase of premises and equipment
Proceeds from sale of equipment
Net cash provided by (used in) investing activities
Financing Activities
Cash flows from financing activities:
Net increase (decrease) in demand and savings deposits
Net (decrease) increase in time deposits
Net (decrease) increase in short-term debt
Repayment of long-term debt
Acquisition of treasury stock
Dividends paid
Net cash (used in) provided by financing activities
Cash and Cash Equivalents
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
See Notes to Consolidated Financial Statements
2002
Years Ended December 31,
2001
2000
43
$
24,719
$
19,134
$
17,063
4,208
1,630
32
1,467
(11,669)
(737,101)
749,039
1,082
(1,810)
410
163
32,170
15,871
94,815
1,754
(41,527)
(9,300)
–
1,982
(5,545)
–
58,050
52,874
(19,059)
(34,734)
(114)
(2,491)
(9,926)
(13,450)
5,134
1,490
2,119
485
(7,659)
(563,018)
516,812
874
(175)
2,728
(17)
(22,093)
18,907
102,458
1,602
(232,056)
(67,115)
–
77,021
(3,462)
127
(102,518)
36,144
28,625
66,902
(14)
(599)
(8,875)
122,183
3,986
1,396
2,156
233
(2,517)
(106,169)
100,148
(861)
8,454
66
(296)
23,659
2,163
17,849
3,016
(4,591)
(66,918)
(4,100)
3,065
(1,019)
466
(50,069)
(7,755)
22,731
35,126
(39)
(2,869)
(8,338)
38,856
76,770
47,815
124,585
$
(2,428)
50,243
47,815
$
$
12,446
37,797
50,243
Consolidated Financial Statements
}}
}} Consolidated Statements of Changes in Stockholders’ Equity
(Amounts in Thousands, Except Share and Per Share Information)
44
Common
Stock
Additional
Paid-in
Capital
Retained
Earnings
Unallocated
ESOP
Shares
Treasury
Stock
Total
$ 8,992 $ 34,264 $ 69,372 $ (2,945) $ (722) $ (5,473) $ 103,488
Accumulated
Other
Compre-
hensive
Income
(Loss)
Balance December 31, 1999
Comprehensive income:
Net income
Other comprehensive income
Unrealized gains on securities
available for sale, net of tax
Comprehensive income
Common dividends declared
($.86 per share)
Retirement of treasury shares
Issuance of common stock
Purchase 145,682 treasury shares at
$19.70 per share
Allocation of ESOP shares
Balance December 31, 2000
Comprehensive income:
Net income
Other comprehensive income
Unrealized gains on securities
available for sale, net of tax
Less reclassification adjustment
for gains realized in net income,
net of tax
Comprehensive income
Common dividends declared
($.89 per share)
Purchase 27,036 treasury shares at
$22.17 per share
Issuance of ESOP shares
Effect of 10% stock dividend
Balance December 31, 2001
Comprehensive income:
–
–
–
–
(374)
434
–
–
9,052
–
–
–
–
–
–
–
–
–
(5,238)
6,343
–
(96)
35,273
–
–
–
–
–
–
–
903
9,955
–
29
24,887
60,189
Net income
Other comprehensive income
Unrealized gains on securities
available for sale, net of tax
Less reclassification adjustment
for gains realized in net income,
net of tax
Comprehensive income
–
–
–
–
–
–
–
–
(continued)
17,063
–
17,063
(8,338)
–
–
–
–
78,097
19,134
–
–
19,134
(8,875)
–
–
(25,790)
62,566
24,719
–
–
24,719
–
–
–
–
5,612
–
(2,869)
–
(202)
–
–
–
–
–
(599)
377
–
(424)
–
–
–
–
–
–
–
–
–
–
–
17,063
3,935
3,935
3,935
20,998
–
–
–
(8,338)
–
6,777
–
722
–
–
–
(1,538)
(2,869)
626
120,682
–
–
–
–
–
–
–
–
–
–
–
–
–
–
19,134
2,402
2,402
(109)
2,293
(109)
21,427
–
(8,875)
–
–
–
755
(599)
406
–
133,041
–
24,719
5,770
5,770
236
6,006
236
30,725
Consolidated Financial Statements
}}
}} Consolidated Statements of Changes in Stockholders’ Equity (continued)
(Amounts in Thousands, Except Share and Per Share Information)
Common
Stock
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Compre-
hensive
Income
(Loss)
Unallocated
ESOP
Shares
Treasury
Stock
Common dividends declared
($1.00 per share)
Purchase 85,844 treasury shares at
$29.00 per share
Issuance of 5,500 shares under
stock option plan
Issuance of ESOP shares
Fractional share adjustment for
10% dividend
–
–
–
–
–
–
42
140
(9,926)
–
–
–
(2,491)
155
792
(14)
–
–
–
–
–
–
Balance December 31, 2002
$ 9,957 $ 58,642 $ 79,084 $ (1,982) $
See Notes to Consolidated Financial Statements
2
(1,729)
1,725
–
–
(16)
– $ 6,761 $ 152,462
45
Total
(9,926)
(2,491)
197
932
Notes to Consolidated Financial Statements
}}
46
Note 1. Summary of Significant Accounting Policies
Trading Securities
Basis of Presentation
At December 31, 2002 and 2001, no securities were held for trading
The accounting and reporting policies of First Community
purposes and no trading account was maintained.
Bancshares, Inc. (“First Community” or the “Company”) and
Securities Available for Sale
subsidiary conform to accounting principles generally accepted in
the United States and to predominant practices within the banking
industry. In preparing financial statements, management is
required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the date of the
balance sheet and revenues and expenses for the period. Actual
results could differ from those estimates. Assets held in an agency
or fiduciary capacity are not assets of the Company and are not
included in the accompanying consolidated balance sheets. Certain
amounts in the 2001 and 2000 financial statements have been
reclassified to conform to the 2002 presentation.
Principles of Consolidation
Securities to be held for indefinite periods of time including
securities that management intends to use as part of its
asset/liability management strategy, and that may be sold in
response to changes in interest rates, changes in prepayment risk,
or other similar factors are classified as available for sale and are
recorded at estimated fair value. Unrealized appreciation or
depreciation in fair value above or below amortized cost is included
in stockholders’ equity net of income taxes and 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. Other
than temporary losses on available for sale securities are in net
The consolidated financial statements of First Community include
the accounts of all wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in
securities losses and gains.
Securities Held to Maturity
consolidation.
Cash and Cash Equivalents
Cash and cash equivalents include cash and due from banks, time
deposits with other banks, federal funds sold, and interest-bearing
balances on deposit with the Federal Home Loan Bank that are
available for immediate withdrawal. Interest and income taxes paid
were as follows:
2002
2001
2000
(Amounts in Thousands)
Interest
Income taxes
$
36,273
9,523
$ 42,968
6,945
$ 37,526
7,206
Investments in debt securities that management has the ability and
intent to hold to maturity are carried at cost. Premiums and
discountsare amortized to expense and accreted to income over the
lives of the securities. Gain or loss on the call or maturity of
investment securities, if any, is recorded based on the specific
identification method.
Loans Held for Sale and Derivative Financial
Investments
Loans held for sale primarily consist of one to four family residential
loans originated for sale in the secondary market and carried at the
lower of cost or fair value determined on an aggregate basis. Gains
and losses on sales of loans held for sale are included in mortgage
Pursuant to agreements with the Federal Reserve Bank, the
banking income in the Consolidated Statements of Income.
Company maintains a cash balance of approximately $661,000 in
For loans to be sold, the Company enters into forward commitments
lieu of charges for check clearing and other services.
or derivatives to manage the risk inherent in interest rate lock
commitments made to potential borrowers. The inventory of loans
serves as the primary means by which the Company evaluates the
47
and loan commitments (both retail and wholesale) is hedged to
adequacy of the allowance for loan losses. The allowance is
protect the Company from interest rate risk and any corresponding
maintained by making specific allocations to impaired loans and
fluctuation in cash flows derived upon settlement of the loans with
loan pools that exhibit inherent weaknesses and various credit risk
secondary market purchasers, and consequently, to achieve a
factors. Allocations to loan pools are developed giving weight to risk
desired margin upon delivery. The hedge transactions are used for
ratings, historical loss trends and management’s judgment
risk mitigation and are not for trading purposes. The derivative
concerning those trends and other relevant factors.
financial instruments derived from these hedging transactions are
The allowance is allocated to specific loans to cover loan
recorded at fair value in Other Assets and Liabilities on the
relationships identified with significant cash flow weaknesses and
Consolidated Balance Sheets and the changes in fair value are
for which a collateral deficiency may be present. The allowance
reflected in Mortgage Banking Income on the Consolidated
established under the specific reserve method is based upon the
Statements of Income. For the year ended December 31, 2002 the
borrower’s estimated cash flow and projected liquidation value of
net derivative expense reflected in the Consolidated Statements of
related collateral. The allowance is allocated to pools of loans based
Income, was $6.9 million which is comprised of a $700,000 decline
on historical loss experience to cover the homogeneous and
in the fair value of the forward mortgage contracts, an $8.1 million
nonhomogeneous loans not individually evaluated. Pools of loans
loss on the contract settlements, and a gain of $1.9 million on rate
are grouped by specific category and risk characteristics. To
lock commitments. Forward mortgage contracts are settled at fair
determine the amount of allowance needed for each loan category,
value upon expiration of the contract and result in either the
an estimated loss percentage is developed based upon historical
payment or receipt or funds. UFM’s accumulated net derivative
loss experience. The historical loss experience is weighted for
position was $1.7 million and $480,000 as of December 31, 2002
variousriskfactorsincluding macro and micro economicconditions,
and 2001, respectively.
qualitative assessments relative to the composition of the loan
Loans transferred to the held for sale classification are transferred at
portfolio, the level of delinquencies and non-accrual loans, trends in
fair value. Any write-down recorded at the point of transfer is
the volume and term of loans, anticipated impact from changes in
charged to the allowance for loan losses. Subsequent write-downs
lending policies and procedures, and any concentration of credits in
in fair value are recorded in non-interest expense while further
certain industries or geographic areas. The calculated percentage is
appreciation in fair value is not recorded. During the fourth quarter
used to determine the estimated allowance excluding any
of 2002, the Company transferred $6.0 million in loans held for
relationshipsspecificallyidentified and evaluated. While allocations
investment to loans held for sale and recognized a write-down
are made to specific loans and classifications within the various
through the allowance for loan losses of $246,000.
categories of loans, the reserve is available for all loan losses.
Allowance for Loan Losses
The allowance for loan losses related to impaired loans is based
The allowance for loan losses is maintained at a level deemed
upon the discounted estimated cash flows or fair value of collateral
adequate to absorb probable losses inherent in the loan portfolio.
when it is probable that all amounts due pursuant to contractual
The Company consistently applies a monthly review process to
terms of the loan will not be collected and the recorded investment
continually evaluate loans for changes in credit risk. This process
in the loan exceeds the fair value. Certain smaller balance,
48
homogeneous loans, such as consumer installment loans and
fees are deferred and amortized over the related commitment
residential mortgage loans, are evaluated for impairment on an
period.
aggregate basis in accordance with the Company’s policy.
Other Real Estate Owned
Premises and Equipment
Other real estate owned and acquired through foreclosure is stated
Premises and equipment are stated at cost less accumulated
at the lower of cost or fair value less estimated costs to sell. Loan
depreciation. Depreciation is computed on the straight-line method
losses arising from the acquisition of such properties are charged
over estimated useful lives. Maintenance and repairs are charged to
against the allowance for possible loan losses. Expenses incurred in
current operations while improvements that extend the economic
connection with operating the properties, subsequent write-downs
useful life of the underlying asset are capitalized. Disposition gains
and gains or losses upon sale are included in other non-interest
and losses are reflected in current operations. In addition, in
income and expense.
accordance with Statement of Financial Accounting Standards
Stock Options
(“FAS”) No. 144, “Accounting for Long-Lived Assetsand for Long-Lived
The Company has a stock option plan for certain executives and
Assets to be Disposed of” requires that any material excess of the
directors accounted for under the intrinsic value method in
carrying value over the fair value be recorded as an impairment loss.
accordance with Accounting Principles Board Opinion (“APB”) 25.
Loan Interest Income Recognition
Because the exercise price of the Company’s employee/director
Accrual of interest on loans is based generally on the daily amount
stock options equals the market price of the underlying stock on the
of principal outstanding. It is the Company’s policy to discontinue
date of grant, no compensation expense is recognized.
the accrual of interest on loans based on the payment status and
In December 2002, the FASB issued FAS 148, “Accounting for Stock-
evaluation of the related collateral and the financial strength of the
Based Compensation.” This new standard provides alternative
borrower. The accrual of interest income is normally discontinued
methods of transition for a voluntary change to the fair value
when a loan becomes 90 days past due as to principal or interest.
method of accounting for stock-based compensation. In addition,
Management may elect to continue the accrual of interest when the
the Statement amends the disclosure requirements of FAS 123 to
loan is well secured and in process of collection. When interest
require prominent disclosure in both annual and interim financial
accruals are discontinued, interest accrued and not collected in the
statements about the method of accounting for stock-based
current year is reversed and interest accrued and not collected from
compensation and the underlying effect of the method used on
prior years is charged to the reserve for possible loan losses.
reported results until exercised.
Loan Fee Income
The effect of option shares on earnings per share relates to the
Loan origination and underwriting fees are recorded as a reduction
dilutive effect of the underlying options outstanding. To the extent
of direct costs associated with loan processing, including salaries,
the granted exercise share price is less than the current market
review of legal documents, obtainment of appraisals, and other
price, (“in the money”), there is an economic incentive for the
direct costs. Fees in excess of those related direct costs are deferred
shares to be exercised and an increase in the dilution effect on
and amortized over the life of the related loan. Loan commitment
earnings per share.
Assuming use of the fair value method of accounting for stock options, pro forma net income and earnings per share for the years ended
49
December 31 would have been estimated as follows:
Net income as reported
Less: Total stock-based employee compensation expense determined
under fair value based method for all awards, net of related tax effects
Earnings per share:
Basic as reported
Basic pro forma
Diluted as reported
Diluted pro forma
2002
2001
2000
(Amounts in Thousands, Except Per Share Data)
$
24,719
$
19,134
$
17,063
(163)
24,556
(310)
$ 18,824
2.49
2.47
2.48
2.46
$
$
$
$
1.92
1.89
1.92
1.89
$
$
$
$
$
(37)
17,026
1.78
1.77
1.78
1.77
$
$
$
$
$
The fair value of options was estimated at the date of grant using the
net carrying amount of goodwill related to the community banking
Black-Scholes option pricing model using the following
segment at December 31, 2002 and 2001 was $24.0 million and
assumptions: i) risk-free interest rate of 5.15%, 5.12% and 6.00% for
$24.3 million, respectively. A portion of the purchase price in certain
2002, 2001 and 2000, respectively; ii) a dividend yield of 3.20%,
transactions has been allocated to values associated with the future
3.40% and 5.21% for 2002, 2001 and 2000, respectively; iii)
earnings potential of acquired deposits and is being amortized over
volatility factors for the expected market price of the Company’s
the estimated lives of the deposits, ranging from seven to ten years
common stock of 24.5%, 31.2% and 26.1% for 2002, 2001 and
while the weighted average remaining life of these core deposits is
2000, respectively; and iv) a weighted-average expected life of the
approximately 3.8 years. As of December 31, 2002 and 2001, the
option of 10.4, 12.2 and 13.7 years, for 2002, 2001 and 2000,
balance ofacquired core depositswas$2.9 million and $2.6 million,
respectively.
Intangible Assets
respectively, while the corresponding accumulated amortization
was $1.2 million and $1.5 million, respectively. The current year
The excess of the cost of an acquisition over the fair value of the net
acquisition of Monroe added an additional $441,000 in deposit
assets acquired is recorded as goodwill. The net carrying amount of
intangible. The net unamortized balance of identified intangibles
goodwill was $25.8 million and $25.3 million at December 31, 2002
associated with acquired deposits was $1.3 million and $1.1 million
and 2001, respectively. The net carrying amount of goodwill at
atDecember 31, 2002 and 2001, respectively. Amortization expense
December 31, 2002 and 2001 related to the mortgage banking
of intangibles for each of the next five years is approximately
segment was $1.8 million and $1.0 million, respectively, while the
$200,000 annually.
50
On January 1, 2002, the Company adopted FAS 142 which required
management has concluded that the current value placed on
that goodwill resulting from business acquisitions (as defined) no
goodwill is not impaired and no impairment losses were recorded
longer be amortized to earnings, but instead be reviewed for
for 2002 or prior years.
impairment. Accordingly, the Company ceased the amortization of
In October 2002, the FASB issued FAS No. 147, “Acquisitions of
goodwill on January 1, 2002. FASB Statement 142 required a
Certain Financial Institutions.” This new Standard which became
transitional impairment test to be applied to all goodwill and other
effective upon issuance provides interpretive guidance on the
indefinite-lived intangible assets within the first six months after
application of the purchase method to acquisitions of financial
adoption. The impairment test involved identifying separate
institutions, and requires companies to cease amortization of
reporting units based on the reporting structure of the Corporation,
goodwill related to certain branch acquisitions. In addition, this
then assigning all assets and liabilities, including goodwill, to these
Statement amends FASB Statement No. 144 to include in its scope
units. Goodwill is assigned based on the reporting unit benefiting
long-term customer-relationship intangible assets of financial
from the factors that gave rise to the goodwill. Each reporting
institutions such as depositor- and borrower-relationship intangible
segment (community and mortgage banking) is then tested for
assets and credit cardholder intangible assets. Consequently, those
goodwill impairment by comparing the fair value of the unit with its
intangible assets are subject to the same undiscounted cash flow
book value, including goodwill. If the fair value of the reporting unit
recoverability test and
impairment
loss recognition and
is greater than its book value, no goodwill impairment exists.
measurement provisions thatStatement 144 requires for other long-
However, if the book value of the reporting unit is greater than its
lived assets that are held and used.
determined fair value, goodwill impairment may exist and further
The effect of the application of the non-amortization provisions of
testing is required to determine the amount, if any, of the actual
FAS Statements 142 and 147 on net income and earnings per share
impairment loss. Through the results of impairment tests,
is presented below.
Reported net income
Add back goodwill amortization, net of tax, subject to FAS 142 & 147
Adjusted net income
Basic and diluted earnings per share
Add back goodwill amortization, net of tax, subject to FAS 142 & 147
Adjusted basic and diluted earnings per share
Years Ended
December 31, 2001
December 31, 2000
(Amounts in Thousands, Except Per Share Data)
$
$
$
$
19,134
1,875
21,009
1.92
0.19
2.11
$
$
$
$
17,063
1,778
18,841
1.78
0.19
1.97
Recent Accounting Developments
require the guarantor to make payments to the guaranteed party
51
FAS 149, “Accounting for Certain Financial Instruments with
based on changes in an underlying value that is related to an asset,
Characteristics of Liabilities and Equity,” which is anticipated to be
liability, or equity security of the guaranteed party. Certain
issued in March 2003, establishes standards for issuers’
guarantee contracts are excluded from both the disclosure and
classification as liabilities in the Statement of Financial Position for
recognition requirements of this interpretation, including, among
certain equity linked contracts tied to the issuers’ shares.
others, guarantees relating to employee compensation, residual
Implementation of FAS 149 is not anticipated to have a material
value guarantees under capital lease arrangements, commercial
impact on the Company’s financial position or results of operation.
letters of credit, loan commitments, subordinated interests in a
In January 2003, the FASB issued Interpretation No. 46 (FIN 46),
special purpose entity, and guarantees of a company’s own future
“Consolidation of Variable Interest Entities”. The objective of this
performance. Other guarantees are subject to the disclosure
interpretation is to provide guidance on how to identify a variable
requirements of FIN 45 but not to the recognition provisions and
interest entity (VIE) and determine when the assets, liabilities, non-
include, among others, a guarantee accounted for as a derivative
controlling interests, and results of operations of a VIE need to be
instrument under FAS 133, a parent’s guarantee of debt owed to a
included in a company’s consolidated financial statements. A
third party by its subsidiary or vice versa, and a guarantee which is
company that holds variable interests in an entity will need to
based on performance rather than price. The disclosure
consolidate the entityifthe company’sinterestin the VIEissuch that
requirementsofFIN 45 are effective for the CompanyasofDecember
the company will absorb a majority of the VIE’s expected losses
31, 2002, and require disclosure of the nature of the guarantee, the
and/or receive a majority of the entity’s expected residual returns, if
maximum potential amount of future payments that the guarantor
they occur. FIN 46 also requires additional disclosures by primary
could be required to make under the guarantee, and the current
beneficiaries and other significant variable interest holders. The
amount of the liability, if any, for the guarantor’s obligations under
provisions of this interpretation became effective upon issuance.
the guarantee. The recognition requirements of FIN 45 are to be
The Company does not anticipate the requirements of FIN 46 to
applied prospectively to guarantees issued or modified after
have a material impact on results of operations, financial position,
December 31, 2002. The Company does not expect
the
or liquidity.
requirements of FIN 45 to have a material impact on results of
In November 2002, the FASB issued Interpretation No. 45 (FIN 45),
operations, financial position, or liquidity.
“Guarantor’s Accounting and Disclosure Requirements for
In June 2002, the FASB issued FAS No 146, “Accounting for Costs
Guarantees, Including Indirect Guarantees of Indebtedness of
Associated with Exit or Disposal Activities.” This pronouncement is
Others”. This interpretation expands the disclosures to be made by
effective for exit or disposal activities initiated after December 31,
a guarantor in its financial statements about its obligations under
2002. This Statement addresses financial accounting and reporting
certain guarantees and requires the guarantor to recognize a
for costs associated with exit or disposal activities and nullifies
liability for the fair value of an obligation assumed under a
Emerging Issues Task Force (EIFT) Issue No. 94-3, “Liability
guarantee. FIN 45 clarifies the requirements of FAS 5, “Accounting
Recognition for Certain Employee Termination Benefits and Other
for Contingencies”, relating to guarantees. In general, FIN 45 applies
Costs to Exit an Activity (including Certain Costs Incurred in a
to contracts or indemnification agreements that contingently
Restructuring).” Management is currently evaluating the impact of
52
this standard. However, it is not anticipated to have a material
effective rate is determined based upon a combination of the
impact on the results of operations, financial position or liquidity.
enacted statutory federal and state rates and reduced or increased
In April2002, the FASB issued FAS145, which updates, clarifies, and
by any corresponding nontaxable income or nondeductible
simplifiescertain existing accounting pronouncementsbeginning at
expenses, respectively.
various dates in 2002 and 2003. The statement rescinds FAS 4 and
Deferred income taxes, which are included in other assets, are
FAS 64, which required net gains or losses from the extinguishment
recognized for the tax consequences of “temporary differences” by
of debt to be classified as an extraordinary item in the income
applying enacted statutory tax rates to the differences between the
statement. These gains and losses will now be classified as
financial statement carrying amounts and the tax bases of existing
extraordinary only if the item is material and both unusual and
assets and liabilities. The bookversus taxbasis difference is created
infrequent in nature. The changes required by FAS 145 are not
by the timing of expense and/or income recognition required for
expected to have a material impact on results of operations,
financial accounting reporting purposes as opposed to what is
financial position, or liquidity of the Company.
required statutorily by enacted federal and state tax laws, as well as
In August 2001, the FASB issued FAS 143, Accounting for Asset
differences assigned to the underlying asset and liability values at
Retirement Obligations. FAS 143 requires an entity to record a
acquisition. Deferred taxes are also applied to the unrealized
liability for an obligation associated with the retirement of an asset
appreciation or depreciation on available for sale securities
at the time the liability is incurred by capitalizing the cost as part of
recorded in Other Comprehensive Income in the Stockholders’
the carrying value of the related asset and depreciating it over the
Equity section of the Consolidated Balance Sheet.
remaining useful life of that asset. The standard is effective for the
Company beginning January 1, 2003, and its adoption is not
expected to have a material impact on results of operations,
financial position, or liquidity.
Income Taxes
Earnings Per Share
Basic earnings per share is determined by dividing net income by
the weighted average number of shares outstanding. Diluted
earnings per share is determined by dividing net income by the
weighted average shares outstanding increased by the dilutive
The Company and its subsidiary file a consolidated federal income
effect of stock options. Basic and diluted net income per common
tax return. The provision for income tax expense and the underlying
share calculations follow:
For the Year Ended December 31,
2002
2001
2000
(Amounts in Thousands, Except Per Share Data)
Basic:
Net income
Weighted average shares outstanding
Earnings per share — basic
Diluted:
Net income
Weighted average shares outstanding
Dilutive shares for stock options
Weighted average dilutive shares outstanding
Earnings per share — dilutive
$
$
24,719
9,9,9924,24,663636
2.49
$
$
19,134
9,944,310
1.92
$
$
17,063
9,607,217
1.78
$
$
24,719
9,924,636
48,493
9,973,129
2.48
$
$
19,134
9,944,310
36,609
9,980,919
1.92
$
$
17,063
9,607,217
–
9,607,217
1.78
Note 2. Merger and Acquisitions
53
On November 30, 2002, the Company acquired Monroe Financial,
and Hinton in Summers County, West Virginia, were simultaneously
Inc. (“Monroe”), and its banking subsidiary, The Bank of Greenville
merged with and into First Community Bank, N. A. (“FCBNA” or the
(“Greenville”) for $1.96 million cash. Greenville’s three branch
“Bank”). The completion of this transaction resulted in the addition
facilities in Greenville and Lindside in Monroe County, West Virginia
of $29.8 million in assets including $16.5 million to the loan
portfolio, and an additional $28.0 million in deposits to the Bank.
Note 3. Securities Available for Sale
As of December 31, the amortized cost and estimated fair value of
securities classified as available for sale are as follows:
U.S. government agency securities
States and political subdivisions
Other securities
Total
U.S. government agency securities
States and political subdivisions
Other securities
Total
2002
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair
Value
(Amounts in Thousands)
$ 138,981
93,587
57,048
$ 289,616
$
$
5,006
2,739
4,144
11,889
$
$
–
(620)
–
(620)
$ 143,987
95,706
61,192
$ 300,885
2001
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair
Value
(Amounts in Thousands)
$ 195,689
97,683
59,387
$ 352,759
$
$
981
1,230
1,022
3,233
$
$
(467)
(1,464)
(54)
(1,985)
$ 196,203
97,449
60,355
$ 354,007
Securities available for sale with estimated fair values of
because issuersmayhave the rightto callor prepayobligationswith
$207,391,813 and $180,086,000 at December 31, 2002 and 2001,
or without call or prepayment penalties. Included in the amounts
respectively, were pledged to secure publicdeposits, securitiessold
below are securities that were acquired in the November 30, 2002
under agreements to repurchase and other short-term borrowings
acquisition of The Bank of Greenville. The book and estimated
and for other purposes.
market value of these securities are $7.6 million and $7.7 million,
As a condition to membership in the Federal Home Loan Bank
respectively, at December 31, 2002. During 2002, the Company
(“FHLB”) system, FCBNA is required to subscribe to a minimum level
experienced a net loss from available for sale securities of
of stockin the FHLB of Atlanta. At December 31, 2002, FCBNA owned
$393,000. Gross losses resulted from an other-than-temporary
approximately $6.3 million in stock which is classified as available
write-down of a municipal issue within the portfolio of $576,000
for sale.
The amortized cost and estimated fair value of securities available
for sale by contractual maturity, at December 31, 2002, are shown
below. Expected maturities may differ from contractual maturities
and losses from the sale of securities of $313,000. These losses
were offset by gross gains resulting from securities sold and called
of$496,000. During 2001, a netgain of$181,000 wasrecognized as
a result of the sale of available for sale securities with gains of
$209,000 and losses of $28,000.
54
Amortized Cost
Maturity:
Within one year
After one year through five years
After five years through ten years
After ten years
Total amortized cost
Tax equivalent purchase yield
Average maturity (in years)
Fair Value
Maturity:
U.S.
Government
Agencies &
Corporations
States
and
Political
Subdivisions
Other
Securities
Total
(Amounts in Thousands)
$
–
1,910
37,669
99,402
$ 138,981
5.49%
16.15
$
500
18,537
14,247
60,303
$ 93,587
8.02%
12.39
$
–
26,106
20,295
10,647
$ 57,048
5.56%
8.75
$
500
46,553
72,211
170,352
$ 289,616
6.32%
13.48
Tax
Equivalent
Purchase
Yield
7.72%
6.68%
6.17%
6.28%
Within one year
After one year through five years
After five years through ten years
After ten years
Total fair value
$
–
1,944
39,020
103,023
$ 143,987
$
504
18,983
14,653
61,566
$ 95,706
$
–
28,046
22,142
11,004
$ 61,192
$
504
48,973
75,815
175,593
$ 300,885
Note 4. Securities Held to Maturity
The following table presents amortized cost and approximate fair values of investment securities held to maturity at December 31:
U.S. government agency securities
States and political subdivisions
Other securities
Total
U.S. government agency securities
States and political subdivisions
Other securities
Total
2002
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair
Value
(Amounts in Thousands)
$
336
40,303
375
$ 41,014
$
$
8
2,320
–
2,328
$
$
–
–
–
–
$
344
42,623
375
$ 43,342
2001
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair
Value
(Amounts in Thousands)
$
743
39,768
1,373
$ 41,884
$
$
16
1,487
6
1,509
$
$
–
–
–
–
$
759
41,255
1,379
$ 43,393
U.S.
Government
Agencies &
Corporations
States
and
Political
Subdivisions
Other
Securities
Total
55
Tax
Equivalent
Purchase
Yield
(Amounts in Thousands)
Amortized Cost
Maturity:
Within one year
After one year through five years
After five years through ten years
After ten years
Total amortized cost
Tax equivalent purchase yield
Average maturity (in years)
Fair Value
Maturity:
Within one year
After one year through five years
After five years through ten years
After ten years
Total fair value
$
$
$
$
63
98
175
–
336
5.08%
4.43
$
–
4,594
15,663
20,046
$ 40,303
8.67%
9.14
64
99
181
–
344
$
–
4,935
16,525
21,163
$ 42,623
$
$
$
$
75
–
300
–
375
6.60%
4.79
$
138
4,692
16,138
20,046
$ 41,014
8.62%
9.06
5.78%
8.50%
8.58%
8.70%
75
–
300
–
375
$
139
5,034
17,006
21,163
$ 43,342
Various investment securities classified as held to maturity with an
FCBNA is a party to financial instruments with off-balance sheet risk
amortized cost of approximately $4,454,299 and $4,439,000 were
in the normal course of business to meet the financing needs of its
pledged at December 31, 2002 and 2001, respectively, to secure
customers. These financial instruments include commitments to
public deposits and for other purposes required by law.
extend credit, standby letters of credit and financial guarantees.
Note 5. Loans
Loans consist of the following at December 31:
These instruments involve, to varying degrees, elements of credit
and interest rate risk beyond the amount recognized on the balance
2002
2001
sheet. The contractual amounts of those instruments reflect the
Real estate-commercial
Real estate-construction
Real estate-residential
Commercial, financial
and agricultural
(Amounts in Thousands)
$ 285,847 $ 259,717
77,402
332,671
72,275
364,065
74,186
96,641
Loans to individuals for household
All other loans
and other consumer expenditures 130,522
726
$ 927,621
137,104
961
$904,496
extent of involvement the Company has in particular classes of
financial instruments.
The Company’s exposure to credit loss in the event of non-
performance by the other party to the financial instrument for
commitments to extend credit and standby letters of credit and
financial guarantees written is represented by the contractual
amount of those instruments. The Company uses the same credit
56
policies in making commitments and conditional obligations as it
extending loan facilities to customers. To the extent deemed
does for on-balance sheet instruments.
necessary, collateral of varying types and amounts is held to secure
Commitmentsto extend creditare agreementsto lend to a customer
customer performance under certain of those letters of credit
as long as there is not a violation of any condition established in the
outstanding at December 31, 2002.
contract. Commitments generally have fixed expiration dates or
Financial instruments whose contract amounts represent credit risk
other termination clauses and may require payment of a fee. Since
at December 31, 2002 are commitments to extend credit (including
many of the commitments are expected to expire without being
availability of lines of credit) – $64.2 million, and standby letters of
drawn upon, the total commitment amounts do not necessarily
credit and financial guarantees written – $6.0 million. At December
represent future cash requirements. The Company evaluates each
31, 2002, FCBNA’ssubsidiary, United FirstMortgage, Inc. (UFM), had
customer’screditworthinesson a case-by-case basis. The amountof
commitments to originate loans of $120.2 million.
collateral obtained, if deemed necessary by the Company, upon
extension of credit is based on management’s credit evaluation of
the counterparties. Collateral held varies but may include accounts
receivable, inventory, property, plant and equipment, and income-
producing commercial properties.
Loan commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. The
Company evaluates each customer’s creditworthiness on a case-by-
case basis. The amount of collateral deemed necessary by the
Company is based on management’s credit evaluation and
Standby letters of credit and financial guarantees written are
underwriting guidelines for the particular loan. The total
conditional commitments issued by the Company to guarantee the
commitments outstanding at December 31, 2002 are summarized
performance of a customer to a third party. The credit risk involved
in the following table:
in issuing letters of credit is essentially the same as that involved in
Real estate-commercial (fixed)
Real estate-commercial (variable)
Real estate-construction (fixed)
Real estate-construction (variable)
Real estate-residential (fixed)
Real estate-residential (variable)
Commercial, financial, agricultural (fixed)
Commercial, financial, agricultural (variable)
Loans to individuals for household and other consumer expenditures (fixed)
Loans to individuals for household and other consumer expenditures (variable)
Total
2002
Notional
Amount
Rate
(Amounts in Thousands)
$
5,573
10,349
4,904
8,349
4,211
14,099
1,689
14,739
4,537
1,765
$ 70,215
3.38 - 10.50 %
2.25 - 19.50 %
4.40 - 10.50 %
4.25 - 19.00 %
5.75 - 18.00 %
3.75 - 12.00 %
4.00 - 18.00 %
2.25 - 10.50 %
3.70 - 18.50 %
4.25 - 14.50 %
Management analyzes the
loan portfolio
regularly for
surrounding mid-Atlantic area. Although sections of the West
57
concentrations of credit risk, including concentrations in specific
Virginia and Southwestern Virginia economies are closely related to
industries and geographic location. At December 31, 2002,
natural resource production, they are supplemented by service
commercial real estate loans comprised 30.8% of the total loan
industries. The Company’s presence in three states, West Virginia,
portfolio. Commercial loans include loans to small to mid-size
Virginia, and North Carolina, provides additional diversification
industrial, commercial and service companies that include but are
against geographic concentrations of credit risk.
not limited to coal mining companies, manufacturers, automobile
In the normal course of business, FCBNA has made loans to
dealers, and retail and wholesale merchants. Commercial real
directors and executive officers of the Company and its subsidiary.
estate projects represent several different sectors of the commercial
All loans and commitments made to such officers and directors and
real estate market, including residential land development,
to companies in which they are officers, or have significant
apartment building operators, commercial real estate lessors, and
ownership interest, have been made on substantially the same
hotel/motel developers. Underwriting standards require
terms, including interest rates and collateral, as those prevailing at
comprehensive reviewsand independentevaluationsbe performed
the time for comparable transactions with other persons. The
on credits exceeding predefined market limits on commercial loans.
aggregate dollar amount of such loans was $6.0 million and
Updates to these loan reviews are done periodically or on an annual
$7.8 million at December 31, 2002 and 2001, respectively. Advances
basis depending on the size of the loan relationship.
and repayments of these loans during 2002 were $1.9 million and
The majority of the loans in the current portfolio, other than
$3.7 million, respectively.
commercial and commercial real estate, were made and
Note 6. Allowance for Loan Losses
collateralized in West Virginia, Virginia, North Carolina and the
Activity in the allowance for loan losses was as follows:
Balance, January 1
Provision for loan losses
Acquisition balance
Loans charged off
Recoveries credited to reserve
Net charge-offs
Balance, December 31
2002
2001
2000
(Amounts in Thousands)
$ 13,952
4,208
395
(4,868)
723
(4,145)
$ 14,410
$ 12,303
5,134
484
(4,880)
911
(3,969)
$ 13,952
$ 11,900
3,986
1,051
(5,536)
902
(4,634)
$ 12,303
58
The following table presents the Company’s investment in loans considered to be impaired and related information on those impaired loans:
Recorded investment in loans considered to be impaired
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 in impaired loans
Total interest income recognized on impaired loans
2002
2001
(Amounts in Thousands)
$
8,980
1,238
3,907
9,176
512
$
5,129
1,229
1,310
5,674
255
During 2002, 2001 and 2000, $2,168,000, $2,116,000, and $2,530,000 of assets were acquired through foreclosure and transferred to other
real estate owned.
Note 7. Premises and Equipment
Premises and equipment are comprised of the following as of December 31:
Land
Bank premises
Equipment
Less: accumulated depreciation and amortization
Total
2002
2001
(Amounts in Thousands)
$
$
7,648
24,317
16,832
48,797
23,719
25,078
$
$
7,123
22,258
15,831
45,212
23,499
21,713
Note 8. Other Indebtedness
mortgage assets. At December 31, 2002, credit availability with the
Other indebtedness includes structured term borrowings from the
FHLB totaled approximately $193.6 million. Advances from the FHLB
FHLB of $100 million and $125 million at December 31, 2002 and
are secured by stockin the FHLB of Atlanta, qualifying first mortgage
2001, respectively, in the form of convertible and callable advances.
loans of $331.0 million, mortgage-backed securities, and certain
The callable advances may be called, based on predefined factors,
other investment securities. The FHLB advances are subject to
in quarterly increments that may substantially shorten the lives of
restrictions or penalties in the event of prepayment.
these instruments. If these advances are called, the debt may be
Other indebtedness also includes term borrowings with the FHLB of
paid in full, converted to another FHLB credit product or converted
$10 million as of December 31, 2002 and 2001. This debt has a
to an adjustable rate advance. The contractual maturity of these
weighted average interest rate of 6.01% and $8 million matures in
borrowings is 2010 and the weighted average rate is 5.83% at
2003, while $2 million matures in 2008. Other various debt
December 31, 2002. At December 31, 2001, the Company also held
obligations of the Company, excluding the borrowings of UFM
a non-callable term advance of $10.0 million which matured in
mentioned below, approximated $50,000 at December 31, 2002
December 2002.
and $320,000 at December 31, 2001.
FCBNA is a member of the FHLB which provides credit in the form of
In late 2002, the Bank’s mortgage subsidiary, UFM, entered into a
short-term and long-term advances collateralized by various
loan purchase agreement with Countrywide Warehouse Lending
(“Countrywide”) whereby Countrywide will pre-fund certain loans
December 31, 2002 was $300,000 deficient of Countrywide’s
59
anticipated to be purchased by Countrywide Home Loans, Inc.
minimum net worth requirement. Subsequent to year-end, UFM
This financing arrangement by UFM with Countrywide resulted
received a letter of forbearance from Countrywide, cured the
in additional borrowings at December 31, 2002 of $14.3 million at
deficiency, ceased continuance of this credit facility and ultimately
a floating rate of one month LIBOR plus 200 basis points or 3.42%
requested the return of all related collateral.
at December 31, 2002. UFM’s net worth of $4.2 million at
Note 9. Deposits
At December 31, 2002, the scheduled maturities of certificates of
Time deposits, including certificates of deposit issued in
deposit are as follows:
denominations of $100,000 or more, amounted to $176.8 million
(Amounts in Thousands)
and $173.0 million at December 31, 2002 and 2001, respectively.
2003
2004
2005
2006
2007 and thereafter
Note 10. Income Taxes
Income taxes are as follows:
Income exclusive of securities gains
Net securities (losses) gains
Income tax provisions consists of:
Current tax expense
Deferred tax expense (benefit)
$ 392,821
97,079
48,393
15,102
39,693
$ 593,088
Interest expense on these certificates was $6.1 million, $6.7 million,
and $6.5 million for 2002, 2001, and 2000, respectively.
At December 31, 2002, the scheduled maturities of certificates of
deposit of $100,000 or more are as follows:
Three Months or Less
Over Three to Six Months
Over Six to Twelve Months
Over Twelve Months
Total
(Amounts in Thousands)
$ 39,653
37,998
45,048
54,068
$ 176,767
Years Ended December 31,
2002
2001
2000
(Amounts in Thousands)
10,205
(156)
10,049
$
$
8,330
72
8,402
$
$
7,053
1
7,054
Years Ended December 31,
2002
2001
2000
(Amounts in Thousands)
9,056
993
10,049
$
$
8,734
(332)
8,402
$
$
7,150
(96)
7,054
$
$
$
$
60
Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities for financial
reporting versus tax purposes. The tax effects of significant items comprising the Company’s net deferred tax assets as of December 31, 2002
and 2001 are as follows:
Deferred tax assets:
Allowance for loan losses
Unrealized losses on assets
Deferred compensation
Deferred insurance premiums
Other
Total deferred tax assets
Deferred tax liabilities:
Intangible assets
Fixed assets
Deferred loan fees
Unrealized gain on securities available for sale
Other
Total deferred tax liabilities
Net deferred tax (liabilities) assets
2002
2001
(Amounts in Thousands)
$
$
$
$
5,644
214
979
222
739
7,798
1,537
701
346
4,507
1,636
8,727
(929)
$
$
$
$
5,514
203
916
256
148
7,037
601
267
397
494
1,145
2,904
4,133
The reconciliation between the federal statutory tax rate and the effective income tax rate is as follows:
Tax at statutory rate
(Reduction) increase resulting from:
Tax-exempt interest on investment securities and loans
State income taxes, net of federal benefit
Amortization of goodwill
Other, net
Effective tax rate
Years Ended December 31,
2001
2002
2000
35.00%
35.00%
35.00%
(6.42)%
1.82%
–%
(1.50)%
28.90%
(7.31)%
2.55%
1.57%
(1.30)%
30.51%
(7.77)%
2.36%
1.90%
(2.19)%
29.30%
Note 11. Employee Benefits
The Company has a post-retirement obligation for a group of
61
Employee Stock Ownership and Savings Plan
The Companymaintainsan Employee StockOwnership and Savings
Plan (“KSOP”). Coverage under the plan isprovided to allemployees
meeting minimum eligibility requirements.
Employer Stock Fund: Annual contributions to the stock portion of
the plan are made atthe discretion ofthe Board ofDirectors, and are
allocated to plan participants on the basis of relative compensation.
Substantially all plan assets are invested in common stock of the
Company. Total expense recognized by the Company related to the
retirees that relates to benefits received prior to 1993. The
obligation, which approximated $122,000 and $135,000 at
December 31, 2002 and 2001, respectively, is being amortized over
the average remaining life expectancy of the retirees. Amortization
expense approximated $(13,000), $26,000 and $45,000 in 2002,
2001 and 2000, respectively. The current year decline in
amortization expense was the result of the reduction in the number
of participants involved in the remaining pool of former employees
and the corresponding reduction in the present value of the benefit
Employer StockFund within the KSOP was$675,000, $948,000 and
obligation.
$992,000 in 2002, 2001 and 2000, respectively.
Deferred Compensation Plan
Employee Savings Plan: The Company provides a 401(k) Savings
FCBNA has deferred compensation agreements with certain current
feature within the KSOP that is available to substantially all
and former officers providing for benefit payments over various
employees meeting minimum eligibility requirements. The cost of
periods commencing at retirement or death. The liability at
Company contributions under the Savings Plan component of the
December 31, 2002 and 2001 was approximately $700,000 and
KSOP was $563,000, $216,000, and $66,000 in 2002, 2001 and
$750,000, respectively. The annual expenses associated with this
2000, respectively. The Company’s matching contributions are at
plan for 2002 and 2001 were $91,000 and $138,000 for 2000. The
the discretion of the Board up to 100% of elective deferrals of no
obligation is based upon the present value of the expected
more than 6% of compensation. The Company matching rate was
payments and estimated life expectancies.
100% for 2002, 50% for 2001, and 25% for 2000.
The Company maintains life insurance contracts on the lives of
Employee Welfare Plan
certain of the officers covered under this plan. Proceeds derived
The Company provides various medical, dental, vision, life,
from death benefits are intended to provide reimbursement of plan
accidental death and dismemberment and long-term disability
benefits paid over the post employment lives of the participants.
insurance benefits to all full-time employees who elect coverage
Premiums on the insurance contracts are currently paid through
under
this program
(basic life, accidental death and
policy dividends on the cash surrender values of $598,000 and
dismemberment, and long-term disability coverage are automatic).
$594,000 at December 31, 2002 and 2001, respectively.
The health plan is managed by a third party administrator (“TPA”).
Executive Retention Plan
Monthly employer and employee contributions are made to a tax-
The Company maintains an Executive Retention Plan for key
exempt employer benefits trust, against which the TPA processes
members of senior management. This Plan provides for a benefit at
and paysclaims. Stop lossinsurance coverage limitsthe Company’s
normal retirement (age 62) targeted at 35% of final compensation
funding requirements and risk of loss to $50,000 and $1.95 million
projected at an assumed 3% salary progression rate. Benefits under
for individual and aggregate claims, respectively. Total Company
the Plan become payable at age 62. Actual benefits payable under
expenses under the plan were $1.9 million, $1.4 million, and
the Retention Plan are dependent on an indexed retirement benefit
$1.4 million in 2002, 2001 and 2000, respectively.
formula which accrues benefits equal to the aggregate after-tax
62
income of associated life insurance contracts less the Company’s
Benefits under the Executive Plan vest 25% after five years, 50%
tax-effected cost of funds for that plan year. Benefits under the Plan
after ten years, 75% after 15 years and 5% per year thereafter, with
are dependent on the performance of the insurance contracts and
vesting accelerated to 100% upon attainmentof age 62, irrespective
are not guaranteed by the Company. Additionally, during 2001, the
of years of service under the Plan.
Company entered into a similar retirement plan arrangement as
Directors Supplemental Retirement Plan
described below with non-employee board members of the
In the fourth quarter of 2001, the Company established a Directors
Company.
Supplemental Retirement Plan for its non-employee Directors. This
The Company funded the contracts through the purchase of bank-
Plan provides for a benefit upon retirement from service on the
owned life insurance, (“BOLI”), which is anticipated to fully fund the
Board at specified ages depending upon length of service or death.
projected benefit payout after retirement. The total amount invested
Benefits under the Plan become payable at age 70, 75, and 78
in BOLI for the Executive Retention Plan during 2000 and the
depending upon the individual director’s age and original date of
corresponding cash surrender value at December 31, 2002 was
election to the Board. Actual benefits payable under the Plan are
$4.1 million and $4.7 million, respectively. The associated
dependent on an indexed retirement benefit formula that accrues
obligation expense incurred in connection with the Executive Plan
benefits equal to the aggregate after-tax income associated life
was $177,000, $156,000 and $193,000 for 2002, 2001 and 2000,
insurance contracts less the Company’s tax-effected cost of funds
respectively. The income derived from policy appreciation was
for that plan year. Benefits under the Plan are dependent on the
$157,000, $240,000 and $184,000 in 2002, 2001 and 2000,
performance of the insurance contracts and are not guaranteed by
respectively. A portion of the pre-existing life insurance contracts on
the Company.
non-vested terminating executives was reallocated and used to
In connection with the Directors Supplemental Retirement Plan, the
fund the newly created Director Supplemental Retirement Plan
Company has also entered into Life Insurance Endorsement Method
referenced below.
Split Dollar Agreements (the “Agreements”) with certain directors
In connection with the Executive Retention Plan, the Company has
covered under the Plan. Under the Agreements, the Company
also entered into Life Insurance Endorsement Method Split Dollar
shares 80% of death benefits (after recovery of cash surrender
Agreements (the “Agreements”) with the individuals covered under
value) with the designated beneficiaries of the executives under life
the Plan. Under the Agreements, the Company shares 80% of death
insurance contracts referenced in the Retention Plan. The Company,
benefits (after recovery of cash surrender value) with the designated
as owner of the policies, retains a 20% interest in life proceeds and
beneficiaries of the plan participants under life insurance contracts
a 100% interest in the cash surrender value of the policies. Because
referenced in the Plan. The Company as owner of the policies retains
the Plan was designed to retain the future services of Board
a 20% interest in life proceeds and a 100% interest in the cash
members, no benefits are payable under the Plan in the event of
surrender value of the policies.
involuntary or involuntary termination prior to retirement age as
The Plan also contains provisions for change of control, as defined,
defined in the Plan document.
which allow the participants to retain benefits, subject to certain
The Plan also contains provisions for change of control, as defined,
conditions, under the Plan in the event of a change in control.
which allow the Directors to retain benefits under the Plan in the
event of a termination of service, other than for cause, during the
12 months prior to a change in control or anytime thereafter, unless
options granted pursuant to the Plan are exercisable for a period of
63
the Director voluntarily terminates his service within 90 days
five years after the date of the grantee’s retirement (provided
following the change in control.
retirement occurs at or after age 62), and at disability, or death. If
The Plan expenses associated with the Directors Supplemental
employment is terminated other than by retirement, disability, or
Retirement Plan for 2002 and 2001 were $217,000 and $32,000,
death, vested options must be exercised within 90 days after the
respectively. The level of expense in the prior year is reflective of the
effective date of termination. Any option not exercised within such
fourth quarter 2001 implementation of the Plan.
period will be deemed cancelled.
Stock Options
In the fourth quarter of 2001, the Company also granted stock
In 1999, the Company instituted a Stock Option Plan to encourage
options to non-employee directors. The Director Option Plan was
and facilitate investment in the common stock of the Company by
implemented to facilitate and encourage investment in the common
key executives and to assist in the long-term retention of service by
stock of the Company by non-employee directors whose efforts,
those executives. The Plan covers key executives as determined by
solely as directors, are expected to contribute to the Company’s
the Company’s Board of Directors from time to time. Options under
future growth and continued success. The options granted pursuant
the Plan were granted in the form of non-statutory stock options
to the Plan expire at the earlier of 10 years from the date of grant or
with the aggregate number of shares of common stock available for
two years after the optionee ceases to serve as a director of the
grant under the Plan set at 302,500 (adjusted for the 10% stock
Company. Options not exercised within the appropriate time shall
dividend paid in 2002 ) shares. The options granted under the Plan
expire and be deemed cancelled. The Plan covers non-employee
represent the rights to acquire the option shares with deemed grant
directors as determined by the Company’s Board of Directors.
dates of January 1 for each year beginning with the initial year
Options under the Plan were granted in the form of non-statutory
granted and the following four anniversaries. All stock options
stock options with the aggregate number of shares of common
granted pursuant to the Plan vest ratably on the first through the
stock available for grant under the Plan set at 99,000 (adjusted for
seventh anniversary dates of the deemed grant date. The option
the 10% stock dividend) shares.
price of each stock option is equal to the fair market value (as
A summary of the Company’s stock option activity, and related
defined by the Plan) of the Company’s common stock on the date of
information for the years ended December 31 is as follows:
each deemed grant during the five-year grant period. Vested stock
Outstanding, beginning of year
Granted
Exercised
Forfeited
Outstanding, end of year
2002
2001
2000
Weighted-
Option
Option
Average
Shares Exercise Price Shares
Weighted-
Average
Exercise Price
202,302
68,351
5,500
–
265,153
$ 18.65
27.12
23.91
–
$ 21.18
84,451
120,601
–
2,750
202,302
$ 19.69
17.90
–
15.33
$ 18.65
Option
Shares
59,968
59,968
–
35,485
84,451
Weighted-
Average
Exercise Price
$ 21.78
17.60
–
19.69
$ 19.69
Exercisable at end of year
44,000
$ 23.91
49,500
$ 23.91
–
$
–
Weighted-average fair value of
options granted during the year $ 7.31
$ 5.28
$ 2.97
64
For options with exercise prices ranging from $15.33 to $23.91 the
loans totaling $250,000 have been considered for repurchase.
number of options outstanding is 196,802, the weighted-average
Accordingly, loan repurchases have not had a material adverse
exercise price and the weighted-average remaining estimated life of
effect on the financial position, results of operations or cash flows of
the options outstanding are $19.12 and approximately 10 years,
UFM or the Company.
respectively, while the number and weighted-average exercise price
UFM also originates government guaranteed FHA and VA loans that
of options currently exercisable is 44,000 and $23.91.
are also sold to third-party investors. The department of Housing
For options with the exercise price of $27.12, the number and the
and Urban Development (“HUD”) periodically audits loan files of
remaining estimated life were 68,351 and approximately 13 years,
government guaranteed loans and may require UFM to execute
while none of the options are currently exercisable.
indemnification agreements on loans which do not meet certain
Note 12. Litigation, Commitments and
Contingencies
predefined underwriting guidelines. To date, UFM has been
required to execute only three such indemnification agreements for
In the normal course of business, the Company is a defendant in
defaults which may occur over the five-year period following the
various legal actions and asserted claims most of which involve
indemnification and no losses have occurred under such
lending and collection activities. While the Company and legal
agreements. Accordingly, loan indemnifications have not had a
counsel are unable to assess the ultimate outcome of each of these
material adverse effect on the financial position, results of
matters with certainty, they are of the belief that the resolution of
operations or cash flows of UFM or the Company.
these actions should not have a material adverse affect on the
UFM is subject to net worth requirements issued by HUD. Failure to
financial position of the Company.
meet these minimum capital requirements can initiate certain
The Companyconductsmortgage banking operationsthrough UFM,
mandatory and possibly additional discretionary actions that, if
a wholly-owned subsidiary of FCBNA. The majority of loans
undertaken, could have a directmaterialeffecton UFM’soperations.
originated by UFM are sold to larger national investors on a service
UFM was in compliance with HUD’s $1.0 million minimum net worth
released basis. Loans are sold under Loan Sales Agreements which
requirement at December 31, 2002 and 2001. UFM’s tangible net
contain various repurchase provisions. These repurchase provisions
worth was $4.2 million at December 31, 2002, which exceeded the
give rise to a contingent liability for loans which could subsequently
HUD requirement.
be submitted to UFM for repurchase. The principal events which
could result in a repurchase obligation are i.) the discovery of fraud
Note 13. Regulatory Capital Requirements and
Restrictions
or material inaccuracies in a sold loan file, and ii.) a default on the
The primary source of funds for dividends paid by the Company is
first payment due after a loan is sold to the investor, coupled with a
dividends received from FCBNA. Dividends paid by FCBNA are
ninety-day delinquency in the first year of the life of the loan. Other
subject to restrictions by banking regulations. The most restrictive
events and variations of these events could result in a loan
provision of the regulations requires approval by the Office of the
repurchase under terms of other Loan Sales Agreements. The
Comptroller of the Currency if dividends declared in any year exceed
volume of contingent loan repurchases is dependent on the quality
the year’s net income, as defined, plus retained net profit of the two
of loan underwriting and systems employed by UFM for quality
preceding years. During 2003, subsidiary accumulated earnings
control in the production of mortgage loans. To date, only two such
available for distribution as dividends to the Company without prior
approval are $22.0 million plus net income for the interim period
Quantitative measures established by regulation to ensure capital
65
through the date of dividend declaration.
adequacy require the Company and FCBNA to maintain minimum
The Company and FCBNA are subject to various regulatory capital
amounts and ratios for total and Tier 1 capital (as defined in the
requirements administered by the federal banking agencies. Failure
regulations) to risk-weighted assets(asdefined), and ofTier 1 capital
to meet minimum capital requirements can initiate certain
(as defined) to average assets (as defined). As of December 31,
mandatory and possibly additional discretionary actions by
2002, the Company and banking subsidiary met all capital
regulators that, if undertaken, could have a direct material effect on
adequacy requirements to which they are subject.
the Company’s financial statements. Under the capital adequacy
As of December 31, 2002 and 2001, the most recent notifications
guidelines and the regulatory framework for prompt corrective
from the Federal Reserve Board categorized the Bank as well
action, which applies only to the Bank, the Bank must meet specific
capitalized under the regulatory framework for prompt corrective
capital guidelines that involve quantitative measures of the entity’s
action. To be categorized as well capitalized, the Bank must
assets, liabilities, and certain off-balance sheet items as calculated
maintain minimum Total risk-based, Tier 1 risk-based, and Tier 1
under regulatory accounting practices. The entity’s capital amounts
leverage ratios as set forth in the table below. There are no
and classifications are also subject to qualitative judgments by the
conditions or events since those notifications that management
regulators about components, risk weightings, and other factors.
believes have changed the institution’s category.
December 31, 2002
Actual
For Capital
Adequacy Purposes
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
Amount
Ratio
Amount
Ratio
Amount
Ratio
(Amounts in Thousands)
Total Capital to Risk-Weighted Assets
First Community Bancshares, Inc.
First Community Bank, N. A.
Tier 1 Capital to Risk-Weighted Assets
First Community Bancshares, Inc.
First Community Bank, N. A.
Tier 1 Capital to Average Assets (Leverage)
First Community Bancshares, Inc.
First Community Bank, N. A.
$ 131,097
119,434
13.33%
12.20%
$ 78,671
78,344
8.00%
8.00%
$ 118,618
107,164
12.06%
10.94%
$ 39,336
39,172
$ 118,618
107,164
8.10%
7.35%
$ 58,581
58,344
4.00%
4.00%
4.00%
4.00%
$
$
$
N/A
N/A
97,930 10.00%
N/A
58,758
N/A
6.00%
N/A
72,930
N/A
5.00%
66
December 31, 2001
Actual
For Capital
Adequacy Purposes
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
Amount
Ratio
Amount
Ratio
Amount
Ratio
(Amounts in Thousands)
Total Capital to Risk-Weighted Assets
First Community Bancshares, Inc.
First Community Bank, N. A.
Tier 1 Capital to Risk-Weighted Assets
First Community Bancshares, Inc.
First Community Bank, N. A.
Tier 1 Capital to Average Assets (Leverage)
First Community Bancshares, Inc.
First Community Bank, N. A.
$ 118,296
106,957
12.10%
10.98%
$ 78,234
77,933
8.00%
8.00%
$ 105,809
94,753
10.82%
9.73%
$ 39,117
38,967
$ 105,809
94,753
7.93%
7.13%
$ 53,398
53,170
4.00%
4.00%
4.00%
4.00%
$
$
$
N/A
N/A
97,417 10.00%
N/A
N/A
58,450 6.00%
N/A
N/A
66,462 5.00%
The tangible common equity ratio excludes goodwill and other
Both the Tier 1 and the total risk-based capital ratios are computed
intangible assets from both the numerator and denominator.
by dividing the respective capital amounts by risk-weighted assets,
Tier 1 capital consists of total equity plus qualifying capital securities
as defined.
and minority interests, less unrealized gains and losses
The leverage ratio reflects Tier 1 capital divided by average total
accumulated in other comprehensive income, certain intangible
assetsfor the period. Average assetsused in the calculation exclude
assets, and adjustments related to the valuation of mortgage
certain intangible and mortgage servicing assets.
servicing assets and certain equity investments in non-financial
Note 14. Other Operating Expenses
companies (principal investments).
Included in other operating expenses are certain costs, the total of
Total risk-based capital is comprised of Tier 1 capital plus qualifying
which exceeds one percent of combined interest income and non-
subordinated debt and allowance for loan losses and a portion of
interest income. Following are such costs for the years indicated:
unrealized gains on certain equity securities.
Advertising and public relations
Other service fees
Telephone and data communications
* Cost did not exceed the one percent requirement for the reported period.
Years Ended December 31,
2002
2001
2000
(Amounts in Thousands)
1,347
1,547
1,207
$
$
$
1,223
1,261
*
$
$
$
$
$
$
*
*
*
Note 15. Fair Value of Financial Instruments
The following summary presents the methodologies and
67
Fair value information about financial instruments, whether or not
assumptions used to estimate the fair value of the Company’s
recognized in the balance sheet, for which it is practical to estimate
financial instruments presented below. The information used to
the value is based upon the characteristics of the instruments and
determine fair value is highly subjective and judgmental in nature
relevant market information. Financial instruments include cash,
and, therefore, the results may not be precise. Subjective factors
evidence of ownership in an entity, or contracts that convey or
include, among other things, estimates of cash flows, risk
impose on an entity the contractual right or obligation to either
characteristics, credit quality, and interest rates, all of which are
receive or deliver cash for another financial instrument. Fair value is
subject to change. Since the fair value is estimated as of the balance
the amount at which a financial instrument could be exchanged in a
sheet date, the amounts that will actually be realized or paid upon
current transaction between willing parties, other than in a forced
settlement or maturity on these various instruments could be
sale or liquidation, and is best evidenced by a quoted market price
significantly different.
if one exists.
Assets:
Cash and cash equivalents
Securities available for sale
Securities held to maturity
Derivative financial instruments
Loans held for sale
Loans held for investment
Interest receivable
Liabilities:
Demand deposits
Interest-bearing demand deposits
Savings deposits
Time deposits
Federal funds purchased
Securities sold under agreements to repurchase
Interest, taxes and other obligations
Other indebtedness
2002
2001
Carrying
Amount
Fair Value
Carrying
Amount
Fair Value
(Amounts in Thousands)
$
$ 124,585
300,885
41,014
1,677
66,364
913,211
7,897
$ 124,585
300,885
43,342
1,677
67,503
933,691
7,897
165,557
200,296
180,786
593,088
–
91,877
15,940
124,357
165,557
200,296
180,786
604,313
–
92,112
15,940
141,496
47,815
354,007
41,884
480
65,532
890,544
8,765
161,346
183,685
142,839
590,390
26,500
79,262
15,852
145,320
$
47,815
354,007
43,393
480
66,787
905,361
8,765
161,346
183,685
142,839
593,548
26,500
79,524
15,852
155,104
68
Financial Instruments with Book Value
Equal to Fair Value
Deposits and Securities Sold Under Agreements to
Repurchase
The bookvalues of cash and due from banks, federal funds sold and
Deposits without a stated maturity, including demand, interest-
purchased, interest receivable, and interest, taxes and other
bearing demand, and savings accounts, are reported at their
liabilities are considered to be equal to fair value as a result of the
carrying value in accordance with FAS No. 107. No value has been
short-term nature of these items.
Securities Available for Sale
assigned to the franchise value of these deposits. For other types of
deposits with fixed maturities, fair value has been estimated by
For securities available for sale, fair value is based on current market
discounting future cash flows based on interest rates currently
quotations, where available. If quoted market prices are not
being offered on deposits with similar characteristics and
available, fair value has been based on the quoted price of similar
maturities.
instruments.
Securities Held to Maturity
Other Indebtedness
Fair value has been estimated based on interest rates currently
For investment securities, fair value has been based on current
available to the Company for borrowings with similar characteristics
market quotations, where available. If quoted market prices are not
and maturities.
available, fair value has been based on the quoted price of similar
instruments.
Derivative Financial Instruments
Derivative financial instruments are recorded at estimated fair value
based upon current market pricing for similar instruments.
Loans
The estimated value of loans held for investment is measured based
upon discounted future cash flows and using the current rates for
similar loans. Loans held for sale are recorded at lower of cost or
estimated fair value. The fair value of loans held for sale is
determined based upon the market sales price of similar loans.
Commitments to Extend Credit, Standby Letters of
Credit, and Financial Guarantees
The amount of off-balance sheet commitments to extend credit,
standby letters of credit, and financial guarantees is considered
equal to fair value. Because of the uncertainty involved in
attempting to assess the likelihood and timing of commitments
being drawn upon, coupled with the lack of an established market
and the wide diversity of fee structures, the Company does not
believe it is meaningful to provide an estimate of fair value that
differs from the given value of the commitment.
Note 16. Parent Company Financial Information
69
Condensed financial information related to First Community Bancshares, Inc. as of December 31, 2002 and 2001, and for each of the years
ended December 31, 2002, 2001 and 2000 is as follows:
Condensed Balance Sheets
Assets
Cash
Investment in subsidiary
Other assets
Total assets
Liabilities
Other liabilities
Stockholders’ Equity
Common stock
Additional paid-in capital
Retained earnings
Treasury stock
Accumulated other comprehensive income
Total stockholders’ equity
Total liabilities and stockholders’ equity
Condensed Statements of Income
Cash dividends received from subsidiary bank
Other income
Operating expense
Income tax benefit
Equity in undistributed earnings of subsidiary
Net income
Basic earnings per share
Diluted earnings per share
December 31,
2002
2001
(Amounts in Thousands)
$
6,129
140,767
6,220
$ 153,116
$
5,820
121,679
6,056
$ 133,555
$
654
$
514
9,957
58,642
79,084
(1,982)
6,761
152,462
$ 153,116
9,955
60,189
62,566
(424)
755
133,041
$ 133,555
2002
December 31,
2001
2000
(Amounts in Thousands, Except Per Share Data)
$
11,500
650
(759)
11,391
311
13,017
$ 24,719
2.49
$
2.48
$
$
$
$
$
8,500
331
(552)
8,279
72
10,783
19,134
1.92
1.92
$
$
$
$
7,000
339
(278)
7,061
(18)
10,020
17,063
1.78
1.78
70
Condensed Statements of Cash Flows
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided
by operating activities:
Equity in undistributed earnings of subsidiary
(Decrease) increase in other assets
Gain on sale of assets
Increase in other liabilities
Other, net
Net cash provided by operating activities
Cash flows from investing activities:
Purchase of securities available for sale
Proceeds from sale of securities available for sale
Net cash provided by (used in) investing activities
Cash flows from financing activities:
Repayment of long-term debt
Acquisition of treasury stock
Dividends paid
Net cash used in financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Note 17. Segment Information
Years Ending December 31,
2001
2002
2000
(Amounts in Thousands)
$ 24,719
$
19,134
$
17,063
(13,017)
(138)
(375)
1,169
185
12,543
(1,671)
1,954
283
(100)
(2,491)
(9,926)
(12,517)
309
5,820
6,129
(10,783)
85
(9)
621
–
9,048
(2,855)
586
(2,269)
–
(599)
(8,875)
(9,474)
(2,695)
8,515
5,820
$
$
(10,020)
132
–
138
–
7,313
(1,038)
26
(1,012)
–
(2,869)
(8,338)
(11,207)
(4,906)
13,421
8,515
$
The Company operates two business segments: community
traditional banking products and services through various delivery
banking and mortgage banking. These segments are primarily
channels. The mortgage banking segment consists of mortgage
identified by the products or services offered and the channels
brokerage facilities that originate, acquire, and sell mortgage
through which they are offered. The community banking segment
products. The accounting policiesfor each ofthe businesssegments
consists of the Company’s full-service bank which offers customers
are the same as those of the Company described in Note 1.
Information for each of the segments is included below:
71
December 31, 2002
Community
Banking
Mortgage
Banking
Parent
Eliminations
Total
(Amounts in Thousands)
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Other income
Other expenses
Income (loss) before income taxes
Income tax expense (benefit)
Net income
Average assets
$
59,998
4,208
55,790
10,075
31,786
34,079
10,051
24,028
$
$ 1,467,969
$
$
$
$
915 $
–
915
9,435
9,552
798
309
489 $
61,196
4,208
56,988
20,049
42,269
34,768
10,049
24,719
62,457 $ 143,356 $ (201,538) $ 1,472,244
268 $
–
268
382
759
(109)
(311)
202 $
15
–
15
157
172
–
–
–
$
December 31, 2001
Community
Banking
Mortgage
Banking
Parent
Eliminations
Total
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Other income
Other expenses
Income (loss) before income taxes
Income tax expense (benefit)
Net income
Average assets
$
49,379
5,134
44,245
10,839
29,285
25,799
7,805
$
17,994
$ 1,365,164
Community
Banking
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Other income
Other expenses
Income (loss) before income taxes
Income tax expense (benefit)
Net income
Average assets
$
45,969
3,986
41,983
7,911
25,560
24,334
7,122
$
17,212
$ 1,124,304
(Amounts in Thousands)
462 $
–
462
9,582
8,086
1,958
669
1,289 $
45,271 $
315 $
–
315
16
552
(221)
(72)
(149) $
264
–
264
(162)
102
–
–
–
128,732 $ (252,853)
$
50,420
5,134
45,286
20,275
38,025
27,536
8,402
$
19,134
$ 1,286,314
December 31, 2000
Mortgage
Banking
Parent
Eliminations
Total
(Amounts in Thousands)
65 $
–
65
4,651
4,994
(278)
(86)
(192) $
7,024 $
339 $
–
339
–
278
61
18
43 $
108,133 $
206
–
206
(70)
136
–
–
–
(111,782)
$
46,579
3,986
42,593
12,492
30,968
24,117
7,054
$
17,063
$ 1,127,679
$
$
$
$
$
$
72
Note 18. Supplemental Financial Data (Unaudited)
Quarterly earnings for the years ended December 31, 2002 and 2001 are as follows:
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Other income
Securities gains (losses)
Other expenses
Income before income taxes
Income taxes
Net income
FAS 147 goodwill amortization
Net income as previously reported
Per share:
Basic earnings
Diluted
Earnings per share as previously reported
Dividends
Weighted-average basic shares outstanding
Weighted-average diluted shares outstanding
First Community Bancshares, Inc.
Quarterly Earnings Summary
2002
March 31
June 30
Sept. 30
Dec. 31
(Amounts in Thousands, Except Per Share Data)
$
$
$
$
$
$
24,043 $
9,570
14,473
937
13,536
5,677
177
10,609
8,781
2,464
6,317
139
6,178 $
0.64 $
0.64 $
0.62 $
0.25 $
9,933
9,978
24,179 $
9,007
15,172
1,022
14,150
4,955
9
10,446
8,668
2,630
6,038
142
5,896 $
0.61 $
0.61 $
0.59 $
0.25 $
9,945
9,994
$
$
$
$
$
$
24,451
8,440
16,011
1,302
14,709
4,975
22
10,251
9,455
2,869
6,586
143
6,443
0.66
0.66
0.65
0.25
9,928
9,978
23,531
7,991
15,540
947
14,593
4,833
(599)
10,963
7,864
2,086
5,778
*
*
0.58
0.57
*
0.25
9,893
9,945
73
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Other income
Securities gains (losses)
Other expenses
Income before income taxes
Income taxes
Net income as reported
FAS 142 & 147 goodwill amortization
Adjusted net income
Per share:
$
$
Basic earnings and diluted
$
Basic & diluted earnings per share adjusted for FAS 142 & 147 $
$
Dividends
Weighted-average basic shares outstanding
Weighted-average diluted shares outstanding
First Community Bancshares, Inc.
Quarterly Earnings Summary
2001
March 31
June 30
Sept. 30
Dec. 31
(Amounts in Thousands, Except Per Share Data)
22,901 $
10,986
11,915
747
11,168
4,167
51
8,953
6,433
1,977
4,456
458
4,914 $
0.45 $
0.49 $
0.21 $
9,945
9,952
23,135 $
10,882
12,253
985
11,268
5,010
(7)
9,628
6,643
2,034
4,609
464
5,073 $
0.46 $
0.51 $
0.21 $
9,948
9,967
$
$
$
$
$
23,390
10,580
12,810
1,282
11,528
5,333
153
9,703
7,311
2,311
5,000
468
5,468
0.50
0.55
0.21
9,944
10,003
23,403
9,961
13,442
2,120
11,322
5,584
(16)
9,741
7,149
2,080
5,069
485
5,554
0.51
0.56
0.26
9,940
9,992
* Goodwill amortization on branch acquisitions ceased October 1, 2002 in accordance with FAS 147. Goodwill amortization on all other purchase business combinations
ceased on January 1, 2002.
Report of Independent Auditors
}}
To the Board of Directors
of First Community Bancshares, Inc.
74
We have audited the accompanying consolidated balance sheetsofFirstCommunityBancshares, Inc. and subsidiaryasofDecember 31, 2002
and 2001, and the related consolidated statements of income, cash flows and changes in stockholders’ equity for each of the three years in
the period ended December 31, 2002. These consolidated financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan
and perform the auditto obtain reasonable assurance aboutwhether the consolidated financialstatementsare free ofmaterialmisstatement.
An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An
audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of First
Community Bancshares, Inc. and subsidiary at December 31, 2002 and 2001, and the consolidated results of their operations and cash flows
for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United
States.
As discussed in Note 1 to the consolidated financial statements, in 2002 the Company changed its method of accounting for goodwill as
required by Financial Accounting Standards Board Statement No. 142, Goodwill and Other Intangible Assets, and Statement No. 147,
Acquisitions of Certain Financial Institutions.
Charleston, West Virginia
January 27, 2003
Report of Management’s Responsibilities
The management of First Community Bancshares, Inc. is responsible for the integrity of its financial statements and their preparation in
75
accordance with accounting principlesgenerallyaccepted in the United States. To fulfillthisresponsibilityrequiresthe maintenance ofa sound
accounting system supported by strong internal controls. The Company believes it has a high level of internal control which is maintained by
the recruitment and training of qualified personnel, appropriate divisions of responsibility, the development and communication of
accounting and other procedures, and comprehensive internal audits.
Our independent auditors, Ernst & Young LLP, are engaged to audit, and render an opinion on, the fairness of our consolidated financial
statements in conformity with accounting principles generally accepted in the United States. Our independent auditors obtain an
understanding of our internal accounting control systems, review selected transactions and carry out other auditing procedures before
expressing their opinion on our consolidated financial statements.
The Board of Directors has appointed an Audit Committee, composed of outside directors, that periodically meets with the independent
auditors, bank examiners, management and internal auditors to review the work of each. The independent auditors, bank examiners and the
Company’s internal auditors have free access to meet with the Audit Committee without management’s presence.
John M. Mendez, President & Chief Executive Officer
Kenneth P. Mulkey, Controller
Robert L. Schumacher, Chief Financial Officer
}}
Board of Directors
First Community Bancshares, Inc.
}}
Officers
First Community Bancshares, Inc.
76
Sam Clark (Emeritus)
Agent, State Farm Insurance
Owner, Country Junction Company, Inc.
John M. Mendez
President and Chief Executive Officer
Robert L. Schumacher
Chief Financial Officer
Robert L. Buzzo
Vice President and Secretary
E. Stephen Lilly
Chief Operating Officer
Kenneth P. Mulkey
Controller
Allen T. Hamner
Professor of Chemistry, West Virginia
Wesleyan College; Member Executive
Committee and Chairman, Audit Committee
B. W. Harvey
President, Highlands Real Estate
Management, Inc.; Member Executive
Committee and Audit Committee
I. Norris Kantor
Partner, Katz, Kantor & Perkins,
Attorneys-at-Law
John M. Mendez
President and Chief Executive Officer,
First Community Bancshares, Inc.;
Executive Vice President, First Community
Bank, N. A.; Member Executive Committee
A. A. Modena
Past Executive Vice President and Secretary,
First Community Bancshares, Inc.;
Past President & Chief Executive Officer,
The Flat Top National Bank of Bluefield;
Member Executive Committee
Robert E. Perkinson, Jr.
Past Vice President – Operations,
MAPCO Coal, Inc. – Virginia Region;
Vice Chairman, Audit Committee
William P. Stafford
President, Princeton Machinery Service, Inc.;
Chairman, First Community Bancshares, Inc.;
Member Executive Committee and
Audit Committee
William P. Stafford, II
Attorney-at-Law, Brewster, Morhous,
Cameron, Mullins, Caruth, Moore, Kersey &
Stafford, PLLC; Member Executive Committee
W. W. Tinder, Jr.
Chairman of the Board and Chief Executive
Officer, Tinder Enterprises, Inc.;
CEO, Tinco Leasing Corporation (Real Estate
Holdings); Member Executive Committee
77
A. A. Modena
Past Executive Vice President and Secretary,
First Community Bancshares, Inc.;
Past President and Chief Executive Officer,
The Flat Top National Bank of Bluefield
Robert E. Perkinson, Jr.
Past Vice President – Operations,
MAPCO Coal, Inc. – Virginia Region
Clyde B. Ratliff
President, Gasco Drilling, Inc.
Richard G. Rundle
Attorney-at-Law, Rundle and Rundle, LC
William P. Stafford
President, Princeton Machinery Service, Inc.
William P. Stafford, II
Attorney at Law, Brewster,
Morhous, Cameron, Mullins, Caruth, Moore,
Kersey & Stafford, PLLC
W. W. Tinder, Jr.
Chairman and Chief Executive Officer,
Tinder Enterprises, Inc.
Dale F. Woody
President, Woody Lumber Company
}}
Board of Directors
First Community Bank, N. A.
K. A. Ammar, Jr.
President and Chief Executive Officer,
Ammar's Inc. and Magic Mart
Dr. James P. Bailey
Veterinarian, Veterinary Associates, Inc.
Chairman Emeritus,
First Community Bank, N. A.
W. C. Blankenship, Jr.
Agent, State Farm Insurance
D. L. Bowling, Jr.
President, True Energy, Inc.
Juanita G. Bryan
Homemaker
Robert L. Buzzo
Vice President and Secretary,
First Community Bancshares, Inc.
President, First Community Bank, N. A.
Sam Clark
Agent, State Farm Insurance
Owner, Country Junction Company, Inc.
C. William Davis
Attorney-at-Law, Richardson & Davis
Allen T. Hamner, Ph.D.
Professor of Chemistry,
West Virginia Wesleyan College
B. W. Harvey
President, Highlands Real Estate
Management, Inc.; Chairman, First
Community Bank, N. A.
I. Norris Kantor
Partner, Katz, Kantor & Perkins,
Attorneys-at-Law
John M. Mendez
President and Chief Executive Officer, First
Community Bancshares, Inc.; Executive Vice
President, First Community Bank, N. A.
78
Locations & Other Information
First Community Bank, N. A.
}}
1001 Mercer Street
Princeton, West Virginia
24740-5939
(304) 487-9000 or (304) 327-5175
Pine Plaza Branch (304) 431-2225
211 Federal Street
Bluefield, West Virginia 24701-0950
(304) 325-7151
Mercer Mall Branch (304) 327-0431
Blue Prince Road, Green Valley
Bluefield, West Virginia 24701-6160
(304) 325-3641
Highway 52
Bluefield, West Virginia 24701-3068
(304) 589-3301
101 Vermillion Street
Athens, West Virginia 24712
(304) 384-9010
Corner of Bank & Cedar Streets
Pineville, West Virginia 24874-0249
(304) 732-7011
East Pineville Branch
(304) 732-7011
Mullens Shopping Plaza
Route 54
Mullens, West Virginia 25882
(304) 294-0700
Route 10, Cook Parkway
Oceana, West Virginia 24870-1680
(304) 682-8244
2 West Main Street
Buckhannon, West Virginia 26201-0280
(304) 472-1112
100 Market Street
Man, West Virginia 25635
(304) 583-6525
Corner of Main & Latrobe Streets
Grafton, West Virginia 26354-0278
(304) 265-1111
216 Lincoln Street
Grafton, West Virginia 26354-1442
(304) 265-5111
Main Street
Rowlesburg, West Virginia 26425
(304) 454-2431
16 West Main Street
Richwood, West Virginia 26261
(304) 846-2641
Railroad and White Avenue
Richwood, West Virginia 26261
(304) 846-2641
874 Broad Street
Summersville, West Virginia 26651
(304) 872-4402
Route 20 & Williams River Road
Cowen, West Virginia 26206
(304) 226-5924
Route 55, Red Oak Plaza
Craigsville, West Virginia 26205
(304) 742-5101
111 Citizens Drive
Beckley, West Virginia 25801-2970
(304) 252-9400
50 Brookshire Lane
Beckley, West Virginia 25801-6765
(304) 254-9041
119 Main Street
Greenville, West Virginia 24945
(304) 832-6265
298 Stokes Drive
Hinton, West Virginia 25951
(304) 466-5502
U. S. 219 North
Lindside, West Virginia 24951
(304) 753-4311
101 Sanders Lane
Bluefield, Virginia 24605
(276) 322-5487
643 E. Riverside Drive
Tazewell, Virginia 24651
(276) 988-5577
302 Washington Square
Richlands, Virginia 24641
(276) 964-7454
Chase Street & Alley 7
Clintwood, Virginia 24228
(276) 926-4671
747 Fort Chiswell Road
Max Meadows, Virginia 24360
(276) 637-3122
8044 Main Street
Pound, Virginia 24279
(276) 796-5431
910 East Main Street
Wytheville, Virginia 24382
(276) 228-1901
431 South Main Street
Emporia, Virginia 23847-2313
(434) 634-8866
4677 Main Street
Drakes Branch, Virginia 23937
(434) 568-3301
125 West Atlantic Street
Emporia, Virginia 23847
(434) 634-6555
511 Main Street
Clifton Forge, Virginia 24422
(540) 862-4251
101 Brookfall Dairy Road
Elkin, North Carolina 28621
(336) 835-2265
5519 Mountain View Road
Hays, North Carolina 28635
(336) 696-2265
57 N. Main Street
Sparta, North Carolina 28675
(336) 372-2265
150 N. Center Street
Taylorsville, North Carolina 28681
(828) 632-2265
Subsidiaries of First Community Bank, N. A.
}}
Financial Information
}}
United First Mortgage, Inc.
(A wholly owned subsidiary of First Community Bank, N. A.)
1503 Santa Rosa Road, Suite 109
P. O. Box K-177
Richmond, Virginia 23288
(804) 282-5631
Corporate Headquarters
One Community Place
P.O. Box 989
Bluefield, Virginia 24605-0989
(276) 326-9000
(276) 326-9010 Fax
Stone Capital Management, Inc.
(A wholly owned subsidiary of First Community Bank, N. A.)
207 Brookshire Lane
Beckley, West Virginia 25801
(304) 256-3982
Stock Registrar and Transfer Agent
Registrar and Transfer Company
10 Commerce Drive
Cranford, New Jersey 07016-3572
(800) 368-5948
79
Form 10-K
The Annual Report on Form 10-K, filed with the Securities and
Exchange Commission, is available to shareholders upon request
to the Chief Financial Officer of First Community Bancshares, Inc.
or through the Company’s website listed below.
Financial Contact
Robert L. Schumacher
Chief Financial Officer
First Community Bancshares, Inc.
P. O. Box 989
Bluefield, Virginia 24605-0989
Phone: (276) 326-9000
Internet Access
Website: www.fcbinc.com
E-mail: ir@fcbinc.com
Website: www.fcbresource.com
E-mail: marketing@fcbinc.com
Notes
80
First Community Bancshares, Inc.
One Community Place
Bluefield, VA 24605
276-326-9000
www.fcbinc.com